Brownfields: Emerging Issues in Redevelopment The Economics of Green Presented to: Rutgers, New...

Brownfields: Emerging Issues in RedevelopmentBrownfields: Emerging Issues in Redevelopment The The Economics of GreenEconomics of Green

Presented to: Rutgers, New Jersey Agricultural Experiment Station September 16, 2008

Presented by: Mark Pomykacz, MAI, MRICS

[email protected] 908.534.3590

FEDERAL APPRAISAL & CONSULTING LLC

www.federalappraisal.com

866.FED.APPR

Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC

IntroductionIntroduction

Mark PomykaczMark Pomykacz

Managing Partner, Managing Partner, Federal Appraisal & Consulting Federal Appraisal & Consulting LLCLLC

MAI, MRICS, SCGREAMAI, MRICS, SCGREA Over 22 years appraisingOver 22 years appraising


The Need for GreenThe Need for Green

In the United States alone, buildings In the United States alone, buildings account for:account for: 70% of electricity consumption70% of electricity consumption 39% of energy use39% of energy use 39% of all carbon dioxide 39% of all carbon dioxide (CO(CO22 ) ) emissions emissions 40% of raw material use40% of raw material use 30% of waste output 30% of waste output (136 million tons annually)(136 million tons annually)

12% of potable water consumption12% of potable water consumption


What is What is GreenGreen??

Green is an evolutionary conceptGreen is an evolutionary concept What is “What is “greengreen” today may no ” today may no

longer be “green” tomorrowlonger be “green” tomorrow Fundamentally, Green is about Fundamentally, Green is about

Quality!Quality!


Two Business ReasonsTwo Business Reasons

Profit and/or ImageProfit and/or Image Profits are SupplyProfits are Supply Image is DemandImage is Demand


One Personal ReasonOne Personal Reason

It’s the “right thing to do”, It’s the “right thing to do”, ConscientiousnessConscientiousness

DemandDemand


Profit MotiveProfit Motive

Additional Cost of Construction vs. Additional Cost of Construction vs. Reduced Operating CostsReduced Operating Costs Green does not always cost moreGreen does not always cost more


Profit Motive: Profit Motive:

Construction CostsConstruction Costs

MaterialsMaterials Green building costs may or may Green building costs may or may

not be higher than non-green not be higher than non-green costscostsDepends on level of planningDepends on level of planningGovernment sponsored financial Government sponsored financial incentivesincentives


Profit Motive:Profit Motive: Construction CostsConstruction Costs

DesignDesign Once design is discovered and Once design is discovered and

learned, no additional costlearned, no additional cost


Cost of Green vs Non-GreenCost of Green vs Non-Green

Langdon, Davis; The Cost of Green Revisited, July 2007



Operating CostOperating Cost

Utilities (Elect, Oil, Gas, Water, Sewage)Utilities (Elect, Oil, Gas, Water, Sewage) Maintenance (External building, Internal Maintenance (External building, Internal

building, Land)building, Land) Green features may reduce operating and Green features may reduce operating and

capital expensescapital expenses Which would increase net operating Which would increase net operating

incomeincomeWhich increases profits and valueWhich increases profits and value



Operating Costs Operating Costs

Maintenance and management Maintenance and management expenses may be reducedexpenses may be reduced

Operating and capital repairs may Operating and capital repairs may be reducedbe reduced



May Increase RevenueMay Increase Revenue

Relates to demand sideRelates to demand side Faster, higher priced sales and Faster, higher priced sales and

rentalsrentals Green buildings may have a different Green buildings may have a different

financial risk profile and investor rate financial risk profile and investor rate of return requirements of return requirements


ConscientiousnessConscientiousness

Environmentally FriendlyEnvironmentally Friendly Corporate Image & ConscientiousnessCorporate Image & Conscientiousness Private Conscientiousness, Internal Private Conscientiousness, Internal

MotivationsMotivations


ValuationValuation

Three Approaches to ValueThree Approaches to Value SalesSales IncomeIncome CostCost


Sales ApproachSales Approach Scenario OneScenario One

SubjectSubject Comp 1Comp 1

AdjustmentsAdjustments

Comparable Sale PriceComparable Sale Price $ 9,000,000 $ 9,000,000

Time:Time: -5%-5%

Location:Location: 0%0%

Size:Size: -5%-5%

Condition:Condition: 0%0%

QualityQuality TraditionalTraditional TraditionalTraditional

0%0%

Total Adjustment :Total Adjustment : -10%-10%

Final Adjusted Price :Final Adjusted Price : $8,100,000 $8,100,000

Scenario TwoScenario Two

SubjectSubject Comp 1Comp 1

$ 9,000,000 $ 9,000,000

-5%-5%

0%0%

-5%-5%

0%0%

GreenGreen TraditionalTraditional

25%25%

15%15%

$10,350,000 $10,350,000

DifferenceDifference $2,250,000 $2,250,000

Green PremiumGreen Premium 28%28%

Quality:Quality:DesignDesignFunctionalityFunctionalityAppealAppealMaterials Materials Etc.Etc.


