The Aurora

The name of this project has been changed for confidentiality reasons.

Green finance and tax benefit strategies make a hotel attractive to investors

Project

The Aurora is a planned 150 room limited-service hotel in San Francisco, California. It is expected to be LEED™-Gold certified. The Aurora has finalized licensing agreements with a well-known national hotel flag and will attract business and leisure travelers who desire a hospitality experience focused on health and well being.

Design

At an estimated total project cost of $52 million, this sustainable design features green components that will maximize savings from reduced energy use and water conservation.

Specifically, the hotel will feature:

• Solar shading and advanced window glazing
• Superior wall construction with high thermal resistance, and a green roof to reduce heating and cooling loads for the structure
• Integrated photovoltaic panels for on-site electricity production
• Intelligent lighting systems and energy-efficient appliances to limit occupant electrical usage
• Low-flow plumbing fixtures and appliances (all plumbing fixtures have undergone trial testing to ensure user satisfaction)

Benefits

Preliminary energy modeling for the hotel indicates a 40 percent reduction in energy use versus conventional construction. Energy efficiency and photovoltaic systems will reduce the cost of electricity for the structure by 40 percent, and water conservation strategies should reduce potable water demand by 30 percent.

In addition to energy savings that will substantially lower operating costs for the hotel, the use of sustainable interior materials throughout the structure and high indoor air quality will be hallmarks of The Aurora, The hotel will be able to use  these tangible assets in its marketing.

Our role

Sustainable real estate can offer superior financial returns and mitigate investment risk to protect your real estate assets. It also has complex cost considerations and financial structures that are significantly different from conventional real estate product.

During predevelopment for The Aurora, Galley Eco Capital helped the development team address the complexities of designing and creating an investment case for sustainable real estate and maximize the potential value of their developed asset.

Our financial strategy for The Aurora included the following key components:

Transaction underwriting and due diligence services: life cycle cost analysis (LCCA)

Working with the development team, Galley Eco Capital applied LCCA to the larger systems components to demonstrate the total performance value of certain building system choices for the structure. This analysis allowed the team to compare the quantifiable savings generated by a range of green systems and choose those that maximized future asset value and resulted in the absolute best performance and cost avoidance.

• With payback return and internal rate of return metrics used for the investment horizon, the analysis indicated 2.5 percent greater ROI (levered) compared to conventional construction.
• This boost in projected internal rate of return significantly improved the development’s attractiveness to potential equity investors.
• Galley Eco Capital prepared pro formas containing operating line items that more accurately reflected the sustainable operation of the property. The pro formas will allow the development team and future owners to more accurately monitor the impacts of operating a green building on the net operating income and cash flow. The property is expected to operate at a lower cost than peer hotels in its submarket.

Galley Eco Capital completed this analysis up front, during predevelopment, allowing the development team to use the information during project planning, design, and marketing to potential capital sources and tenants.

Financial incentives: Studies to identify and maximize incentives

Financial incentives for green building are offered by utility providers and by local, state, and federal government. Galley Eco Capital identified the relevant rebates and incentives, which helped lower the initial cost of green building systems for The Aurora.

• We identified over $500,000 in federal, state, and utility rebates available to the project, representing 1 percent of the total project budget. The tax benefits and rebates offset the costs of some of the major green features, such as design, solar photovoltaic array, HVAC, and lighting.
• The financial incentives were nearly equal to the total transaction costs, enough to offset most of the cost of green technologies, renewable energy, and third-party LEED expertise needed for the project.

Tax benefits: Accelerated depreciation study

Cost segregation is a powerful tool that can free up after-tax cash flow for green building projects through accelerated depreciation. Accelerated depreciation can improve cash flow to owners during the initial years of ownership, improving project returns.

• Our cost segregation study for The Aurora identified over $2 million in additional after-tax cash flow, spread over the first five years of property operation. This additional cash flow supplied another boost to the project ROI, which, combined with incentives and lower operating expenses than peer hotels, helped to make The Aurora a very attractive investment for institutional equity.