What Is Sustainable Development? Benefits & Opportunities for Developers and Communiti es James R. DeLisle, Ph.D. F

1. What Is Sustainable Development? Benefits & Opportunities for Developers and Communities James R. DeLisle, Ph.D. February 5, 2008

2. Presentation Overview • Sustainable Real Estate • Value Proposition • Most Fitting Use • Holistic Approaches • Alternative Metrics • Sustainable Real Estate Movement • Nature: Structural shift, with cyclical risks • Need: Strong emotion, less empirical • Issues • Risks • Barriers • Opportunities

3. Overview • Key Questions • What is Sustainable Real Estate? • What are Green Buildings? • What, When, Where Why and How go Green? • Our Challenges in Moving Toward Sustainabilty • Growing right with economic, environmental, ethical and social challenges • Responding to challenges of Global Warming and environmental degradation • Striking balance between needs of current and future generations • Developing customized, collaborative, inclusive values • Ensuring effectiveness and efficiency • Approaching the issue from a holistic perspective

4. Sustainable Real Estate • Definition of Sustainable Real Estate • The use of scarce real estate in an efficient, economic, equitable and socially responsible manner that provides an acceptable –if not optimal– fit between users of space and the space that is produced that has an existing and enduring effective demand and balances the needs of current and future generations. • Evaluative Criteria • Efficient, economic, equitable and socially responsible uses • Achieves goodness-of-fit between users and space • Satisfies current and future demand for space • Balances needs of current and future generations

5. The Real Estate Sustainability Spectrum What are the three key dimensions of Real Estate? S…. E…. L…. Static Linkages Environment Sustainable….

6. How Look at Real Estate? • Perspectives • Dimensions: space-time, money-time Money-time Space-time

7. Highest and Best Use vs. Most Fitting Use • DefinitionThe reasonably probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value” as of the date of the appraisal. • Criteria • Legal • Physically possible • Reasonably probable • Financially feasible • Maximize value • Most Fitting Use • “Satisficing or Optimizing” vs. Maximizing Value

8. Interdisciplinary Approach to Sustainability Disposition/Redevelop Operation $ Acquisition/Production Planning Feasibility Time Portfolio Mgmt. Construction Mgmt. Marketability Asset Mgmt. Quality Controls Appraisal Hold/Sell Analysis Leasing Project Mgmt. Engineering Marketing Tenant Improvements Architectural Oversight Architectural Valuation Tenant Relations Cost Mgmt. Environmental Buyer Selection Property Mgmt. Construction Financing Legal Broker Management Accounting/Reporting Inspections Cost Estimation Negotiations Engineering Pre-leasing Closing Negotiations Financial Mgmt. Releases Final Inspection or Sourcing if Existing

9. Real Estate Valuation Model Value = Income/Return Value Return = Income/Value * Return Income = Value * Return Income Cost

10. Frontdoor Model Toward Sustainable Real Estate TRCm * Wcc GIr NIr / NIR Land Hard & Soft Costs TRCm

11. Backdoor Model Toward Sustainable Real Estate RCR TRCj * Wcc GIm / NIR NIm Land Hard & Soft Costs TRCj

12. Green Building and Project Finance Financing Risk/Return Hurdle D/E * Wcc GIr Lease Structure: Who Captures? NIr / NIR Site Selection Operating Efficiency Materials & Labor TRCm

13. Sustainable Real Estate Value • Value: • cost of materials • costs of construction • cost of financing • cost of fees • Income • gross income • net level, pattern • Return • absolute vs. risk-adjusted • attribution to income vs. value

14. Sustainability: Irretrievable Commitments Improvement Cost Demolition & Lost Income TRCje Wcc NOIe TRCj Improvement Cost * Wcc Wcc NOI gap Land Value NOIn

15. (NOI) (NOI) (NOI) (NOI) (NOI) Sustainable Business Models • Function: ( Quantity of Business + Cost of Business + Quality of Business + Continuity of Life)

16. Green: What it is & What’s Driving It? • Background • Historical • Cyclical phenomenon tied to energy costs • Lessons Learned • Recent • Global Warming Catalyst tied to environment • Social Responsibility • Urban Environmental Issues • Energy Depletion • Greenhouse Gases • Climate change • Stormwater Control • Urban Heat Island Effect • Transportation: Congestion and Pollution

17. Green: Where’s it Going? • The Green movement is a Temporary Phenomenon… • 500 + Corporate & Institutional Investors  • Major Interest Groups/Catalysts • US Green Building Council (USGBC) • Mayors 2030 Challenge • CSR: Corporate Social Responsibility • SRI: Socially Responsible Investing • RPI: Responsible Property Investing • Green Finance Consortium • Property Insurance Corporate RE Executives

18. Green Buildings: Diffusion of Innovation Corporate Social Responsibility Global Warming Rising Energy Costs Profit/Return Rising Requirements Growth in Membership in USGBC Degree of Green Innovation Growth Maturity Decline

19. Green Communities: Competitive Positioning? http://www.sustainlane.com/us-city-rankings/seattle.jsp

20. Other Drivers toward Sustainability • Corporate Social Responsibility • Socially Responsible Investing • Green Building Finance Consortium • Graaskamp on Social Responsibility: Man is the only animal that builds his terrarium about him as he goes and real estate is the business of building that terrarium. So we have a tremendous ethical content, tremendous social purpose. The student is looking for a field in which entrepreneurship and a way of life can be integrated into social purpose. We like to argue that the entrepreneurship of tomorrow is going to be the individual who can inventively implement social policy.