Traditional

$/Annual

Gross Income

Rent PSF $25.00

Rent $1,250,000

Less: Vacancy & Credit Loss Rate 10.0%

Effective Gross Income $1,125,000

Operating Expenses

R.E. Taxes $20,000

Utilities $30,000

Operating Expenses $125,000

Reserves Rate 4.0%

Reserves $45,000

Management Expense Rate 5.0%

Management Expense $56,250

Total Expenses $276,250

OER 24.6%

Net Operating Income $848,750

Capitalization Rate Calculation

Nominal Interest Rate 7.50%

Loan Term 20

Loan to Value: 75.00%

Equity Rate: 12.00%

Indicated Cap Rate, rounded 10.25%

Capitalized Value $8,280,213

Green

$/Annual

$30.00

$1,500,000

9.5%

$1,357,500

$21,000

$20,000

$150,000

4.0%

$45,000

5.0%

$56,250

$292,250

26%

$1,065,250

7.50%

20

75.00%

11.75%

10.05%

$10,598,569

Indicated Value rounded

Traditional$8,280,000

Green $10,599,000

Difference $2,319,000

Green Premium 28%

Income Approach


Cost ApproachCost ApproachScenario 1

Traditional

Base Cost $175

Adjustments $0

Depreciation

Physical -4%

Functional, Super Adequacy 0%

Economic 0%

Value via Cost $168

Scenario 2

Green

$225

$0

-4%

-5%

0%

$205

Scenario 3

Traditional

$175

$0

-4%

0%

0%

$168

Scenario 4

Green

$225

$0

-4%

0%

0%

$216

$50 Cost to Cure

27%

Curable Functional Obs

$205Value after Cure, via Cost


ValuationValuation

Market evidence is neededMarket evidence is needed Education is neededEducation is needed


Vancouver Valuation Vancouver Valuation AccordAccord

Appraisers MustAppraisers Must identify the relevant components of a sustainable property;identify the relevant components of a sustainable property; provide information resources for green buildings and projects provide information resources for green buildings and projects

data;data; evaluate the initial costs in context with the longer-term evaluate the initial costs in context with the longer-term

benefits;benefits; analyze capital and operating costs relative to net income analyze capital and operating costs relative to net income

from operations and reversion;from operations and reversion; analyze the relevance of green features in the marketplace;analyze the relevance of green features in the marketplace; assess market and investment risk(s) relative to potential assess market and investment risk(s) relative to potential

rewards;rewards; identify who pays the costs and who receives the benefits for identify who pays the costs and who receives the benefits for

the sustainable elements incorporated; and the sustainable elements incorporated; and provide a competent and reliable estimate of market value in provide a competent and reliable estimate of market value in

the context of available datathe context of available dataSteve Bergsman, Sustainable by all accords: the recently signed Vancouver Valuation Accord marks agreement among industry leaders to address the interrelationship of sustainability and value, Valuation Insights & Perspectives, Spring 2007


Cost premium statsCost premium stats

Delloitte and Lockwood, Dollars and Sense of Green Retrofitting p.4


Where are the problems?Where are the problems? The government The government is at fault, some say, for not leading the is at fault, some say, for not leading the

way by providing more financial incentives for green way by providing more financial incentives for green building, and for not investing more in alternative building, and for not investing more in alternative energies like solar.energies like solar.

Builders Builders are to blame for sticking to their old energy-are to blame for sticking to their old energy-wasting patterns, all in the name of maximum profits with wasting patterns, all in the name of maximum profits with minimum risk.minimum risk.

Appraisers Appraisers are to blame, some say, for not aggressively are to blame, some say, for not aggressively seeking out and valuing green building features.seeking out and valuing green building features.

Homebuyers Homebuyers are guilty of shortsightedness when are guilty of shortsightedness when favoring a slightly smaller purchase price over vastly favoring a slightly smaller purchase price over vastly lowered monthly utility bills lowered monthly utility bills

Brownfields: Emerging Issues in Redevelopment The Economics of Green Presented to: Rutgers, New...

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