Is it a good idea to guarantee LEED certification?

Cheap stunt to grab market share?

Or is this just a sign of how commoditized the LEED consulting market is becoming?

LEED consultants Energy Ace have announced that they guarantee LEED-certification on their projects, which has caught quite a bit of attention around the industry over the past few days.

I am sure attorneys all over the  nation are getting pretty curious about how this firm got comfortable with  making this offer.

As this lawyer writing for GreenerBuildings points out:

Energy Ace doesn’t appear to serve any design or construction role.  Remember, important decisions are made at both the design and construction stages that impact achieving LEED certification.  How can Energy Ace be comfortable that LEED administration is enough?

So what makes Energy Ace comfortable with offering this ? The lawyer writing the article alludes to revealing more information on Friday, and we’ll be checking in to see what that is.

My take on these things is that there is no free lunch and most people do things for rational reasons (most of the time).

So we just need to locate the quid pro quo in this deal and decide if it contains sufficient countervalue for Energy Ace to make this offer.

What limits their exposure on this type of agreement? Possible issues to explore are:

• What does the owner have to agree to contractually to get this kind of protection?
• Is it worth it to the ownership? Have owners really been that skittish  about “certification risk” in the first place, since the real estate industry has largely accepted the need to green their properties already?
• Isn’t there already enough knowledge present in the industry about the certification process that makes a guarantee redundant?
• Does the presence of this guarantee allow them to charge more for services (as they are theoretically offering more protection to the owner for the economic risk they are taking)?
• Is it transferable? When a bank forecloses on a project that Energy Ace is working on, can the lender take over the guarantee and enforce it once they step into the owner’s shoes? Or would the guarantee be void the moment any of the other key parties are no longer on the active on the job (like the general contractor, for example).
• How is liability determined if LEED-certification is ultimately not achieved as promised?

Yep, we’re pretty curious here.

With real estate construction volume and transactions down so dramatically, third parties such as LEED consultants have to market extra hard to win business within the much smaller pool of projects available.

LEED consultants are currently price takers within their sector, as fees have been decreasing in a weak industry. That is partly due to the presence of more firms entering the sector as green building is taking off.

So while the certification guarantee might help Energy Ace win more business, I’m concerned that it opens the strategic floodgate to intensify competition and weaken pricing for LEED consulting services beyond what is reasonable.

It is not a good point in the real estate and overall economic cycle for this intensity of competitive forces to become so active in green building, just as it is starting to take off.

My questions to the (many) Green Journey readers who are LEED consultants:

Do you think that Energy Ace’s guarantee will force others to make the same kind of offers to win business?

Green Business Case Starts with Critically Questioning Your Base Case

How do you get more value from your green business case?

Real estate investors like to say that you buy most of your value in a good deal at the time of purchase. In short, buy for the right (read: low)  price.

When it comes to determining the added value that sustainability brings an asset, we’re finding that a good deal of the value is often hidden in the base case. Because there’s often more cost and downside risk trapped in there there than the typical pro forma projection indicates. And keeping that information hidden unfairly penalizes the green business case.

The base case should reflect the most accurate economics and total value creation possible by building and operating the asset as a conventional building over the holding period.

Examples

Here are a couple of basic ways that base cases often bury the true risks and costs of  doing business as usual:

One problem we frequently see is that future operating projections do not trend energy and water costs at an accurate rate of inflation. For the most part,  energy and water costs in many markets are increasing well above the rate of inflation. However, lots of practitioners still apply one static inflationary rate — usually the CPI — to all income and expenses for the asset’s entire holding period.

Fighting climate change has caused many state and regional authorities to introduce new regulatory frameworks aimed at improving land use, transportation, building codes and even cap-and-trade frameworks. Take California, for example. The AB32 legislation  has been clearly designed to have a systemic effect on where we locate, how we build and commute to buildings. Most of these regulations have announced implementation dates well within the next ten years.

Even though it might be difficult to predict exactly how these regulations will change market forces over the holding period, the base case discounted cash flow, in California particularly, should also recognize the impact of long-term systemic changes to the project’s marketability due to changes to broader market systems and demographics, such as those being introduced by AB32-related legislation.

