Sustainable design is cuttingoperating costs, and attractinginvestor capital

Developers and investors who are concerned about the financialfeasibility of “going green” are in for a pleasant surprise. Buildingor renovating according to Leadership in Energy andEnvironmental Design (LEED) standards isn’t some sort of expensive fad:It’s just good business.While the savings in operating costs will vary considerably,it’s generally believed that the greener you go, the more you’llsave.Not onlywill energy conservation help your bottomline—even if theconservation apparatus presents an extra initial cost—but you’ll stand towin various tax breaks, grants, and expedited permits in exchange forbeing kind to the environment. It’s too early to tell what impact a Gold orPlatinum LEED certification will have on a building’s resale value, or therents it can command, but so far the news is positive. Moreover, it’s generallyagreed that whether by legislation or market demand, buildings ofthe future will all have to meet certain environmental standards.

“We’re seeing a lot of commercially viable buildings, such as TimesSquare in our city and elsewhere around the country, that are applyingfor LEED status at one level or another,” reports real estate lawyer BarryLePatner, partner in LePatner & Associates. “The General ServicesAdministration in Washington has announced that its future buildingswill adopt LEED standards, and so have many charitable institutions.”

Some skeptics have wondered whether capital providers will beinterested in funding green buildings, and whether operational cost savingswill justify the effort and expense of going green. But so far, there’sbeen little resistance on the part of investors, and the few meaningfulstatistics available on operational costs are more than encouraging.

“A number of organizations are interested in funding green buildings,one way or another,” confirms Tom Hicks, vice president for LEED at theUS Green Buildings Council, which is based in Arlington, VA. “One ofthe most notable is the Hines CalPERS Green Development Fund (HCG).Thomas Properties Group has a $500-million fund for which they’resecuring capital, which they’ll use to buy and operate green buildings aswell as to buy buildings that need to be ‘greened up.’ The California EPAbuilding in Sacramento is one that they upgraded for about $500,000,and the operational savings paid it back quickly.”

Green REITs are also emerging, Hicks notes. It’s too soon to tellwhether the market will deem them profitable, he says, but if profitabilitymeans higher net operating income, green buildings will deliver that.

“We think green buildings will be a home run among capitalproviders,” he says. “We’ve talked to banks that are considering differentlending terms for green buildings, and The Kresge Foundation andEnterprise Community Partners, through grants and other offerings, arespurring that kind of development. InWashington, King County has fundingfor commercial properties to pursue LEED certification: smallamounts, but they might push you over the top.” New York and NewJersey are offering green tax credits, and some jurisdictions offer expeditedpermitting that could save as many as 12 months in the developmentprocess. “A Lowe’s Home ImprovementWarehouse in Austin, TX recentlyused its green initiatives to speed the permitting process, and those few extra months of early sales essentially paid forthe store,” Hicks says.

Mary Spink, executive director and developmentdirector at the Lower East SidePeople’s Mutual Housing Association, insiststhat there are few, if any, financial downsidesto going green, although some initiatives canbe initially costly.

“Especially if you’re a non-profit, you’llhave to bring a project in at a certain number,and that’s hard to do if you’re using recycledmaterials, putting in bamboo floors, putting insolar collectors even though solar isn’t feasiblehere yet,” she admits.

Another point to keep in mind in NewYork City, Spink adds, is that the shortage ofland will often restrict how green a developmentcan be. For example, a new buildingmight not have room for a graywater plant ora rainwater catchment.

“You can save by qualifying for certain greentax credits,” she notes. “As far as your lendersare concerned, they’re not usually interested inanything besides ‘Can you pay it back?’ They’llstill look systematically at what you need andwhat you can pay, based on insurance costs,water and sewer, etc. Energy savings that yourealize by going green will sometimes give yousome wiggle room.”

Jim Himes, director of EnterpriseCommunity Partners’ New York office, saysthere are a variety of ways to turn environmentallyfriendly initiatives into savings onoperating costs. “For example, one of MarySpink’s innovations was to put the insulationfor a building on the outside of the structure,between it and the façade, so that it’s notbisected by floorplates,” Himes says.”Because the building is better insulated, asmaller boiler is required, and that can go onthe roof. All told, she’s saving 85% on utilitycosts on one of her recent developments.”

Enterprise New York gives grants of$50,000 to pay for the consulting required tomake a building greener, and might reduceinterest rates on its loans by as much as 500basis points if the building meets certain standards,Himes says. “I think other lenders willgo this way too,” he adds.

Indeed, other banks are making morefavorable terms available to green developers.The San Francisco-based New ResourceBank, for example, is offering a 125-basispoint discount on loans to “green leadership”commercial projects. On a loan of $5 million,this could translate to about $60,000savings over 10 years.

“When you build to LEED standards youmight experience an incremental increase in first costs, but it’ll be paid back quickly,” asserts Peter Liu, thebank’s founder and vice chairman. “Our own office building isGold LEED, and our cost of construction was about 1% over whatwe’d have paid if we’d built conventionally, but we expect a higherreturn on investment. We’re saving on lighting by using attractiveglass walls for natural daylight, and photosensors that adjustthe interior lighting depending on available daylight—as well asmotion sensors that turn the lights out if nobody’s in the room.”

“Going green makes a building more marketable, leading tofaster rents, faster sales,” Liu adds. “Speed is dollars. Of course thekey real estate fundamentals have to be there, but if you get thebasics of development right, you can use the greenness of the projectas a differentiator in the marketing process.”

Paul Bello, partner at AKF Engineers, based here, admits thatgreen buildings were regarded as a fad not too long ago, but heinsists that they’ve turned out to be anything but.

“The nomenclature of environmental sustainability, the philosophyof it, has gotten into the minds of the clients, the designers, andthe general public,” he says. “I don’t see any major project that’snot considering sustainable design—which will lose that labelsoon, and just be considered good design practice. It’s commerciallyviable now, and it makes economic sense on a long-termbasis.”

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