21. Corporate Real Estate: Value Creation Maximize Optimize Enhancing RE Costs Enduring Situational Minimize Tactical Strategic Perspective

22. Why are companies Going Green Corporate Business Model Gross Revenues Costs of Goods Business Activity Labor Profit Profit Real Estate Costs Time Corporate Social Responsibility

23. Green Cost Savings • Green Cost Savings • Context • Energy = 30% of operating costs • Operating costs = 39% of real estate costs • Real estate costs = 10-15% of business costs • 20% energy savings = .2-.6% of business costs Energy = 30%

24. How Green? LEED Certification • LEED: What it is? • Leadership in Energy and Environmental Design (LEED) Green Building Rating System™ • Benchmark for the design, construction, and operation of high performance green buildings • LEED Categories • LEED CI: Commercial Interiors • LEED CS: Core & Shell • LEED EB: Existing Buildings • LEED NC: New Construction

25. LEED New Construction • Reuse existing building/sites • Protect natural and agricultural area • Reduce need for automobile use • Protect and/or restore natural sites • Develop only appropriate sites • Innovation in Design 5 • Sustainable Sites 14 • Materials & Resources 13 • Energy & Atmosphere 17 • Water efficiency 5 • Indoor Environmental Quality 15 • Exceptional Performance in Achieved LEED-NC Credit • Innovation in other Green Building Categories • Use materials with less environmental impact • Reduce & manage waste • Reduce amount of materials needed • Establish energy efficiency and system performance • Optimize energy efficiency • Encourage renewables and alternative energy sources • Support ozone protection protocols • Reduce quantity of water needed for building • Reduce municipal water supply and treatment burden • Establish good air quality • Eliminate, reduce and manage the resources of indoor air pollution • Ensure thermal comfort and systems controllability • Provide for occupant connection to the outdoor environment Geddes, EDA W NV

26. Other Approaches to Sustainability • ABGR: Australian Building Greenhouse Rating, AUS 2005 • BASIX: Building Sustainability Index, NSW 2004 • BEPAC: Building Environmental Performance Assessment Criteria, Canada 1993 • BREEAM: Building Research Establishment Environmental Assessment Method, UK 1990 • CASBEE: Comprehensive Assessment System for Building Environmental Efficiency, Japan 2004 • CEPAS: Comprehensive Environmental Performance Assessment Scheme, HK 2001 • EMGB: Evaluation Manual for Green Buildings: Taiwan 1998 • Energy Star: USEPA & DOE Rating on Energy Efficiency & Indoor Env. • EPGB: Environmental Performance Guide for Building, NSW • GHEM: Green Home Evaluation Manual, China 2001 • GreenStar: Green Building Council, AUS • HKBEAM: Hong Kong Building Environmental Assessment Method, HK 1996 • NABERS: National Australian Building Environmental Rating System, AUS 2001 • SBAT: Sustainable Building Assessment Tool: South Africa Ding, Grace 2007

27. Primary Research: LEED Market Penetration

28. LEED Platinum: New Construction Example Total Number = 35

29. Market Share by Type by LEED Rating

30. Existing Building : Share with Points/Category Indoor Environmental Quality Sustainable Sites Energy & Atmosphere Materials & Resources Efficiency Innovation & Design Process

31. Distribution of LEED Certification by Level LEED Share: Rating by Type

32. Geographic Dispersion by Type of Green Activity

33. Sustainable Building Assessment Tool (SBAT-1) Gibberd, J 2003

34. Responsible Property Investing (RPI) • Overview • Nature: going beyond compliance with minimum legal requirements • Goal: better manage the risks and opportunities associated with environmental, social, and governance issues in property investing. • Rationale: reduce risk and pursue opportunities while addressing the challenging issues facing present and future generations. • Scope • A variety of efforts to address ecological integrity, community development, and human fulfillment in the course of profitable real estate investing. • Level: Portfolio, asset, or property management

35. Drivers and Barriers to RPI Drivers Behind RPI Concern for risk and return 4.6 Opportunities to outperform 4.3 Business advantage 4.2 Moral responsibility 4.1 Voluntary codes of behavior 3.9 Internal leadership 3.9 Cost avoidance 3.9 Customers 3.7 Employee recruitment/retention 3.2 Investors 3.1 Peer activity 2.8 Stakeholder pressure 2.7 Insufficient financial performance 3.9 Insufficient tenant demand 3.7 Lack of products to invest in 3.4 Lack of information 3.3 Incompatible with fiduciary duty 3.2 Legal Restrictions 2.7 Internal resistance 2.4 Barriers to RPI Source: RESPONSIBLE PROPERTY INVESTING: A Survey of American Executives Gary Pivo, 2007

