Pitching Green: The Benefits of Green Technology and Sustainable Building

Pitching Green to Investors and Lenders

Green buildings are often unique to their market. A number of benefits of green construction, such as those mentioned above (improved worker productivity and morale), cannot readily be quantified on a project's financial analysis. These factors can make it difficult for investors, lenders, and executives to support an unfamiliar product that may possibly lead to higher design and construction costs. When making the business case for investing in a green development or renovation, the developer or owner should therefore focus on answers to these five 'bottom line' questions.

1) Will it cost more to design and construct a green building?

Multiple studies have concluded that, on average, incorporating green building features adds only a minor premium to overall design and construction costs. As reported by Charles Lockwood in the June 2006 edition of Harvard Business Review, four industry studies of more than 150 buildings across the United States have concluded that it costs, on average, only 0.8% more to achieve basic LEED certification than to construct a standard building. Greg Kats' landmark 2003 report to California's Sustainable Building Task Force, 'The Costs and Financial Benefits of Green Build-ings,' concluded that green building results in increased upfront costs of only approximately 2% (or approximately $4/square foot).

Increased building construction costs are often tied to a 'green learning curve' in the design and construction process. Therefore, a developer or owner needs to consider carefully the green experience of the architects and contractors for the project, and whether the developer or owner will be paying a premium for green learning on the job. In addition, a developer or owner should ensure that the green components of the building are considered from the outset of a project and integrated with the overall project approach, rather than the more expensive process of adding green elements to a standard building design. A variety of commercial software products allow a project team to analyze the costs and benefits of incorporating green building techniques at the initial stages of the design process. Because architects and builders are becoming more familiar with green building techniques and developers and owners are often thinking 'green' from the outset of a project, there are an increasing number of examples of green buildings costing no more to design and construct than a standard building.

As governmental entities further 'green' their codes, the incremental cost of seeking LEED-certification over baseline requirements has decreased. Green roofs are consistent with new Chicago zoning requirements, and all commercial structures must meet baseline levels for energy efficiency under Chicago's Energy Conservation Code. An energy efficient building envelope is also consistent with the recent Illinois requirement for all new commercial construction to follow the 2000 International Energy Conser-vation Code (with 2001 supplement).

2) How will green impact the government approval process?

Adopting a green approach can significantly expedite the approval process, thereby reducing the carrying costs of the project. Some municipalities have a separate accelerated permit process for green buildings. For example, Chicago issues permits within six weeks for projects being built to LEED certification standards, reducing by two months the city's average timeframe for processing permits. Applicants are guided through the expedited permit process by a team of city experts in green building design. Even without a specific program, a green project can curry favor with local officials if, for example, the developer is seeking variances, and with neighbors and other vocal constituent groups when navigating the public approval process.

3) Are there incentive programs to offset any increased costs of green development?

Commercial developers and property owners can take advantage of a number of incentive programs when undertaking a green project. A handful of states, including Maryland, New York, and Oregon, offer tax credits for new developments or renovations involving green technology. Under the federal ENERGY STAR' program, developers and owners can be eligible for a federal income tax deduction of up to $1.80 per square foot for improving the energy efficiency of existing commercial buildings or designing high efficiency into new buildings. Local government entities, such as Portland, OR and Arlington County, VA, have adopted incentives for the use of green technology that include grants to developers and allowing increased project densities. In addition, a number of utilities offer technical assistance and financial incentives for projects incorporating energy efficient measures.

4) How will green impact the operational and maintenance costs?

Adherence to green design increases the net operating income from a project for a multitude of reasons:

• Energy and Water Savings: Greg Kats' 2003 report found that (i) LEED rated buildings, compared with standard buildings, are on average 25-30% more energy efficient; and (ii) green building water conservation strategies can reduce water use by more than 30% indoors and more than 50% for landscaping. (If tenants are responsible for these costs, the savings to the tenants can be reflected in higher rents.)
• Less Maintenance: Green building features, such as green roofs, frequently require less maintenance than their conventional counterparts and have a longer lifespan.
• Cheaper Insurance: The insurance industry is moving closer to providing preferential treatment for energy-efficient commercial buildings.
• Lower Cost of Tenant Turnover: One study cited by Kats, What Office Tenants Want: 1999 BOMA/ULI Office Tenant Survey Report, found that the number one reason that tenants leave an asset is because of HVAC heating/cooling problems. Moreover, green building features, such as underfloor air, make it less costly to change the layout of a space if a tenant does leave.

