Get the Best Valuation for Your Green Real Estate Project

 

The appraisal industry is just starting to incorporate sustainable design considerations into the valuation practice. So how can you navigate your green project towards its maximum appraised value?

We recently heard Wells Fargo’s appraiser James Finlay’s personal perspectives on how the appraisal industry is working to adapt valuation standards to sustainable real estate.  Here’s a short summary of his comments:

Green Project Valuation Road Bumps

• On-site distributed energy systems: The real estate appraisal might overlook the value of these components. A lot of these systems would best be appraised by an M&E (mechanical and electrical) appraiser. Additionally, systems like geothermal heat pumps may also require the services of an M&E appraiser.
• Appraisers can’t base their operating expense assumptions on your energy savings projections alone. Claiming that your asset is designed to use 30% less energy than conventional product is not evidence enough- what happens when the performance is suboptimal? If you don’t support your case for the lower operating expense projections, don’t expect the appraiser to go out on a limb for you- it’s their job to be conservative.
• Appraisers are unlikely to value incentives. Simply stated, banks won’t lend on property tax credits or any other green incentives that would flow through the asset’s revenue stream, so don’t expect your appraiser to value them.  Expect them to be reversed out so that the appraisal is based upon the assets true economic performance. (Our note: we’ve seen cases of owners negotiating large incentive packages –and their lenders ignoring the fact that some of these incentive benefits could also be additional collateral that secures loan repayment).

Preparing for a Good Appraisal

Finlay provided the audience with key suggestions on how to manage the appraisal process in order to maximize the appraised value of high-performance assets:

• Hire an appraiser with green experience. Look for a local appraisal expert with some green experience, who is eager to learn more about green building systems. If a perspective lender has a go-to appraiser, find out in advance of agreeing to terms whether they have any green experience. If not, offer up an experienced, alternative appraiser.
• Proactively provide your appraiser with as much relevant and organized information as you possibly can. Don’t just assume that an appraiser will be able to value your advanced building systems- provide them with the data and evidence they need to do so. It’s your responsibility to build the case for higher than market value.

Most importantly:

• If you are not monitoring and tracking the performance of your green buildings, you are not maximizing appraisal value. Want an appraisal to accurately reflect the superior energy performance of your asset? You need to track your data. Additionally, utilizing building management systems and commissioning (or retrocommisioning) are great ways to show an appraiser that the asset will continue to outperform market assumptions.

By the way, there will be great case studies and valuation discussions at the upcoming Green Building Finance and Investment Forum, which will be held here in San Francisco next week on March 2-4, 2009.

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