Cost Benefit Analysis of LEED Green Building Design and Construction

1. Cost Benefit Analysis ofLEEDGreen Building Design and Construction Tom Link Youngtao Shi Bill Morrow

2. What is LEED? 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! Increased First Cost Decreased Life Cycle Costs For whom? Owner? Developer? Lender? Occupants? Society? Value & Equity Most lenders and developers do not consider energy savings and worker productivity when deriving value of commercial real estate…. Occupant Productivity 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 NPV of Future Cash Flows VALUE

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

10. So … • Problem Boils Down to…. • 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 Pre-LEED Costs & Benefits Owner Contractor Occupant Society 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 = Costpost-LEED – CostPre-LEED • ∆Benefit = Benefitpost-LEED – BenefitPre-LEED Sign Convention ∆Cost = (+)Increase; (-) decrease ∆Benefit = (+)Increase; (-) decrease

19. αx ∆ 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) + Cost Impacts = ∆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. θ x ∆Energy (Post – Pre LEED) λ x ∆Water (Post – Pre LEED) μ x ∆Material (Post – Pre LEED) + Life Cycle Benefit Impacts =∆BLC(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) + =∆BS (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 Benefits Now ask: “which year ?” Cost

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

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

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?