Future-proofing Tip: Use Green Building Rating System Critiques

I have posted before about future-proofing being the hot buzzword for industry pacesetters. Property owners now dedicate an increasing amount of time to (re-)positioning their teams and portfolios for the expectations of a sustainability-conscious world.

But while everybody gets the catchy phrase, how does ‘everyday future-proofing’ actually happen?

I recently met with a group of executives, who detailed their process of moving their firm towards being a socially responsible corporate citizen. They talked about how sustainability has injected elements of excitement and risk into today’s real estate industry. They were happy about ‘going green’, but also expressed frustration about being on a ‘hamster wheel’, since the good green building initiatives they were currently implementing could easily be superceded by “bigger, better, faster” improvements to building science and the regulatory environment.

Fortunately for many firms with this type of anxiety, the American Institute of Architecture has just published “Quantifying Sustainability”, a report in which they have issued new position statements about the Green Globes, LEED NC-v2.2 and SBTool 07 rating systems. It’s a not-too-dense ten pager and a quick read – if you can squint through the 6 point font they are using.

Here are the Cliff Notes from the AIA report:

• On Green Globes: the AIA recommends that Green Globes ratings systems adopt more specific and stringent requirements for energy reduction and building operational performance since these are the two most important dimensions of carbon production. Green Journey Notes: Making recommendations about requiring items which are at the heart of carbon production is a slap.

• On LEED NC-v2.2: The AIA calls for more implementation of Life Cycle Analysis, and would like to see the greater use of renewable energy and a requirement for greater carbon reduction for certified projects. Green Journey Notes: While the report says that the AIA is neutral about all ratings systems, they did take the time to refer to LEED as “providing a measure of environmental achievement” and said that the recommended changes would “continue to make this system an effective resource for architects”. None of the other rating systems evaluated received this level of praise. Second of all, the USGBC has already announced, and we’ve already posted here,  that the next upgrades to the LEED rating system incorporates all of these suggestions in some form of another. I am guessing that this paper was written before the USGBC’s announcement of the changes.

• On SBTool 07: The AIA recommends that this system would be a stronger tool if there was an increase in the number of required items vs those that are simply encouraged and if project documentation were required. Green Journey Notes: Ouch!

So how can this intel improve “everyday future-proofing”?

• Rating system weaknesses can contain clues: revealed by the critiques are direct pointers to the most likely changes that you will see to those ratings systems. They are also a comment about what will define good industry practice in the near future. So there’s your content for potential future proofing. Here’s the core of where you can mine your ideas about staying ahead of the curve in a sustainable world.

• Beware of minimum compliance: Just trying to achieve the minimum certification level leaves your firm open to the risk that your buildings could easily fall outside the newer standards of acceptability, once any ‘tweaks’ are made to the rating system.

• The endgame is low and no carbon: Understand the difference between a single asset checklist process and achieving concrete energy and operational performance targets across your portfolio that are tied to quantifiable carbon reductions. As you can see from the AIA’s position on ratings systems, this is the tough measure that they are applying which means that this the the industry standard they are driving towards, even if the current ratings systems might not reflect it.

“Green” Real Estate Expert to Speak in Las Vegas in May

SAN FRANCISCO, CA - Of the thousands of sustainability consultants, contractors, and capital providers for green real estate transactions in the United States, Galley Eco Capital LLC is quite unique. Lisa Michelle Galley, the firm’s Managing Principal, is in a league of her own, being one of a handful of commercial real estate finance specialists in the nation with focused expertise on green real estate projects. Galley will be sharing her expertise at the 2008 Global Real Estate Investment & Deal-Making Summit in Las Vegas, Nevada on May 15 and 16 as a speaker on two different topics. The event is being hosted by the International Real Estate Trade Organization, a network that connects local real estate experts and companies to the global marketplace.

Because of her specialized experience in underwriting green real estate transactions, Galley has spoken at numerous conferences and events for companies and associations, as well as her own green real estate finance and investment seminars. This upcoming speaking engagement at the new Palazzo Resort is a particularly important one for Galley because of the emphasis on green finance and investment issues. This year’s summit will feature a half-day preconference session titled “Global Green Building & Socially Responsible Investing.” In this session, government and industry leaders will assemble to address global sustainability issues and their effect on the financing, development, and operation of properties around the world.