36. Green Building Finance Consortium Founding Members • National Association of Realtors • BOMA International • CB Richard Ellis • City of Seattle • Kennedy Associates Real Estate Counsel • Cherokee Investment Partners • Swinerton Builders, Inc. • Davis Langdon • EPA EnergyStar Division • Northwest Energy Efficiency Alliance • Revival Partners Collaborating Groups • The Appraisal Institute • Royal Institute of Chartered Surveyors • CoreNet Global • American Institute of Architects • World Business Council for Sustainable Development • Commission for Environmental Cooperation • Vancouver Valuation Accord • U.S. Green Building Council • High Performance Building Protocol Committee • Lawrence Berkeley National Laboratories • ASHRAE 189P High Performance Building Standards

37. GBFC Mission/Challenge • Structure • Independent organization • Collaborative Approach • Mission/Challenge • Enable Private Sector Investment • Appropriate recognition of the “value” of Green Building Investment • Development of Property Specific Process • Focus on risk assessment – downside and upside • Greater emphasis on existing buildings

38. Underwriting Sustainable Buildings: GBFC • Underwriting QuestionAre the benefits of investment sufficient to compensate for the risks undertaken?” • Standard • Fiduciary purpose, not tactical or strategic • Independent (3rd party) testing of investment assumptions • Approach • Value is incorporated, but the focus is risk • Underwrite to specific investment criteria • Return Hurdles • Risk Tolerances

39. Institutional Investors vs. Corp. on Statements on Green

40. Investors & Corp Respondents: Green Decisions

41. Biggest Barriers: Corp vs. Inst. Investors • Institutional Investors • Costs, costs • Perception of higher costs • Must be financially feasible • Knowledge of benefits to various parties • Lack of knowledge • Lack of incentives • Investor buy-in • Investor interest • Costs then education • Education of public • Efficacy and Cost-effectiveness • The party paying not one benefiting • Building payback is short-term • Office space is a commodity product • Hold periods too short to justify • Knowledge • Too many unknowns • Lack of long term benchmarking • Lack of demand by clients/tenants • Lack of research & public education • Commitment • Retrofitting existing isn’t justified • Tenants don't know or care • When tenants decide, developers will follow • Education • Requires new methods/education • Educating the public on the pros and cons • Cost/benefit analysis

42. Greatest Opportunities: Corp vs. Inst. Investor • Institutional Investors • Image • Self-sustaining, renewable energy • Good PR, leadership • Marketing, Market Advantage • Good public policy • Lower operating costs • Cost savings • Increased productivity • Actually improve air • Doing the right thing • Environmental benefits • Reduce carbon • Education • Consistent, fact based, education • Education of managers & investors • Identifying "low hanging fruit" • Competitive Advantage • First mover advantage • Better work environment; productivity • Marketing as customers demand green • Spatial Impacts • Improved performance and operations • More comfortable building & operation • Environmental Benefits • Sustainability & ecology effects • Reduce resources; energy savings • Carbon reduction, waste reduction

43. Research Issues: Corporate vs. Inst. Investors • NCREIF • What is real benefit? • How much does it really cost? • What is payback period? • Benchmarking; how measure? • What interests of clients? • How be cost competitive? • How improve social benefits? • What are clients interests? • Who is going to lead? • How quantify and justify? • What trade-offs • How affect value? • Performance • How measure benefits? • Do studies show operational savings? • Factual data on effects, net costs • What added costs, new and existing • Lessons Learned • What mistakes have you seen • Keep open mind and not one answer for all • How change traditional way of doing things? • Education • Who teaches skills, materials and techniques? • Beyond materials & energy, what works? • Does green give competitive advantage? • Approaches • Beyond LEEDS; RPI & energy star? • How create more incentives?

44. Biggest Risks: Corporate vs. Inst. Investor • Institutional Investor • Too much, too soon • Not catch on; too complex • Failure of untried products • Negative performance impacts • Surge in new construction • Discussion out of hand • Too much, too soon • New technology • Lack of tenant interest • Temporary phenomenon • Excessive gov interventions • Too knee-jerk, high-handed • Complexity • Too complicated, too fast • Continuing to ignore existing buildings • Efficacy • Projected savings not recaptured • Higher costs more to maintain in long run • Tenants or users don't like the product • Too much hype, too fast; bogus case studies • Uncertainty • Not knowing what the economic effect is • Unproven technologies that don’t work • Unexpected side effects, such as air quality • Market Acceptance • Not Getting public buy-in/losing support • Developers spend & tenants don’t respond • Interventions Institutionalized • Being forced with unintended consequences • Movement entrenched in building codes

45. Summary • Sustainable Real Estate Movement • Nature: Structural shift, with cyclical risks • Need: Strong emotion, less empirical • Sustainable Real Estate • Value Proposition • Most Fitting Use • Holistic Approaches • Alternative Metrics • Issues • Risks • Barriers • Opportunities