Using the income approach to valuation, the increase in net operating income from the savings listed above supports an increase in building asset value.

5) How will the green features give the project a competitive edge?

Within recent months, major magazines and newspapers have featured stories on green development on their covers and front pages. LEED-certified buildings receive more than their fair share of reviews in newspapers and periodicals. In the leasing market, green buildings can gain a competitive edge by differentiating the product from comparable standard buildings, appealing to a growing market segment, and obtaining free marketing in local and national publications.

Pitching Green to Prospective Tenants

Prospective tenants will have an entirely different set of questions about the benefits of green building. The 'softer' benefits of green will be more attractive to tenants considering their company image and use of the premises by employees. If the developer or owner can successfully answer these three questions for prospective tenants, the project's lease rates can further help to justify the benefits of green to investors, lenders, and executives focused on the bottom line.

1) What will a green building communicate to the public about my company?

Green buildings provide a tangible, visible statement of a company's environmental ethos. Major corporations such as Toyota, Wal-Mart, and Ford have embraced green building as an expression of their commitment to socially responsible practices. Companies with a much smaller global footprint can use a green office space as a symbol of their commitment to enhancing their immediate community. Educational signs or brochures about the building's green features (or, better yet, staff trained to understand and explain these features) allow a company to highlight its eco-awareness every time a visitor comes to the office.

2) How will my workers benefit from the green features?

Tenants want to work in green buildings. Studies have shown that employees are healthier and more productive while at an office that is located in a green building. Workers will always prefer sunlight over florescent bulbs, a roof garden over a sterile concrete courtyard, and natural landscaping over turf grass. Less visible green features, such as comfortable air temperatures and indoor air quality, have been cited by office tenants as highly important workspace attributes. Further, inadequate ventilation and chemical contaminants from indoor sources have been attributed to 'sick building syndrome' ' situations in which building occupants experience acute health and comfort effects that appear to be linked to time spent in a building, but no specific illness or cause can be identified. White-collar workers spend approximately one-third of their lives in the office. A green building demonstrates that the tenant/employer cares about the impact of the workspace on its employees' mental and physical health.

3) How will green impact my bottom line?

Tenants also receive a bottom-line benefit from green buildings. Depen-ding on the structure of its lease, the energy and water savings could accrue to the benefit of the tenant. The LEED rating system recognizes that a tenant is more likely to act in an energy-efficient manner if the tenant is accountable for energy use and therefore provides points for leasing arrangements structured to include submetering of energy usage and tenant responsibility for energy costs. An even greater financial benefit can accrue to tenants because of increased worker productivity in a green building. In one controlled study described by Kevin Mills in an article appearing in Energy Policy, an insurance company found a 7% increase in productivity (based on quantifiable measures such as numbers of files processed, renewals, and quotes) following the implementation of environmental improvement strategies. As CNET News reported in a 2005 article on green building, building technology experts have estimated that office worker productivity in a green building increases, on average, by 2% to 16%. The typical company spends much more on its staff than its office space. Therefore, increased worker productivity can easily outweigh any other financial benefit of green technologies. Finally, because tenants tend to be more satisfied in green buildings for the reasons previously discussed, tenants are less likely to leave the space and undergo the costly and disruptive process of transitioning to a new office.

Although green technology is still in its infancy stage in many areas, it is obvious that green building practices are here to stay. Real estate professionals need to understand green technology to better service their business and customers.

James T. Mayer is a partner in Holland & Knight LLP's Chicago office and concentrates his practice in commercial real estate law, including all aspects of real estate acquisition, development, leasing, operation, management, and disposition. He can be reached at [email protected]. Jonathan E. Furr is a senior counsel in the Chicago office and practices in the area of state and local government, environment and land use, real estate development, and education. He can be reached at [email protected], or 1-888-688-8500.

Every successful entrepreneur understands that you must know your audience before making a business pitch. This same cardinal business rule applies to commercial office developments and renovations; a developer or owner interested in pursuing a green building project needs to be prepared to justify the green rationale to different audiences having a stake in the project. Investors and lenders will want to know how the green components impact development and operational costs. Prospective tenants will have an entirely different focus ' they will want to know how the green features will enhance the company's image or impact employees' use of the space.

