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Green Value: The Sustainable Business Case

BCBEC AGM Chris Corps

22 September, 2009

fidelisOld Town, Montréal

fidelisOld Town, Montréal

fidelisBasilique Notre Dame, Montréal

fidelisOld Town, Montréal

fidelisOld Town, Montréal

fidelisTransamerica Tower, San Francisco

fidelisMarché Bonsecours, Montréal Hyatt Embarcadero, San Francisco

fidelisRailway Museum, San Francisco

fidelisBank of England, London, UK

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Counting Green

The Role of Valuation

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Green Value

Initiated 2004, published November 2005

Literature & best practice reviewReviewed green building value aspectsSubsequent studies now improving analysis, better data now available

"There is a relationship between the market value of a real estate asset, its green features and related performance."

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Green Value Summary

Sponsors:RICSBC HydroCanada Green Building CouncilEnglish Partnerships (UK)Greater Vancouver Regional DistrictGreen Buildings BCNatural Resources CanadaRealPacOthers: CMHC, City of Vancouver

TeamCushman Wakefield LePage, Busby Perkins + Will, BuildGreen, DTZ (UK)

18 project reviews in:San Francisco, CaliforniaMinneapolis, MinnesotaOberlin, OhioNew York City, New YorkNew Westminster, Vancouver, Victoria, BCKitchener, Ottawa & Toronto, OntarioMontreal, Quebec6 UK projects

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Green Value: The Main Value Benefits

1. Lower operation/maintenance costs

2. Energy & resource savings

3. Grants, subsidies, inducements etc.

4. Attract tenants faster (i.e. absorption)

5. Higher rents, investment/sale value

6. Lower turnover/vacancy

7. Reduced fitting-out costs (i.e. TI's)

8. Lower internal move costs (i.e. churn)

9. Increased productivity

10. Faster, better public process

11. Improved risk, marketability

Vancouver Island Technology Park, BC

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Examples of Green Value

Pennsylvania Power and Light conversion's power savings:

Traditional energy saving: 4.1 yrs payback, 24% ROIGreen Value: 69 days payback, 540% ROIDifference: largely productivity benefits

Reno Post Office upgrade:Improved productivity gains paid for the $500,000 renovation in under a yearAnnual energy savings a 'free bonus'

Mountain Equipment CoMountain Equipment Co--op, Montrealop, Montreal

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Green Cost Savings: What's in Operating Costs

%Electricity 19.5%Oil 0.3%Gas 5.9%Water 2.8%Sewage 1.0%External building 4.2%Interior systems 27.3%Roads & grounds 4.1%Utility & central systems 6.2%Treatment & environmental systems 3.3%Janitorial 25.5%

External building

Roads & grounds

Utility & central systems

Janitorial

Treatment & environmental systems

Sewage

Water

Gas

Oil

Electricity

Interior systems

Data courtesy of:

International Facilities Management Institute

Energy: 30%Energy: 30%

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Green Cost Savings: How Big are Operating Costs

$0.0

0

$5.0

0

$10.

00

$15.

00

$20.

00

$25.

00

$30.

00

DOWNTOWN VANCOUVER

BROADWAY C

ORRIDOR

BURNABY

RICHMOND

NORTH SHORE

SURREY

NEW WEST Average net Rent

Average Operating Costs

Data courtesy of:

Average net Rent61%

Average Operating Costs39%

…of which 30% is energy……of which 30% is energyof which 30% is energy

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Green Cost Savings: The Total Costs of Business

CONTEXTEnergy = 30% of operating costsOperating costs = 39% of real estate costsReal estate costs = 10-15% of business costs20% energy savings = 0.2-0.6% of business costs

Figures are typical & vary depending on location and other factors

Data courtesy of:

SO: If energy is a small percentage of the costs of operating a typical business… Where's the beef?

SO: If energy is a small percentage of the costs of operating a typical business…Where's the beef?

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Peak Oil, Climate Change: Exxon's 2003 Economic and Energy Outlook

MBDOE

0

40

80

120

160 World Demand

Existing Field Decline ~ 4-6%

Gap

1980 1985 1990 1995 2005 201520102000

WorldProduction ??

??

