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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2009

What Being Green Really Means

Understand a building's energy performance to help clients enhance asset value

What Being Green Really Means

Strategic energy management is the backbone of any green-building portfolio, and energy-efficiency is the most cost-effective green strategy available to building operators. For mortgage professionals, understanding energy management is a powerful tool when clients are considering investing in a multifamily asset that claims to be green.

"Green" does not necessarily mean high-performing; even a building that is designed or retrofitted to green standards will underperform if it is not operated efficiently. Likewise, a building not originally designed with efficiency in mind can be operated to a high standard.

A building that operates at maximum energy-efficiency not only will have lower operating costs each year, but its systems also likely will need less maintenance and will have longer life expectancies. In addition, if property-managers track their building's energy performance, they are more likely to be diligent over other important issues -- a good sign the building is a well-maintained, high-performing asset.

By looking at a green building's energy performance closely, mortgage brokers can assess its viability and seek to increase borrower return on investment, benefiting all involved parties. Understanding when a multifamily asset is performing as efficiently as possible has numerous benefits to lenders and brokers, including:

  • Avoiding the "brown" discount. Various studies have pointed to a green premium in office buildings. Although they don't substantiate scientifically proven cause-and-effect relationships, these studies pose an interesting theory in the marketplace. As green buildings become mainstream, investors, tenants, buyers and others will expect all buildings to have sustainable features, to be energy-efficient and to perform at a high level financially. In other words, today's green buildings are tomorrow's new standard. Regardless of whether green buildings deliver a premium, their non-green (aka, "brown") counterparts likely will be discounted in the market.
  • Staying ahead of regulation. Numerous bills and regulations that address climate-change targets have been proposed at the federal level, and many specifically address energy-efficiency in buildings or call for strict, new national energy codes. Whatever the mechanisms -- e.g., carbon taxes, cap-and-trade, energy-performance disclosure, etc. -- builders and owners likely will have to account for their properties' carbon emissions, which are a direct product of the energy they consume. In addition, local jurisdictions are increasingly enacting green-building policies.
  • Finding incentives: For new construction projects, building greener and more energy-efficient multifamily communities can lead to numerous benefits from municipalities, including expedited permitting, reduced permitting fees, tax breaks and increased density. Several incentives also are in place for existing buildings.
  • Increasing asset value: As energy costs continue to increase, any reduction in energy consumption will impact the bottom line. Decreasing consumption increases net operating income (NOI), which in turn can increase asset value.

To help their multifamily clients, brokers also should understand the myths in the green-building marketplace, know how to assess a single asset's energy performance and be well-versed in overall multifamily-building energy-management fundamentals.

Marketplace myths

There are two key energy myths that prevail in the multifamily-housing industry. The first is that utilities are not a controllable expense. On the contrary, energy and water typically are the largest controllable expenses in most multifamily communities.

To better understand utility costs in the multifamily industry, the U.S. Environmental Protection Agency (EPA) researched energy and water costs in common areas and in resident units. The 2008 data for four portfolios of market-rate apartment buildings that total more than 90,000 units were analyzed to come up with an average common-area cost. For apartment-use data, the EPA used the 2005 Energy Information Administration Residential Energy Consumption Survey.

Combined, the average utility costs of residents and common areas yield an estimated total utility cost in multifamily buildings of $2.20 per rentable square foot. This is in line with the National Apartment Association's 2008 Survey of Operating Income and Expenses in Rental Apartment Properties, which showed total utility costs of $1.36 to $2.37 per net-rentable square foot in master-metered properties. This same report showed utilities to be the largest controllable operating expense, with energy being the largest portion of utility expenses.

In the EPA's research, the energy portion of utility costs came to $1.84 per net-rentable square foot.

Considering these factors, potential property-buyers should view energy as a controllable expense. They should substantiate any green features with reliable energy-savings claims and identify the bottom-line impact before purchasing a property. Even if owners or operators control only their building's common area, they can still achieve significant savings.

