Green is going mainstream. More and more, green is being incorporated into investment criteria. Integrating green criteria into our underwriting decisions is no longer for just do-gooders – it’s sound risk management. Green criteria impacts real estate in three primary categories: location, physical attributes, and operational practices. Last month, I suggested a new set of criteria relating to the location of real estate that should be incorporated into our decisions. Part 2 explores criteria relating to the physical attributes of real estate that, if not built into the deal, will increase an underwriter’s risk.
Capital-Intensive LEED Prerequisites
Does the building you’re about to lease, purchase, or mortgage even have the ability to pursue LEED certification? To qualify for LEED certification, an asset must first meet the LEED prerequisites, and then must meet criteria from a selection of credits. LEED prerequisites are essentially the same across the various LEED rating systems. For an existing building to pursue LEED certification, or for the building to meet the needs of a tenant wanting to LEED certify the leased space under LEED for Commercial Interiors (LEED-CI), the building must meet certain prerequisites.
When underwriting, know whether or not the asset meets the capital-intensive, base-building prerequisites. If not, incorporate the cost into your pro forma. The capital-intensive, base-building prerequisites, which are discussed below within a broader context, are:
- Achieving a minimum level of energy efficiency.
- Meeting a baseline level of water usage based on the Uniform Plumbing Codes.
- No chlorofluorocarbons in the base-building HVAC&R equipment.
As demand for energy increases, so does its price. When we purchase a car, we know the fuel efficiency of the vehicle. The importance of fuel efficiency increases as the price of gasoline increases. The same will be true for the energy (electricity and natural gas) that powers our real estate.
Multiple indicators clearly tell us that the price of energy is going up: an over-burdened electrical transmission grid, increasing demand, rising costs, the need for energy independence, global climate change, and the regulation of greenhouse gases. When we buy a refrigerator or HVAC unit, we know its efficiency rating.
The EPA’s ENERGY STAR® tools allow us to know the energy efficiency and resulting carbon emissions of our real estate – office buildings, retail stores, hotels, medical facilities, warehouses, etc. The free, online program generates a “Statement of Energy Performance.” Knowing a building’s energy-efficiency rating on a scale of 1 to 100 prior to signing a lease, purchasing an asset as an investment, or making a loan is basic risk management. When we purchase ENERGY STAR-labeled equipment, we know it’s energy efficient.
We have the same choice with buildings. Buildings scoring 75 or above and validated may earn the ENERGY STAR label. ENERGY STAR Portfolio Manager allows for the tracking of energy and water. State and local governments across the country, as well as corporations and large real estate owners, are now adopting policies that leverage EPA’s ENERGY STAR tools to reduce energy use in commercial buildings. In 2010, California will require the “Statement of Energy Performance” on all real estate transactions, including leases, loans, and acquisitions. Similarly, the District of Columbia will require that all real estate be benchmarked in ENERGY STAR Portfolio Manager by 2010. Cities, such as New York City and Dallas, are considering passing similar measures. Sooner than later, savvy investors and prudent lenders and tenants will require it.
The prerequisite for LEED for Existing Buildings is an ENERGY STAR score of 69; however, the higher the ENERGY STAR score, the more LEED points that can be earned – up to 15 points, which is more than any other credit. Room for improvement always exists, and significant savings are often found in the low-hanging fruit. So, how do you identify the low-hanging fruit?