Property Specs Factor into Specific Sustainable Decisions

MBA (5/28/2008 ) Murray, Michael
Benefits from sustainable commercial real estate—Leadership in Energy and Efficiency Design (LEED)-certified buildings or Energy Star buildings—depend on specific property types and various perspectives from corporations, investors and lenders.

“One of the most important frameworks for understanding the types of decisions made is the difference between strategic decisions, tactical decisions and property-specific decisions,” said Scott Muldavin, executive director of the Green Building Finance Consortium and president of The Muldavin Co., San Rafael, Calif.

The Green Building Finance Consortium plans to release a study in the next few months on underwriting sustainable commercial real estate behind studies that “inappropriately cited and misused [potential benefits] by both knowing and unknowing participants in the sustainability industry."

"The challenge is not just which benefits or costs apply, but the magnitude of the costs and benefits, and the effect on cash flow and risk for their specific property," Muldavin said. "This is the work of the Consortium."

He noted that pension fund boards, CEOs and corporation boards make strategic decisions for sustainable buildings, while tactical decisions include responsibility for phasing in the types of properties and the sustainable attributes in a green building for investment.

Property specific decisions consist of the underwriting risks and returns of specific investments with sustainable features and calculating benefits or returns to compensate for investment risks in a specific property. It also includes modifying current practices to underwrite potential health, productivity and potential increases in tenant demand from a specific property.

“As will be discussed in more detail in the Consortium’s report,Underwriting Sustainable Property Investment, the appropriate use of data and analysis is largely determined by the type of decision that is being made,” Muldavin said. “For example, an investor thinks differently from a lender. [A lender] is not willing to take the same kind of risks. There is a subtle but really important difference in the way that an equity investor does due diligence on a property to determine whether they should invest and when a [commercial] lender does [due diligence]."

The green building industry focused on the strategic level for the last three to four years—using case studies, business case analysis and applying strategic decisions to cost benefit and financial studies—but the data and analysis was not appropriate for tactical and property-specific decisions, according to Muldavin.

“The majority of cost benefit and other financial studies in recent years are directly applicable to strategic decisions, but due to the general nature of the analyses, and insufficient presentation of risks, rewards and financial or building results, from a real estate investment perspective most of the data and analysis is not useful or appropriate for tactical or property-specific decisions,” he said.

Strategic, tactical and property-specific decisions require “more specific and granular information at the property level,” while fundamental underwriting and valuation methods and practices do not require change, Muldavin noted. He said decisions on sustainable buildings will require new information, analytic procedures and organizational changes “to properly value and underwrite sustainable properties.”

The Mortgage Bankers Association, a member of the Green Building Finance Consortium, financed a newly-developed LEED-certified building, and MBA plans to move into its new offices at 1331 L. Street, NW, in Washington, D.C., by June 16.