Friday, September 26, 2008

Which Green Certification System?

Today there are three green building certification systems. The recognized leader, and one we are all familiar with, is the U.S. Green Building Council's signature Leadership in Energy and Environmental Design (LEED) certification, applicable to both new and existing buildings. An alternative to the LEED standard is Green Building Initiative's Green Globes certification. Green Globes' roots go back to Canada in 1996 when the Canadian Standards Association published the Building Research Establishment's Environmental Assessment Method (BREEAM) as a guideline for existing buildings in Canada. It became an online assessment and rating tool for existing buildings under the Green Globes brand in 2000. At about this same time, they expanded their footprint into the development of standards for new building design. Practically, it is clear to me that Green Globes is more of a Web-based assessment tool than a standard. Amazingly, Jones Lang LaSalle acquired the business this past July, presumably because they saw the marketplace begging for a tool that could enable a quick, less expensive assessment of a building's overall performance. Jones Lang LaSalle believed that this would be particularly attractive to owners of large portfolios of existing buildings, such as themselves.
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Finally, there is the National Association of Home Builders' National Green Building Standards. However, these focus principally on single-family residential construction and remodeling and multi-family construction.
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In my opinion, the likelihood that a single certification will overwhelmingly dominate the market is low. Rather, competition among certification systems will accelerate over the next few years. In fact, it is much more likely that each certification system will find its own niche in the market. For example, LEED certification is not cheap and can be prohibitively expensive for small commercial buildings, portfolios of existing commercial buildings and low-price-point residential properties. But working through all this will take time.
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Where does this leave the owner or manager of an existing building or a portfolio of existing buildings, particularly in the tough real estate market we are living in today? In my view, the most important element of establishing a "green" building is reducing energy consumption. This is a winner no matter what the economic climate and the place to start. There are things that can be done that are relatively inexpensive (refer to an earlier blog of mine) and things that require a capital investment. I believe the spiraling cost of energy in all its forms and government tax incentives and credits will continue to support at least moderate capital investment levels with excellent ROIs. Lower energy cost will also mean a greater NOI and therefore, enhance a property's value. No matter what "green" certification you may ultimately choose at some point in the future (probably following market drivers), the investment in reducing energy will never go to waste!
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Would anyone like to share with our community their experience with "green" certification of existing buildings? I am sure we would all be interested.

Tuesday, September 23, 2008

New Initiatives Deal with Energy Reduction in Existing Buildings

The commercial real estate industry spends approximately $24 billion annually on energy and contributes approximately 18% of U.S. carbon dioxide emissions. It is also well known that energy represents the single largest controllable operating expense for buildings, typically a third of variable expenses, and this expense continues to increase! No prudent building owner or manager would argue that a re-evaluation of energy use in their buildings is a high priority. Unfortunately, to-date the principal focus has been on new buildings or buildings undergoing significant renovation, not on existing buildings, of which there are orders of magnitude more. Only the United Kingdom has focused on both new and existing premises with expansion this past summer of its energy performance requirements to commercial property over 26,900 square feet when built, sold or rented.

Energy retrofits to existing buildings in the U.S., although a growing priority, have often been complicated by numerous financial and contractual barriers. However, BOMA this past summer unveiled its Energy Performance Contract (EPC) Model. Developed in collaberation with the Clinton Climate Initiative (CCI), the BOMA EPC Model allows building owners to perform major energy retrofits to existing buildings by removing key barriers and providing a turnkey solution. The Model provides a standardized energy performance contract, similar to the American Institute of Architects' construction contract. The key legal and technical provisions in the contract have been vetted by top real estate and energy service companies, along with BOMA legal counsel and numerous experts in the field. The BOMA EPC Model provides a market mechanism that every building, regardless of age, location and type, can use to significantly improve efficiency.

As part of the EPC Model, BOMA and CCI teamed up with USAA Real Estate Company to generate an energy reduction pilot project to test the Model. The pilot project clearly demonstrated the business case, including development of a financial structure to fund the costs. Working with an investment bank, Hannon Armstrong, a financial structure was developed using the assets in the building as collateral, not the building itself, and using the guaranteed energy savings from the project to pay for the loan.

The BOMA EPC Model is a significant industry event. The industry finally has a streamlined, industry-vetted, cost effective and time efficient model contract that can be used to implement major energy retrofit projects in existing buildings.

It is also interesting to note that BOMA also has released a new lease guide, the BOMA Green Lease Guide, for writing "green language" into a commercial real estate lease. Terms of the lease actually incentivize tenants to reduce energy consumption. The Guide offers an alternative to the typical triple net lease, where the landlord pays for capital improvements to reduce energy consumption, but the tenants, who pay the utility bills, reap the benefits of these measures.

While much has been written and done about reducing energy in new buildings, it is clear that the greatest impact will be achieved by reducing energy in existing buildings. Fortunately, this is becoming a much higher priority in the industry.