The term 'green building' generally refers to an approach to make building improvements more energy efficient and reduce the negative impacts on human health and the environment. In 1998, the U.S. Green Building Council, a coalition of building industry leaders, first launched the LEED (Leadership In Energy and Environmental Design) Green Building Rating System in order to grade buildings in such areas as site selection, energy and water consumption, indoor air quality, and use of renewable materials. The U.S. Green Building Council has developed separate LEED rating systems for, among others, new construction, existing buildings, and commercial interiors. Despite its increased acceptance, commercial developers and building owners wishing to undertake a green development or renovation may have to justify to investors and lenders why a project should incorporate green technology and, therefore, 'go beyond code.'

While some of the documented benefits of green building, such as increased worker productivity and improved morale, may make a project more attractive to the ultimate tenants and other occupants of the building, these benefits may prove to be difficult to pitch to investors, lenders, and executives focused on the bottom line. How well the developer or owner tailors its pitch to the audience frequently holding the purse strings can determine whether the project is added to the growing list of LEED-certified projects, or takes a more traditional path with no green technology and, therefore, fewer long-term benefits to the developer or owner.

Pitching Green to Investors and Lenders

Green buildings are often unique to their market. A number of benefits of green construction, such as those mentioned above (improved worker productivity and morale), cannot readily be quantified on a project's financial analysis. These factors can make it difficult for investors, lenders, and executives to support an unfamiliar product that may possibly lead to higher design and construction costs. When making the business case for investing in a green development or renovation, the developer or owner should therefore focus on answers to these five 'bottom line' questions.

1) Will it cost more to design and construct a green building?

Multiple studies have concluded that, on average, incorporating green building features adds only a minor premium to overall design and construction costs. As reported by Charles Lockwood in the June 2006 edition of Harvard Business Review, four industry studies of more than 150 buildings across the United States have concluded that it costs, on average, only 0.8% more to achieve basic LEED certification than to construct a standard building. Greg Kats' landmark 2003 report to California's Sustainable Building Task Force, 'The Costs and Financial Benefits of Green Build-ings,' concluded that green building results in increased upfront costs of only approximately 2% (or approximately $4/square foot).

Increased building construction costs are often tied to a 'green learning curve' in the design and construction process. Therefore, a developer or owner needs to consider carefully the green experience of the architects and contractors for the project, and whether the developer or owner will be paying a premium for green learning on the job. In addition, a developer or owner should ensure that the green components of the building are considered from the outset of a project and integrated with the overall project approach, rather than the more expensive process of adding green elements to a standard building design. A variety of commercial software products allow a project team to analyze the costs and benefits of incorporating green building techniques at the initial stages of the design process. Because architects and builders are becoming more familiar with green building techniques and developers and owners are often thinking 'green' from the outset of a project, there are an increasing number of examples of green buildings costing no more to design and construct than a standard building.

As governmental entities further 'green' their codes, the incremental cost of seeking LEED-certification over baseline requirements has decreased. Green roofs are consistent with new Chicago zoning requirements, and all commercial structures must meet baseline levels for energy efficiency under Chicago's Energy Conservation Code. An energy efficient building envelope is also consistent with the recent Illinois requirement for all new commercial construction to follow the 2000 International Energy Conser-vation Code (with 2001 supplement).

2) How will green impact the government approval process?

Adopting a green approach can significantly expedite the approval process, thereby reducing the carrying costs of the project. Some municipalities have a separate accelerated permit process for green buildings. For example, Chicago issues permits within six weeks for projects being built to LEED certification standards, reducing by two months the city's average timeframe for processing permits. Applicants are guided through the expedited permit process by a team of city experts in green building design. Even without a specific program, a green project can curry favor with local officials if, for example, the developer is seeking variances, and with neighbors and other vocal constituent groups when navigating the public approval process.

3) Are there incentive programs to offset any increased costs of green development?

Commercial developers and property owners can take advantage of a number of incentive programs when undertaking a green project. A handful of states, including Maryland, New York, and Oregon, offer tax credits for new developments or renovations involving green technology. Under the federal ENERGY STAR' program, developers and owners can be eligible for a federal income tax deduction of up to $1.80 per square foot for improving the energy efficiency of existing commercial buildings or designing high efficiency into new buildings. Local government entities, such as Portland, OR and Arlington County, VA, have adopted incentives for the use of green technology that include grants to developers and allowing increased project densities. In addition, a number of utilities offer technical assistance and financial incentives for projects incorporating energy efficient measures.

4) How will green impact the operational and maintenance costs?