The second prevailing energy myth is that first cost -- in this case, the cost of including energy-efficient features in a project -- is paramount if energy costs can be passed through to residents. This mentality has long predominated in the industry and continues to be the general paradigm.

There is a shifting tide brought about by an increased interest in climate change and green living, however. As a more environmentally conscious demographic begins to rent, demand for energy-efficient apartments likely will increase. Lenders and brokers should be wary of multifamily inventory where a first-cost mentality still prevails.

Assessing energy performance

Ask property-owners how many kilowatt hours of electricity their building used last year, and they likely won't know. Most probably track energy costs, but this metric on its own reveals little about an asset's energy performance. Energy costs fluctuate and have risen sharply in the past 10 years. Occupancies may rise or fall.

The only way to understand a building's energy performance fully and to track savings from energy-efficient improvements is to benchmark consumption over time, assessing its performance as compared to its peers. Comparing performance across a portfolio of buildings makes it easy to identify lower-performing buildings and those with the best opportunity for investment; to set baselines and monitor progress toward goals; and to share lessons learned from higher-performing buildings.

Property-owners have various tools to track their buildings' performance. The EPA's ENERGY STAR program, for instance, offers a free online tool called Portfolio Manager that allows users to track the performance of buildings across their portfolio. Portfolio Manager, which is widely adopted by the commercial office sector, has been recently enhanced to also help multifamily-housing owners and operators assess and track performance of buildings in their portfolios.

One of the tool's value-added features lets owners and operators track weather-normalized energy-use intensity. The tool accounts for the weather in a building's particular climate and normalizes the data to account for a particularly hot summer or cold winter. Additionally, a building in Washington state can compare its performance to its sister building in Florida, taking the effects of regional climate and different weather patterns out of the equation. The tool also calculates changes in greenhouse-gas emissions and in water use and can automatically generate reports in one short document.

As carbon becomes regulated, this type of data likely will become more important to real estate owners, buyers and sellers. Some jurisdictions already require sellers to disclose a building's energy performance to prospective buyers. Savvy brokers and buyers can use this information to assess a prospective property and adjust their offers accordingly.

Energy-management fundamentals

Some portfolios have seen common-area energy-consumption savings of 10 percent to 20 percent within one year from a minimal investment of 3 cents to 5 cents per square foot. Most of these reductions come through stressing the importance of wise energy management and instituting no- and low-cost measures with quick paybacks.

Although upgrades to high-efficiency windows, heating, ventilating and air-conditioning systems, and roofs may have large savings, they also have large price tags. Smaller, everyday activities also will lead to significant savings. Brokers should understand the importance of energy management to an asset's financial performance.

Managers of a high-performing and well-maintained building from an energy-management perspective likely have implemented fundamental no- and low-cost best practices to improve their buildings' energy-efficiency, including:

  • Replacing incandescent light bulbs with compact fluorescent lamps;
  • Retrofitting linear fluorescent lights with high-efficiency T5 or T8 lamps;
  • Installing light-emitting-diode exit signs;
  • Installing programmable thermostats;
  • Setting back temperatures in model and vacant units;
  • Installing occupancy sensors in fitness centers, business centers, boiler rooms, electrical and telecommunications rooms, and model units;
  • Reducing pool and spa temperatures;
  • Conducting preventive maintenance on climate-control systems;
  • Installing timers on common-area hot-water heaters, pool pumps and water features;
  • Locking thermostats in common areas;
  • Reducing irrigation run times and irrigate during cooler times of day;
  • Using window shades, glazing or blinds to reduce solar gain in summer; and
  • Checking with local utilities for energy-efficiency rebates and incentives.

•  •  •

Energy-efficiency is the backbone of any green-building project. All else being equal, high-performing buildings will perform highly in the market from a financial standpoint, as well.

By understanding strategic energy management and identifying borrowers who understand and incorporate energy-efficiency into their buildings, brokers stand the best chance of being involved with high-return real estate transactions.


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