Green Buildings Reap Future Rewards

Investing in Green Buildings Reap Future Rewards

Original article by:

Inside Indiana Business

By: Natalie Stucky – Partner, Real Estate and Financial Institutions Groups of Bose McKinney & Evans LLP

Most people believe that green buildings cost more than conventional buildings even though a Davis Langdon 2007 study indicates that there is no significant difference between the average cost of the two types. To accurately measure green building costs, one must consider initial construction costs, cost offsets, operating expenses, and revenue generated by the property.

The initial costs of any building, green or otherwise, depend upon many factors, including climate; availability and cost of materials and labor; zoning and building codes; building type; and site condition. Some cost factors are controllable, others aren’t, but often they can be mitigated. For instance, researching availability and delivery time or pre-purchasing materials may avoid costly delays later in the project. Considering the full range of options for specific systems and materials and clearly identifying and communicating the owner’s requirements, priorities and constraints increase the odds that project goals and expectations will be met. According to the U.S. Department of Energy (the “DOE”), integrated building design and construction reduces energy use by 50% or more and reduces maintenance and capital costs. Commissioning agents check work in progress to verify that compliance with the plans and specifications and that the building systems are properly installed and operate as specified in the construction documents. According to the DOE, operating costs for commissioned buildings range from 8% to 20% less than non-commissioned buildings.
Incentives can offset costs. Cash incentives may be available under Indiana’s State Energy Program or Energy Efficiency and Conservation Block Grant Program which support energy efficiency and renewable energy initiatives like retrofits and financial incentive programs for energy efficiency improvements on private property. Federal tax incentives include credits for up to 30% of the cost of qualified property, and deductions of up to $1.80 per square foot of building space for qualified energy efficiency improvements. State incentives include a 3-year investment tax deduction for qualified property, and the Hoosier Business Investment Tax Credit of up to 10% of a qualified investment. Locally, expedited plan review, approval and permitting processes, and credits against permit fees or lower permit fees are becoming more common.

“Negative incentives” encourage green practices. Effective in 2012, all household and commercial lamps and lighting equipment made or imported for use in the U.S. are required to meet new energy standards. Congress appears likely to approve a carbon emissions cap and trade system that could penalize building owners for failing to reduce greenhouse gas emissions and a national minimum building energy code aimed at increasing building energy efficiency.

Some utility companies have loan and rebate programs for purchases of high efficiency equipment. Energy service companies (“ESCOs”) offer contracts whereby the ESCO pays for energy efficiency improvements and recovers the costs over time through the energy savings by selling power back to the owner at an agreed upon rate. “Green loan programs” and “green banks” are emerging in certain parts of the country that focus on financing green businesses and green building projects. The SBA also offers a 504 loan program for projects that decrease energy consumption by at least 10%.

Consulting with a qualified person as early in the project planning process as possible to determine which incentives a project may qualify for and to ensure that all necessary steps are taken to obtain those incentives is critical.

Operating costs and revenues from the project should also be considered. Green buildings are more efficient and use less energy, resulting in lower utility bills. Studies show that, on average, Energy Star® buildings use 40% and LEED buildings use 30% less energy than conventional buildings. The Sears Tower retrofit is expected to reduce annual electricity use by 80% and water usage by 40%. Similarly, the Empire State Building retrofit is projected to reduce energy use by 38%, resulting in annual savings of $4.4 million.

Another operating cost component is human capital. Studies show that worker salaries are 72% higher than building energy costs and that workers account for as much as 92% of the life cycle costs of a building. According to the DOE, people who live and work in green buildings are healthier and 20% more productive. Reductions in absenteeism, health problems, insurance claims, and turnover, and increased productivity all affect profitability.

Last are occupancy levels, rents and resale prices. Studies indicate that LEED buildings have 4.1% higher occupancy levels, rent at an average of $11.33 per square foot more, and sell for an average of $171 per square foot more than comparable conventional buildings, while Energy Star® buildings have 3.6% higher occupancy, a $2.40 per square foot rental premium, and sell for an average of $61 per square foot more than comparable conventional buildings, demonstrating that green buildings provide a much higher rate of return.
There is substantial evidence that green buildings do not cost significantly more than comparable conventional buildings. Further, the offsets, incentives, operating cost savings, and increased rental and resale values from green buildings add up to a higher return than other types of investments, including conventional buildings. Energy costs are expected to rise. Government regulations and mandates for higher building energy performance will increase. Public awareness and concern for environmental and energy issues are growing and reflected in the increasing preference of building occupants for green buildings. Buildings without energy savings strategies will ultimately experience higher operating costs, depressed values and lower occupancy rates. In other words, green buildings are a smart investment.