Lots of investors haven’t yet begun to explore the effect these issues have on doing business as usual — only adjusting terminal cap rates over a ten year holding period by the typical ~50 bps, reflecting a “same old same  old” point of view about their asset’s future.

While the investors cannot predict ten years into the future exactly how much of a direct change to exit risk these actions might have, leaving these issues altogether ignored unintentionally, and unfairly penalizes the green business case.

So it’s amazing to us that — even as commercial real estate is in the midst of a great strategic disruption, due to green building as well as capital markets forces — investors still prepare pro forma operating projections as if nothing’s ever going to change.

What Kind of Market Will We Be Selling Into?

Take a look at “Connected Real Estate”, a collection of essays by subject matter experts, edited by Kevin O’Donnell and Wolfgang Wagener.

In it, the authors and Cisco Systems lays out many ways that technology and connectivity will drastically change the expectations of building construction, operation and workplace activities.

In addition to Cisco’s marketing of building internet services, the book includes some pretty sobering ways that information technology will impact the ‘business as usual’ case for conventional buildings.

One graphic called “Where Work Gets Done in 2010″, presents the following estimates of where work happens next year: corporate facilities, 40 percent, in between, 20 percent, and at home, 40 percent.

If 40 percent of work gets done at home by 2010 (basically now), what will the need for space in your property’s submarket be like over the next ten  years?

Other quotes:

We think of buildings with technology as one combined solution. Unconnected buildings are pieces of concrete and mechanical equipment, and of no use to anyone.

We believe that the move to smart buildings will be driven by the home.

These are all bold opinions, which support Cisco’s business model, but also highlight the need to critically question how much of the conventional building’s base case will really be valid throughout the coming decade.

I think not much.

Photo credit: Flickr - Kunsthaus Graz/Fatlum

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Reminder: Let’s Talk About Your Leadership

Come see my talk with Kira Gould and other Sustainability Leaders at OWA on 18 August 2009!

This is a last call to come out and join the discussion on leadership and collaboration within sustainability  tonight  (18 August). The link above includes info on the event location and registration.

I look forward to seeing you there.

Friday Video: City-scale Sustainability in Curitiba, Brazil

Happy Friday!

I’m happy to pass along this great video — from the fabulous EcoCity blog — about how the Brazilian city of Curitiba has garnered world acclaim for its successful implementation so many city-wide sustainability solutions.

The video is a trailer for the actual DVD of a longer documentary about the town.

The documentary is getting rave reviews and being heavily advertised in the “alternative” theaters in my neighborhood.

This week has been a blur of meetings with lots of folks about a variety of practical, district and city-wide sustainability and finance initiatives.

Whether its power transmission, existing home retrofits or a master-planned development,  our partners are finding out that, in many cases, there can be lots of (stimulus) money and good will at the deal table, but there’s still a hairy problem to get the cooperation of the many financial players needed to make the whole deal work.

Seeing how the City of Curitiba managed to overcome barriers lets us go into the weekend knowing that practical solutions to scaling up and financing sustainable solutions are at hand.

Have a great weekend!

Photo credit: Flickr/Bruno Henrique Barruta Barreto

Yudelson: ‘You should be tougher’ on non-LEED West Village

Your input is requested on a very important matter!

Yesterday, I highlighted the UC Davis West Village student/faculty housing development getting a $2 million grant from the California Energy Commission.

I also noted the project not adhering to LEED guidelines or any other third-party rating standard for that matter.

That definitely caught the attention of none other than Jerry Yudelson — a Green Journey reader with regular comments — who took me to task on not going deeper on the lack of third-party rating standard for the project.

His point:

Like this story, but you have to be tougher in your commentary. Not only is LEED not mentioned, thus no third-party accountability, but CEC did not require it as a condition of the grant, going against a clear requirement for all new state buildings. Also, there are no clear sustainability objectives: e.g., housing to use no more than 5 kWh/sq.ft./year for heating, cooling, hot water and lighting, no more than 50 gals/capita/day water, 100% use of certified wood, no use of PVC, etc. Without these touchstones/benchmarks, the so-called “sustainable design” is not ground-breaking at all, just a grab bag of technologies and design approaches.

I gotta admit: Jerry’s making a big point. It is true that not even the most minimum standard for energy and water saving guidelines were agreed for the project, despite it being a deal controlled and co-sponsored by the University of California (sponsorship from ground lessor relationship). Adding to that, the project received funding from the California Energy Commission, a big proponent of green building in general.