Galley’s presentations will take place on the afternoon of May 16 and are called “Capital for Green and Socially Responsible Developments” and “Green Building – Finance and Trends.”

Galley Eco Capital’s key differentiator is the ability to help commercial real estate developers and investors quantify the value-added from a green property transaction upfront. With a hands-on approach to implementing underwriting green buildings, deep knowledge of the capital markets and applying customized financial strategies, Galley’s company has gained superior knowledge through real-world case studies, which results in her institutional investor and developer clients achieving better returns with less risk than when using typical underwriting approaches. The focus is kept on each facet of the green investor’s success.

About Lisa Michelle Galley

Lisa Michelle Galley is the Founder and Managing Principal of Galley Eco Capital, LLC. Galley Eco Capital is a green real estate financial services consultancy dedicated to helping green investors optimize their green and socially responsible investments.

For more information about Lisa Michelle Galley and Galley Eco Capital, visit www.galleyecocapital.com. For more details about the summit, visit www.globalrealestatesummits.com.

» Original Press Release [PDF] (1)

Energy Efficiency & Building Value: Co-Star Statistics

Looking for data to support the value of building green? Join a growing crowd and read on…

If my software let me write sarcastic subtitles, this one would be “Most often cited statistics at green real estate conferences in Spring 2008″. Seriously, now that so many in commercial real estate are trying to quantify how much (additional) asset value can be created by green initiatives, I think it is good to share those zeitgeist concepts that help shape the industry’s attitudes towards investing in green real estate.

Like alot of you, I’ve been to quite a few green building finance conferences lately. I’ve noticed that in the larger venues, the findings from the Does Green Pay Off? report always get a slide or two throughout the presentations.

Take a look at one of the basic statistics connecting greater energy efficiency with higher sales prices (click directly on the image to see a larger version):

Data source: Does Green Pay Off? by Norman Miller, Jay Spivey and Andy Florance

I read this paper some time ago when it first circulated, and was a little hesitant about how much weighting to apply to its findings since it is focused on energy efficiency, which is only a part of developing green buildings. I am still hearing people speaking about Energy Star and LEED as if they are synonymous — they are not.

Nevertheless, green real estate investors are using this information as support for the idea that optimizing a building’s energy consumption is already being rewarded in the capital markets when they sell their properties.

Based on what I’ve been hearing, many of them are also assuming (hoping!) that the seller of a fully green building should be rewarded with an even higher sales price.

The Green Building Finance & Investment Forum: First Movers, 9 Ideas & Some Challenges

So today is a two post day, just to stay on top of the info deluge that is besieging my inbox. I’d posted before about the Green Building Finance & Investment Forum, which took place the latter half of last week.

The focus of the conference was for the green first movers to share experiences from their particular vantage point.

Most Talked About Green Building Ideas

• Be green or be obsolete. You have heard this one here many times before. It was reiterated throughout every panel and presentation. Leanne Tobias used the term “future-proofing” to refer to how green is being seen as a way to mitigate the risk of obsolescence. It became one of the most repeated buzzwords throughout the event.

• Think abundance - apply sustainability to grow the top line. Tom Paladino gave a wonderful case study about how his firm uses sustainability to create specific features that increase the rent premium owners can get on their buildings. This runs contrary to most people’s focus on using green building principles to reduce expenses.

• Sustainable markets – the downtown premium. Jonathan Rose presented his company’s approach to investing, which includes focusing on smart growth locations. They’ve got it down to the point where they have established relative return premiums for various markets.

• LEED branding is gaining economic value. Transwestern’s Greg O’Brien pointed out that investors were seeing a particular value in green building being certified. It is not enough for an investor to just say that they had made specific improvements to the property, but that LEED certification was being seen as a ‘good housekeeping’ seal of approval on the asset.

• Think beyond the net zero building. On the technology and innovation panel, panelists talked about thinking in terms of a net zero community, not just individual buildings. Bill Sisson, of United Technologies and the World Business Council for Sustainable Development and Laura Rodormer, of Swinerton Management Consulting talked about the need for the investment community to enlarge its view of how far we can go with net zero energy.

• Go for the low-hanging fruit. Immediately adopt low cost green strategies. Several panelists said that there were many high ROI green moves that can be immediately implemented at little or no cost (and without an investment committee’s approval). Changing lightbulbs might sound boring, but the energy savings generate a great return.

