1. 6 VALUATION AND FUNDING OF SUSTAINABLE PROPERTY

2. Slide header copy In This Chapter >Fundamentals of valuation >Planning the analysis >Linking performance to value >Funding for green buildings 1-1 6-1

3. Slide header copy Market Size 1-2 >Multiple ways to consider value: -Direct monetary benefits for the owner -Indirect benefits to the owner -Indirect benefits to society Considerations of Value 6-2

4. Slide header copy Exercise: Value Discussion Starter 1-1 1-36-3 >12-story, mixed-use building in downtown Kansas City: -Benefits indirect to owner? -Benefits direct to owner? -Benefits seen only by tenants? -Benefits to city? -Benefits to society?

5. Slide header copy Approaches to Valuation 1-46-4 >Comparable sales approach >Income approach >Cost approach

6. Slide header copy 1-1 1-5 Comparable Sales Approach 6-5 >Not commonly practiced for sustainable property -No two sustainable properties have exact location, features, or performance

7. Slide header copy Income Approach 1-66-6 >Income (I) / Rate (R) = Value (V) >Cap rates are derived from recent sales of comparable properties >Standard assumptions for what is a comparable property for a given sustainable property are not used

8. Slide header copy Data Gathering for Cost Approach 1-1 6-7 >According to Appraisal Institute: >“It makes sense to cost an exact replica of green building appraised… Trying to find replacement cost requires large amounts of judgment and tradeoffs.”

9. Slide header copy Planning the Analysis 1-66-8 >Counseling client on feasibility of proposal, reliability of cost estimates, and forecasts of cash flow require: -Market analysis/feasability study -Financial projections for project -Recognizing rate of return impacts from sustainable feature costs

10. Slide header copy Linking Performance to Value 1-1 6-9 >You may be asked to provide reporting system on performance of property. >Reporting systems should show how measures are influencing value on an ongoing basis.

11. Slide header copy Discussing the Debt Market with Clients 1-66-10 >Common source of funding for green projects is debt market -Banks -Insurance companies that address risk

12. Slide header copy Searching for Funding 1-1 6-11 >Check “DSIRE” and EPA Web sites >Inquire among contacts >Conduct your own search

13. Slide header copy The Underwriter Perspective 1-66-12 >Unique challenges to projecting risk: -Methods of projecting financial return do not account for financial gain of risk avoidance and revenue gains -Buildings may not perform over time -More sophisticated and explicit analysis and documentation of risk required -Different financial models, analysis, and data may be required

14. Slide header copy The Appraiser Perspective 1-1 6-13 >Risk profile consists of: -Potential for greater construction and delivery risks -Different pattern of lease-up and absorption risks -Fewer peers -Different tenant reduction and turn-over risks -Different re-tenanting costs -Different pattern of periodic capital replacements -Different reversion price -Low exposure to obsolescence -High exposure to green obsolescence

15. Slide header copy The Underwriter Perspective 1-66-12 >Unique challenges to projecting risk: -Methods of projecting financial return do not account for financial gain of risk avoidance and revenue gains -Buildings may not perform over time -More sophisticated and explicit analysis and documentation of risk required -Different financial models, analysis, and data may be required

16. Slide header copy Exercise: Valuation Concepts 1-1 6-15 DCF analysis The equity market The cost approach Complex sustainable property risk profile DSIRE Income capitalization Comparable sales approach Government sector owner-users B. E. H. G. F. A. C.