Adherence to green design increases the net operating income from a project for a multitude of reasons:

• Energy and Water Savings: Greg Kats' 2003 report found that (i) LEED rated buildings, compared with standard buildings, are on average 25-30% more energy efficient; and (ii) green building water conservation strategies can reduce water use by more than 30% indoors and more than 50% for landscaping. (If tenants are responsible for these costs, the savings to the tenants can be reflected in higher rents.)
• Less Maintenance: Green building features, such as green roofs, frequently require less maintenance than their conventional counterparts and have a longer lifespan.
• Cheaper Insurance: The insurance industry is moving closer to providing preferential treatment for energy-efficient commercial buildings.
• Lower Cost of Tenant Turnover: One study cited by Kats, What Office Tenants Want: 1999 BOMA/ULI Office Tenant Survey Report, found that the number one reason that tenants leave an asset is because of HVAC heating/cooling problems. Moreover, green building features, such as underfloor air, make it less costly to change the layout of a space if a tenant does leave.

Using the income approach to valuation, the increase in net operating income from the savings listed above supports an increase in building asset value.

5) How will the green features give the project a competitive edge?

Within recent months, major magazines and newspapers have featured stories on green development on their covers and front pages. LEED-certified buildings receive more than their fair share of reviews in newspapers and periodicals. In the leasing market, green buildings can gain a competitive edge by differentiating the product from comparable standard buildings, appealing to a growing market segment, and obtaining free marketing in local and national publications.

Pitching Green to Prospective Tenants

Prospective tenants will have an entirely different set of questions about the benefits of green building. The 'softer' benefits of green will be more attractive to tenants considering their company image and use of the premises by employees. If the developer or owner can successfully answer these three questions for prospective tenants, the project's lease rates can further help to justify the benefits of green to investors, lenders, and executives focused on the bottom line.

1) What will a green building communicate to the public about my company?

Green buildings provide a tangible, visible statement of a company's environmental ethos. Major corporations such as Toyota, Wal-Mart, and Ford have embraced green building as an expression of their commitment to socially responsible practices. Companies with a much smaller global footprint can use a green office space as a symbol of their commitment to enhancing their immediate community. Educational signs or brochures about the building's green features (or, better yet, staff trained to understand and explain these features) allow a company to highlight its eco-awareness every time a visitor comes to the office.

2) How will my workers benefit from the green features?

Tenants want to work in green buildings. Studies have shown that employees are healthier and more productive while at an office that is located in a green building. Workers will always prefer sunlight over florescent bulbs, a roof garden over a sterile concrete courtyard, and natural landscaping over turf grass. Less visible green features, such as comfortable air temperatures and indoor air quality, have been cited by office tenants as highly important workspace attributes. Further, inadequate ventilation and chemical contaminants from indoor sources have been attributed to 'sick building syndrome' ' situations in which building occupants experience acute health and comfort effects that appear to be linked to time spent in a building, but no specific illness or cause can be identified. White-collar workers spend approximately one-third of their lives in the office. A green building demonstrates that the tenant/employer cares about the impact of the workspace on its employees' mental and physical health.

3) How will green impact my bottom line?

Tenants also receive a bottom-line benefit from green buildings. Depen-ding on the structure of its lease, the energy and water savings could accrue to the benefit of the tenant. The LEED rating system recognizes that a tenant is more likely to act in an energy-efficient manner if the tenant is accountable for energy use and therefore provides points for leasing arrangements structured to include submetering of energy usage and tenant responsibility for energy costs. An even greater financial benefit can accrue to tenants because of increased worker productivity in a green building. In one controlled study described by Kevin Mills in an article appearing in Energy Policy, an insurance company found a 7% increase in productivity (based on quantifiable measures such as numbers of files processed, renewals, and quotes) following the implementation of environmental improvement strategies. As CNET News reported in a 2005 article on green building, building technology experts have estimated that office worker productivity in a green building increases, on average, by 2% to 16%. The typical company spends much more on its staff than its office space. Therefore, increased worker productivity can easily outweigh any other financial benefit of green technologies. Finally, because tenants tend to be more satisfied in green buildings for the reasons previously discussed, tenants are less likely to leave the space and undergo the costly and disruptive process of transitioning to a new office.

Although green technology is still in its infancy stage in many areas, it is obvious that green building practices are here to stay. Real estate professionals need to understand green technology to better service their business and customers.

James T. Mayer is a partner in Holland & Knight LLP's Chicago office and concentrates his practice in commercial real estate law, including all aspects of real estate acquisition, development, leasing, operation, management, and disposition. He can be reached at [email protected]. Jonathan E. Furr is a senior counsel in the Chicago office and practices in the area of state and local government, environment and land use, real estate development, and education. He can be reached at [email protected], or 1-888-688-8500.