cost benefit analysis of leed green building design and construction tom link youngtao shi bill...
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Cost Benefit Analysis of LEED
Green Building Design and Construction
Tom Link
Youngtao Shi
Bill Morrow
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)
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?
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
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)
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
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?
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.
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
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
CBA – Our approach
Contractor
Owner
Occupant Society
Pre-LEED
Costs & Benefits
Post -LEED
Costs & Benefits
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 ?
Matrix – Impact scale, not $
Scale Values for each LEED Credit
10 Huge Impact 9
8 7 6 5 Medium Size Impact
4 3
21 Small Impact
Appl
y to
Bot
h C
osts
& B
enef
its
What are Cost Impacts?
For Each Credit, There is a Cost – (Boundary around Contractor)
• Construction
• Architecture & Engineering
• Construction Management
• Materials / Equipment
• Construction Time
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
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
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
Life Cycle Benefit Impacts
θ x ∆ Energy (Post – Pre LEED)
λ x ∆ Water (Post – Pre LEED)
μ x ∆ Material (Post – Pre LEED)
+
=∆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
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
Big Picture – What we think it might befor Year 0
-10-8-6-4-202468
10
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71
Cost
Benefit
Credit (ordered according to cost with Benefits shown as negative)
mat
rix
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
Big Picture – What we think it might befor Year 3 +
-10-8-6-4-202468
10
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71
Cost
Benefit
Credit (ordered according to cost, second order according to Benefits; benefits are shown as negative)
mat
rix
LEED Credits (Cost vs. Benefit) Year 3
large Net
Benefits
Small O&M Cost
-1
0
1
2
3
4
5
6
Year1
Year2
Year3
Year4
Year5
Year6
Year7
Year8
Costs
Benefits
Log. (Benefits)
Log. (Costs)
CBA – First few years (our guesses!)
Anticipated Conclusions:Provided all Benefits are
counted, Benefits will pay for
additional Costs
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
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?