1. Cost Benefit Analysis of LEED Green Building Design and Construction Tom Link Youngtao Shi Bill Morrow

2. What is LEED? www.usgbc.org www.usgbc.org Leadership in Energy and Environmental Design Voluntary, consensus-based national standard to encourage developing high-performance, sustainable “green” buildings Green Building Rating system developed, administered, and monitored by US Green Building Council (non-profit 501c(6) trade association) System only about 2 years old Currently: 500 projects under development applying for LEED Certification (9/2002) 31 Certified Projects (11/2002)

3. LEED Score card

4. LEED Score card -- Details

5. To Build LEED, or not? Costs – what additional costs are involved? Benefits – what additional benefits will come from a Green Building? How do you measure Costs and Benefits?

6. Depends on who you ask! For whom? Owner? Developer? Lender? Occupants? Society? Most lenders and developers do not consider energy savings and worker productivity when deriving value of commercial real estate…. Increased First Cost Decreased Life Cycle Costs Occupant Productivity Value & Equity Sustainability

7. Cost-Benefit Approach Some Definitions: First Costs/Benefits (FC): Year 0 Cost/benefit of design, construction, marketing, etc. Life Cycle Costs/Benefits: After Year 0 Future costs and benefits: energy savings, replacement costs, tenant health/productivity, maintenance costs, operating costs etc. Smaller “footprint” for the future to inherit (sustainability)

8. NPV & Cash Flows Cash flows = income (rent) – expenses – debt service Most commercial tenant leases pass on some or all utility and maintenance costs to tenants So… Cash flows typically DO NOT include worker productivity/health, energy savings, or societal benefits Developers, & lenders care less about higher energy costs, worker health/productivity, etc. because these costs are passed on to tenants VALUE NPV of Future Cash Flows

9. Developer’s Dilemma = $10,000,000 FC (w/o green design) = $10,150,000 FC (w/ green design) Lender = $8,000,000 mortgage ? Where does the $150,000 come from? Will extra cost increase NOI?

10. Problem Boils Down to…. So … Will increased FC increase NOI enough to increase NPV of future cash flows and increase VALUE? Yes, if…. A) Rent can be increased, B) debt service can be reduced, and/or C) operating costs decrease Justifying increased FC by projecting higher NOI is difficult because cost savings and increased productivity of green design are often realized by tenants--- not developers.

11. When LEED Makes Sense Most Certified LEED Buildings are owner occupied Corporate Headquarters Schools, Universities Government buildings Environmental Centers Owner Occupied Buildings care about: Energy Savings Worker Productivity Branding (image benefits of having a Green Building) Owner occupied buildings will often have more equity in deals, thus less concerned with additional up front costs Market will shift towards Green Building design as tenants demand lower energy costs and higher worker productivity and developers realize that Green buildings keep value longer than non-Green buildings

12. OK, Let’s do CBA! QUESTION : how ? … what about those hard Costs and vague Benefits ? ANSWER – Draw Boundaries – a Cost / Benefit to whom? Contractor ? Owner / Operator of Building ? Occupant of Building ? Society as a whole ? Different Costs & Benefits apply to each of these boundaries

13. CBA – Our approach Contractor Owner Occupant Society Pre-LEED Costs & Benefits Post -LEED Costs & Benefits

14. How do we know Cost and Benefit amounts? We Don’t ! Costs are easier to calculate because they are finite, but until the building is built, they are only estimates Benefits are difficult to count because they are less finite, and are therefore all ways estimates How then can we compare costs to benefits ?

15. Matrix – Impact scale, not $ Scale Values for each LEED Credit 10 Huge Impact 9 8 7 6 5 Medium Size Impact 4 3 2 1 Small Impact Apply to Both Costs & Benefits

16. What are Cost Impacts? For Each Credit, There is a Cost – (Boundary around Contractor) Construction Architecture & Engineering Construction Management Materials / Equipment Construction Time

17. What are Benefit Impacts? For Each Credit, there are Benefits – Life Cycle Costs (Boundary around Owner) Energy Water Material Externality Benefits Occupants (Boundary around Occupants) Productivity Health Non-Measurable Societal (Boundary around Society) Societal Sustainability Building Marketability

18. Estimates – The ∆’s ∆ Cost = Cost post-LEED – Cost Pre-LEED ∆ Benefit = Benefit post-LEED – Benefit Pre-LEED Sign Convention ∆ Cost = (+)Increase; (-) decrease ∆ Benefit = (+)Increase; (-) decrease

19. Cost Impacts α x ∆ Construction (Post – Pre LEED) β x ∆ Architecture & Engineering (Post – Pre LEED) ε x ∆ Construction Management (Post – Pre LEED) ζ x ∆ Materials / Equipment (Post – Pre LEED) η x ∆ Construction Time (Post – Pre LEED) + = ∆C ( Total Impacts from Costs) Where: α, β, ε, ζ, and η are all weighting factors used to correct for inequalities in each item’s respective importance

20. Life Cycle Benefit Impacts θ x ∆ Energy (Post – Pre LEED) λ x ∆ Water (Post – Pre LEED) μ x ∆ Material (Post – Pre LEED) + =∆B LC (Total Impacts from Life Cycle Benefit) Where: Θ,λ,μ are all weighting factors used to correct for inequalities in each item’s respective importance

21. Societal Benefit Impacts ξ x ∆ Occupant's Productivity (Post – Pre LEED) φ x ∆ Occupants Health (Post – Pre LEED) ψ x ∆ Societal Sustainability (Post – Pre LEED) ω x ∆ Building Marketability (Post – Pre LEED) + =∆B S ( Total Societal Benefit Impacts) Where: ξ,φ,ψ,ω are all weighting factors used to correct for inequalities in each item’s respective importance

22. The Algorithm – Total Costs and Benefits for all boundaries Cost Benefits Now ask: “which year ?”

23. Big Picture – What we think it might be for Year 0 Credit (ordered according to cost with Benefits shown as negative) matrix LEED Credits (Cost vs. Benefit) Year 0 Certified LEED (26 credits) Silver LEED (33 credits) Gold LEED (39 credits) Platinum LEED (51 credits) large First Cost Small benefits

24. Big Picture – What we think it might be for Year 3 + Credit (ordered according to cost, second order according to Benefits; benefits are shown as negative) matrix LEED Credits (Cost vs. Benefit) Year 3 large Net Benefits Small O&M Cost

25. CBA – First few years (our guesses!) Anticipated Conclusions: Provided all Benefits are counted, Benefits will pay for additional Costs

26. Supporting Examples Conde Nast Building: New York City $600 million dollar project Cost 5%-10% more to build green 10% less to operate (energy savings) Additional capital expense should be paid off in 10 years Greater Pittsburgh Community Food Bank LEED Silver certified $5.8 million dollar project $31,000 annual energy savings

27. Conclusions We believe that LEED buildings will net a positive boost to the overall US economy. Building LEED can make sense when building financer not only owns and occupies the building, but additionally values externalities like productivity, and sustainability However, the challenge is helping non-owner, non-occupant builders finance the building of LEED certified building in a society that mainly values bottom lines. If worker productivity and increasing societal sustainability are not valued, then LEED buildings are more difficult to justify. BUT … we still have to do the work and obtain results. QUESTION.. Are our conclusions correct?.. We will see! Questions?