New Paper Highlights Decision Approach on Green Property Valuation

How can professionals approach valuing green buildings, when there is still a lack of performance data?

Lots of folks accuse appraisers of being roadblocks to advancing green real estate because many still don’t provide any recognition for the higher value of sustainably designed projects in their valuations.

Check out a new report, “High Performance Building: What’s It Worth?” by the Cascadia Green Building Council, Vancouver Valuation Accord and Cushman Wakefield.

Co-authored by appraiser and thought leader Theddi Wright Chappell of Cushman Wakefield (covered previously here), this paper provides leadership on this problem via an appraiser’s professional insight into three sustainably built projects.

The authors acknowledge hurdles to green property appraisal up front: modern valuation methodology, like investment and lending as a whole, is solely focused on “economic considerations”.

In their words, “neither the methodology that is practiced by the valuation profession nor the methodology that is typically used by the investment community or major lending institutions includes specific considerations of social or environmental factors. It is largely assumed these are reflected in the price or rent paid in the market”.

They reviewed three LEED-certified buildings in detail, pointing out areas on each project where sustainable design strengthened the property’s marketability and operations, with strong connections to positive valuation support.

The connection between design and its possible value-add was highlighted via comments like the following:

- “experienced a comparatively quick absorption period”

- “high or moderately high” tenant satisfaction feedback

- “higher than average level of occupancy”

- “achieved competitive rents”

Particularly useful, is their presentation of questions that can accompany a particular valuation approach (cost, sale or income), designed to help the valuer incorporate a deeper analysis of sustainable design impacts on the project. These questions will be useful to anyone underwriting a potential investment into a green building. One example:

[For the Income Approach]: Was the building commissioned? Commissioning could impact assumptions relative to both operational and performance risk.

This particular paper’s value (excuse the pun) is in showing the many deciders out there that the lack of long years of economic performance data on green buildings need not be an impediment to increasing financing, investing and appraising green buildings.

By adopting the right review approach, anyone underwriting a project can learn to uncover and analyse the pertinent issues, which can lead to a more accurate investment decision.

Take a look at the paper and let us know your thoughts.

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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