ULI White Paper Guides Sustainability Over Entire Property Cycle
- Jun 18, 2019
Presumably, no one in the commercial property world really needs to be told that sustainability is increasingly important or that green buildings can save money while conserving energy and water and reducing carbon emissions. But what hasn’t been much addressed, according to the Urban Land Institute, is the transaction side, that is—exactly what kind of steps to take with respect to sustainability when buying, selling or leasing a property.
That’s why the institute’s Greenprint Center for Building Performance has released “Embedding Sustainability in Real Estate Transactions,” a new white paper and toolkit that highlights 11 actionable steps encompassing the entire property cycle: acquisition due diligence (first two steps), acquisition financing (steps three and four), the hold period (steps five through eight) and preparing for disposition (the last three steps). What’s at stake, the report states, can be significant, in some cases a 50 percent–plus increase in asset value over the lifetime of an investment.
The 11 recommendations aren’t merely theoretical. They’re based on interviews with 30 real estate leaders representing such players as Bentall Kennedy, CBRE, Duke Realty, Eastdil Secured, Heitman, Hines, LaSalle Investment Management, MetLife, Nuveen, Tishman Speyer and Vornado. These participants collectively used combinations of one or more of the 11 actions described in the toolkit to generate NOI increases of from $0.50 to more than $10 per square foot per year and to increase the sale value of their properties more than 50 percent, as compared with a business-as-usual approach.
With no further preamble, here’s a summary of the 11 steps:
- Look at actual energy expenses, not estimates.
- Expand the due diligence/property condition assessment to include key sustainability factors. One recommendation here is to model future flood risks and sea-level rise, instead of simply relying on federal flood maps, which might not reflect current risks.
- Include big-ticket items in project financing. Acquisition funding is the lowest-cost capital a building will ever get in its life cycle, so it makes sense to try to factor in estimates for upgrading the building envelope and/or mechanical systems.
- Leverage sustainability-specific financing tools.
- Upgrade the building systems in the right order and as soon as possible. For example, if a chiller is replaced before upgrades are made to the building envelope, it could end up being oversized for the building’s needs, wasting money and energy.
- Attract tenants at a premium by featuring sustainability and health in leasing activities.
- Leverage leases to align costs and benefits for landlord and tenant.
- Guide the tenant fit-out process to maximize building performance.
- Market your building to buyers who will pay a premium for sustainability. A growing pool of investors is seeking sustainable real estate investments.
- Find a qualified appraiser and use valuation guidance for sustainable buildings.
- Make any remaining big investments a year before disposition in order to capture value in the sales price.