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$20

$40

$60

$80

$100

$120

$140

Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Natural gas

Electricity Index

Peak Oil, Climate Change: Impact of Energy Inflation Average fuel

inflation rateGeneral inflation

Real fuel inflation rate

Home heating fuel 8.06% 1.90% 6.16%Gas at the pump 4.73% 1.90% 2.83%Electricity Index 0.93% 1.90% -0.97%Natural gas 4.66% 1.90% 2.76%

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Peak Oil, Climate Change: Governance Issues

Climate change is shifting policies, legislative framework

Policy and legislation e.g. New YorkRegulations e.g. energy labelsFinancial assistance e.g. US residential construction finance

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The Vancouver Valuation Accord: An Agreement to Change

www.vancouveraccord.org

Accord Case Studies

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Accord Aspects

Valuation standards review and adjustment

Professional EnhancementProfession increasingly being asked to changeProfessional Training and Development to include sustainability issues and factorsEvidence of where sustainability has impacted asset and property value

Academic/Educational Capacity Development

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Buildings, Value & Resilience

The ability to withstand the impacts of change

What change?Climate changeFossil fuel depletion & inflation

Major factorsMore water, less water, more heat, less heatFlood, sea rise, storms, wind, fire, snowSupply chain management (energy, transportation, risk)

Manitoba Hydro, Winnipeg

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High Performance Green Building: What's it Worth?

Buildings in Portland, Seattle, Vancouver

650 West Georgia Street, VancouverA/C & energy retrofit, 19% ROI validatedBUT with Green Lease, potential for 197% ROI through leveraging rental capitalisation

ImpactAttractive for landlords AND benefit to tenantsNOT business as usual L/T relationship –partnership not adversarialCorrect appraisal is central

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High Performance Green Building: Vancouver Centre Retrofit Analysis

Assumptions (Vancouver Centre - Class A off ice)Building size sq ft 472,422Finance rate 5.00%Green savings psf pa $0.51psfpaGreen savings total pa $240,935paLife cycle 12.00yrsYield (Cap rate) 6%Years Purchase (1/yield) 16.66666667Energy retrofit costs psf $4.32psfEnergy retrofit costs -$2,040,863Rent (excluding utility costs) psf -$29.00psfRent paid to landlord -$13,700,238paUtility costs psf -$2.61psfRenovationRenovation capital costs -$2,040,863pa

Renovation finance over life cycle -$219,296paRenovation savings $240,935paRenovation profit(loss) pa $21,639paTraditional "simple payback" analysis 8.47yrsMaximum breakeven interest rate 7.08%

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High Performance Green Building: Vancouver Centre Retrofit Analysis

Value analysisBefore After

TenantTenant's utility payments -$1,233,021pa -$992,086paRental increase -$240,935paTenant's total occupancy costs -$14,933,259pa -$14,933,259pa

LandlordLandlord's gross rent $13,700,238pa $13,941,173pa

Less: cost of finance -$219,296paLandlord's net rent $13,700,238pa $13,721,877paLandlord's increase in net income $21,639paIncrease in capital value, after debt service $360,647Capitalised value after debt service $228,337,300 $228,697,947Retrofit value as % of building value 0.16%

ProfitCapital investment -$2,040,863Capitalised gross annual return on investment $240,935paGross increase in capital value $4,015,587ROI before debt service 196.8%Capitalised value after debt f inance $360,647ROI after debt service 17.7%

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James Bay IRM Retrofit, Illustrative Schematic

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Life cycleLife cycle

Transfer pricingTransfer pricing

"Residual""Residual"

Operating costsOperating costs

Capital costsCapital costs

Measure What You Value, Value What You Measure

Solid WasteSolid Waste

Liquid WasteLiquid Waste

EnergyEnergy

WaterWater

MaterialsMaterials

GHGsGHGs

Reduce GHGs by 25- 33%

Power the equivalent of 10% of homes

Heat the equivalent of 30% of homes

Run the equivalent of 10% of cars

Recover, recycle and re- use clean water

Flexible, scalable, local, incremental, Just-in-Time

Least expensive or potentially profitable

Reduces risk

Potential Benefits

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LCC ≈

LCA ≠

LCV

Life Cycle CostingCost assessed over life cycle

Life Cycle AssessmentBroaden, include cost savings

Life Cycle ValuationBroadestInclude value – to occupier, owner, perhaps society, communityInclude residual/reversionAdjust for finance

• Reconcile finance & asset life

Best net assessment

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Asset & Sustainability Metrics 1

The Triple Bottom Line is not just for wimps

Economic/financial benefitRisk & long term asset performance

Extended math includesResources

• Energy, water, air/gas, materials, waste, money, others

Report all inputs & outputs over the entire life cycle and beyondCount human performance

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Asset & Sustainability Metrics 2

Life cycle valuationCapital and operatingWithin and beyond system boundaries

• Impact of transfer pricing / profit shareLife cycle considerations

• Life cycle valuation, not just cost savings• Include reversionary value

GHGs etcCO2e measurement/pricingRising impact of water

DCFGradual reconsideration of discounting & initial yield

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