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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   April 2014

Exploring Green Value in Commercial Appraisals

Energy-efficient buildings may mean better loan terms and more equity

Exploring Green Value in Commercial Appraisals

It is not uncommon for commercial mortgage professionals to help clients understand and navigate the appraisal process during a refinancing or new-construction deal. In doing so, it is important to keep a close watch on all the factors that impact the property value, including its green-building features. Ensuring that the appraisal accurately evaluates these features may mean better loan terms and provide the opportunity to pull additional equity out of the property.

The most desirable “green” result of the appraisal is for the property to be designated as a high-performance building — one that, per the Energy Policy Act of 2005, incorporates energy efficiency, durability, life-cycle performance and occupant productivity. To achieve this designation, detailed, thorough information is a necessity when commercial real estate is assessed.

For everyone who is involved in the appraisal process, it is also important to be equipped with proper tools and knowledge to go down the right path in this journey.

Data is essential to the valuation process. Appraisers support their green-building valuation analysis with market data on any commercial property under consideration. This data is then used to help explain why the property stands out from its conventional counterparts.

Valuation guidelines

Recognizing this need to provide assistance to owners and developers who retrofit an existing building or build a new one with energy-efficient features, the Appraisal Institute and the Institute for Market Transformation recently issued a guide, “Green Building and Property Value: A Primer for Building Owners and Developers.” This guide can help mortgage professionals, lenders and real estate appraisers ensure the green-building valuation process is thorough and accurate.

Using the information provided in this guide, appraisers can make the case for green appraisal value of buildings with energy-efficient features. And when commercial mortgage bankers and brokers work with their clients to secure funding for these properties, it’s important that these financial professionals are also aware of what goes into the valuation process — and, ultimately, how appraisers generate credible, reliable opinions of value.

Value components

Proper green-building value assessment requires an understanding of how energy-efficient practices apply to the four components of value.

  • Revenue: In a number of markets, rental premiums are emerging in green buildings because many well-heeled tenants are willing to pay more for green spaces. With green features on the shopping list of many top companies, trophy office buildings in leading U.S. markets are chasing the most lucrative tenants by making high-performance features increasingly common.
  • Occupancy: Occupancy premiums make a compelling argument for green investments. When it’s determined that the green features of a building will result in higher occupancy than an otherwise similar property built without environmental considerations, a significant argument can be made for valuation increases.
  • Operating expenses: The most straightforward value proposition of owning a green building is lower utility bills. These savings are realized from steadily improving energy codes, green certification programs such as Leadership in Energy & Environmental Design (LEED) and Energy Star, and well-executed retrofits. The resulting energy savings reduce operating expenses and increase net operating income, which often have positive effects on value.
  • Risk: Green-building valuation also shows up in the risk-mitigating protections these assets offer to owners and banks. In the appraisal and underwriting process, high-performance buildings with green features may offer a valuable hedge against changes in consumer preferences, as well as future regulatory developments and rising energy costs.

Despite institutional commitments to sustainability at the highest level, banks and real estate appraisers cannot maximize valuation for green and high-performance buildings without active engagement and advocacy from mortgage professionals and their clients.

Lenders

The primary consideration when valuing a high-performing asset is to provide an expanded scope of service in the appraisal that accounts for the complexity of high-performance buildings. The appraiser is the one who develops a scope of work for the appraisal, but it’s the lender that makes a scope of services request in the bidding, or request for proposals for the assignment.

Mortgage professionals can drive this process, however, by taking a proactive role with developers and owners when choosing banks, making sure to utilize the services of financial institutions with expertise in green buildings. When banks hire appraisers, the appraisers are more likely to succeed if both parties have experience working with high-performance assets, or know the local market.

Requesting a professionally designated appraiser can help ensure that the appraiser meets the necessary experience standards. Additionally, brokers and bankers should determine if the appraiser has received any specialized education on the valuation of sustainable buildings.

Finally, at the review stage after the appraisal, the bank or investor should analyze the appraiser’s report. Banks with qualified reviewers who have experience in green valuation and high-performance buildings are the best bet in analyzing the appraiser’s work.

Working with appraisers

After an appraiser has been selected, mortgage professionals and their clients should work with lenders to provide as much data in advance about the property and its market as possible. Examples of this data include market studies with comparable properties, energy audits or bills, equipment specifications and monitoring plans, construction or retrofit costs, a pro forma, and other due diligence.

Data on tenant demand for green features — preferably with a list of tenant representative contact information — is also valuable information to supply to the appraiser.

Translating this into value requires “unpacking” market research and creating a value narrative appropriate for the building. This information can be brought to bear at multiple points in the appraisal process:

  • When meeting with lenders, bring the data and set expectations of the green scope of work.
  • Make sure green elements are built into the scope of work provided to appraisers bidding on the assignment.
  • Use the opportunity of a data request list to send the data that supports the value narrative.
  • Interview the appraiser or appraisal manager. Tell the story by designating a “champion” to describe the property’s green attributes to the appraiser. This could be the owner, an architect or a consultant.

Appraiser’s questions

When performing their appraisals of value for commercial green buildings, appraisers consider the market profile of the subject property and ask questions such as:

  • Do the best tenants in a market prefer energy-efficient buildings? Are tenants looking for certifications?
  • Are the building’s energy audits and historical-use data credible?
  • What are the potential rent and vacancy premiums?
  • Is the building an early adopter of any unproven green technologies? Is the property of higher quality?
  • Does the property need the green features just to stay competitive or to avoid obsolescence? Is the property more marketable than its peers?

Summary

It’s obvious that the mortgage professional, client, lender and appraiser all play key roles in the valuation process for commercial green buildings. Understanding the roles each party plays and the sequence of the process is essential to accurately evaluating a property’s green features and maximize the valuation assessment. To recap the process:

  • The broker and the client ask the bank to include high-performance features in the appraisal scope of work and have prepared supporting data.
  • The bank’s loan officer writes an appropriate scope of work and looks for qualifications in bids from appraisal companies.
  • The appraisal company assigns a qualified appraiser.
  • The broker and the client provide data on the building’s high-performance features to the appraiser.
  • A bank or investor reviewer ensures that high-performance building documentation meets underwriting guidelines.
  • The appraiser delivers an appraisal report that includes green considerations, which is then analyzed by a qualified reviewer.

• • •

More and more borrowers are seeing the value of green-building features in retrofitting and new construction. They, however, need the expertise of commercial mortgage professionals who understand the assessment process to take full advantage of the substantial short- and long-term financial benefits that come from high-performance buildings.  



 


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