What’s different about underwriting sustainable real estate?

Sustainable buildings are just a little different...

Do you see the unique value that green brings to your real estate investments reflected within their appraisals? No? Well, join the big crowd and read on: this is a special post for you.

Not everybody in commercial real estate is immersed in gloom and doom. Some folks, like the Appraisal Institute, are using the downtime coming from fewer transactions to get themselves fit for the sustainable real estate future. In case you missed the announcements, the AI is in the midst of a series of classes for their members, to introduce them to sustainability principles and the basic considerations for appraising green buildings.

I’ve had the chance to talk with the seminar’s co-developer,  Theddi Wright Chappell, Cushman Wakefield’s new National Practice Leader for Green Buildings & Sustainable Real Estate. The overall course is framed around the question “how is a sustainable building different?” than conventionally built property.

With good questions focused around understanding the differences, appraisers will be more likely to surface up more relevant facts that help them to better distinguish the risk profile of the green vs the non-green building.

As for the potential differences, any of these may be present within the green transaction:

• lower exposure to energy and consumables costs increases
• potential for greater construction and delivery risks, depending on factors such as availability of trained professionals
• different pattern of lease-up and absorption risks
• different pattern of tenant retention and turn-over risks
• different pattern of periodic capital improvements
• lower exposure to obsolescence.
  

The Green Journey Take

This is just a tidbit of the considerable body of knowledge that Theddi and her AI colleagues have packed into this very timely course for those just getting into the green real estate game.

Within our own practice, we typically receive detailed investment cases from clients for green buildings, which completely overlook any type of enhancement that sustainability brings to the assets. Nearly 100% of the time, some portion of our investment client work involves working with the the investor to “connect the dots” between the green building’s design and construction budget and the operating pro forma assumptions during the holding period. The clients rightfully want to know how appraisers might handle these same issues, under the logical (but incorrect) assumption of if the appraiser won’t count it, why should we do change our underwriting? So, from our point of view, it is good to see that the AI is helping to address this question with their new course.

What can you do? Talk with your appraisal colleagues about how they might evaluate sustainable real estate and urge them to take this new course, if they have lots of questions.