Here at Galley Eco Capital, we’re aware of several large developments in California that have gone through an extensive environmental review and entitlement process taking many years. The sustainability requirements that they were required to adhere to were baked into the deal years ago, somewhere during the process.

Should the developer feel compelled to achieve LEED-certification anyway?  I know that we USGBC supporters would want them to do so.

They finally achieve entitlements now, years later, during a new era that expects more vigorous, sustainable land use, transportation, environmental and building policy. I am not 100% sure about whether this is the case for West Village, but it fits the fact pattern.

Other developments, such as the Catellus Mission Bay project here in San Francisco, encountered a similar situation with their entitlements. In Mission Bay’s case, the master developer did not have to require LEED-certification from vertical developers, but some — Alexandria and McCarthy Cook, for example — built buildings to LEED-Silver, anyway.

In their case, these vertical developers needed LEED-certification from a marketability standpoint, to remain competitive with UC San Francisco or the large biotech and pharma companies on the prowl for new space. The West Village developers are marketing the units at below market prices, so assuming the pent up demand remains strong, they will not face any marketing risk associated with the fact that their product is essentially “self-certified”. Here the real estate story could trump the broader trend towards going green.

Your turn: What do you think?

• Should we be harder on the West Villages of the world, who are getting grant funding for “research” even as they avoid adhering to the most minimal third-party certification?
• Are we not hard enough?
• Are their efforts really just a ‘grab bag of technologies and design practices like Jerry says?

Please send me (and Jerry) your point of view. I will compile all the messages and share with those who respond.

We like this kind of issue here on Our Green Journey, because we want an authentic discussion first amongst finance and investment professionals — no fluff. That’s the only way that we are all going to create better, more sustainable results for our communities.

So tell it like you really see it. Your input would be very much appreciated.

$2 Million Grant for Affordable Zero Energy Housing Village

Bold stimulus and green building plans associated with AB32 are moving from the drawing board to the construction site.

West Village Community Partnership received a $2 million grant from the California Energy Commission for the study and development of advanced energy strategies for a 220-acre, 4,000 student and faculty housing development for UC Davis. The grant award came under the CEC’s Public Interest Energy Research (PIER) Program for Renewable-Based Energy Secure Communities (RESCO).

The grant essentially funds a living laboratory type of study of different energy applications to be designed for and installed in the community.

The developer and UC Davis will be studying how to put together an optimal mix of renewable technologies for the project — including creative financing structures to overcome the first-cost barrier for ultra-efficient green design as well as documenting resident behaviour; whether they actually save or waste more energy in this type of development.  Since the project will be built in several phases, the developer will have a chance to improve each new phase’s energy delivery plans, based upon what is learned by studying prior phases.

I love the intersection of the real estate story with the AB32/2030 Challenge issues– they’re already putting together a mixed use addressing pent up demand in the student and faculty housing market in that area. UC Davis ground leases the land to the developer. His focus will be on getting the project financed, built and sold (and paying ground rent of some amount, of course). The project was reportedly already sustainably designed before the grant was awarded. Now grant money will pay for the advanced energy requirements and “study” (read: actually do) the creative financing.

We also point out that one word is missing from both the story and the project website:  “LEED”. As much as the sustainability of the development is being touted, there is no mention of the design guidelines adhering to any particular third-party rating system, like LEED.

And what about the sustainability objectives?

• Housing units are to be sold at below market prices to attract top talent and students to the University.
• On-site renewable power generation.
• Strong focus on alternative transportation: bicycling and biking will be preferred mode of transport to campus for residents.
• Community layout takes advantage of sun and natural breezes.
• Landscaping is integrated with storm-water systems to cleanse run-off and create habitat areas

The energy strategies to be included are path-breaking for a development of this size. Those to be included and studied with grant funding are:

• energy-efficiency measures in building design (passive and active)
• demand response
• distributed solar photovoltaic to create electricity from the sun
• distributed solar thermal on homes to pre-heat water
• biogas coupled with fuel cell to generate electricity
• advanced energy storage using modern battery techniques
• smartgrid technology to efficiently manage energy supplies

Photo credit: Flickr / Shazari - Eggheads

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