• Metrics measure what matters. Several investors pointed this out. We will not have positive financial, environmental and social outcomes unless we are measuring portfolio performance on all of these dimensions. Real estate investors now have the challenge to integrate measuring environmental and even some social outcomes within their portfolios alongside financial returns.

• Use government incentives, subsidies and tax breaks to your advantage. Steve Grant, of the Bond Companies, was in the audience.  He stood up in the middle of a presentation and pointed out how his company has gotten quite strategic about how they source and apply incentive dollars. It can be a significant source of financing that is often overlooked by investors.

• The green building tsunami is just beginning. State of California Treasurer Bill Lockyer commented that a year ago the investment officers at CalPERS and CalSTRS (our state pension funds) hardly ever heard about green building investments. Now they get about two proposals a week, requesting their investment in a new green fund.

And then there are still challenges

• Diagnosing with LEED-EB: Lots of investors talked about how implementing LEED for Existing Buildings is a very challenging, highly imperfect endeavor. Not only just to green a building, but they are also applying LEED-EB (now LEED-EBOM) as a screen for potential investments. No solutions were offered, this is an open point for all of us to follow. However, it was interesting to note that several
  consultants in the audience were muttering that the investors difficulties stemmed from trying to force LEED to fit their organization’s existing investment approach (i.e. put LEED criteria into the organization’s existing checklists) and not the other way around. There are lots of efforts underway throughout the industry trying to tackle this problem, so I’m sure we’ll see lots of movement here in the coming months.

• Underwriting, Appraisals & Standards: When it comes to talking about underwriting standards, the industry talk sounds like the City of Babel. Lots of confusion. We still lack formalized underwriting standards that the industry can apply in order to understand green buildings financially, but there are groups, such as the Green Building Finance Consortium, that will be putting out papers about this topic in the coming months. Tim Lowe also presented a detailed analysis of what needed to happen in order for real estate appraisers to adequately value green properties. In short, there is lots of education still needed within the appraisal industry.

Green Real Estate Champions: Do You Know the ‘1% Rule’?

How does green building knowledge spread inside your company? Does the company focus on formal technical training? More on triple bottom line values? Concentrate the new knowledge on a ‘chosen few’ and leave it to them to transfer their green building know-how to others? Or is it a viral, water-cooler kind of movement?

The big real estate investment companies are making serious moves to adopt green building and sustainability and I’ve been talking to folks who ask, how’s it really spreading?

In any case, these industry pacesetters shoulder the greening of trillions of dollars of real estate not to mention (re-)educating thousands of professionals all over the globe. And they are doing this while the industry is turning on a dime to go green. So these companies’ competitiveness is riding on the success of their approach.

And back to the question –  how is green building knowledge spreading in real estate companies?

We don’t have the silver bullet answer, yet. In the meantime, I’ll share a hypothesis about knowledge ‘makers’ and ‘users’ from Church of the Customer – the ‘must read’ blog for marketers.

They call it the ‘1% Rule‘. It describes their theory of knowledge creation and sharing within communities. Paraphrased, it says that

roughly 1% of the people in your ‘community’ create nearly all the content. Roughly 10% of the employees actively synthesize it.

Basically, the authors observed that it is usually a small group of people who are having the most powerful effect on the knowledge that is created and spread within a certain community. If you believe them, then you will spend time and resources identifying this group of employees, customers, suppliers, etc. and engage them heavily. And give them a platform to engage you. Relying on formal tools like employee surveys and job descriptions is not useful for really getting to the people most likely to embrace and spread the gospel. They are motivated by other things.

And here’s one catch: the 1% Rule uses the phrase democratized community in the definition. Everybody in these communities has equal access to the information and equal opportunity to contribute their own opinions.

So what about spreading green building knowledge in investment real estate firms? A few questions:

• Is your company going for the mass marketing approach to spreading green building know how?
• Do you have democratized knowledge creation and sharing in your company?
• Do you know the sustainability 1%-ers in your firm, beyond the ones who have sustainability directly in their job description?
• Are you the green building 1%-er in your firm?
• Could and should the 1% Rule apply to spreading green building know how within investment real estate firms at all?

Share what you think with the Green Journey community!

Photo Credit: Flickr/Sue Richards - Knowledge

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