Brownfields: Emerging Issues in Redevelopment The Economics of Green Presented to: Rutgers, New...
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Transcript of Brownfields: Emerging Issues in Redevelopment The Economics of Green Presented to: Rutgers, New...
Brownfields: Emerging Issues in RedevelopmentBrownfields: Emerging Issues in Redevelopment The The Economics of GreenEconomics of Green
Presented to: Rutgers, New Jersey Agricultural Experiment Station September 16, 2008
Presented by: Mark Pomykacz, MAI, MRICS
[email protected] 908.534.3590
FEDERAL APPRAISAL & CONSULTING LLC
www.federalappraisal.com
866.FED.APPR
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
IntroductionIntroduction
Mark PomykaczMark Pomykacz
Managing Partner, Managing Partner, Federal Appraisal & Consulting Federal Appraisal & Consulting LLCLLC
MAI, MRICS, SCGREAMAI, MRICS, SCGREA Over 22 years appraisingOver 22 years appraising
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
The Need for GreenThe Need for Green
In the United States alone, buildings In the United States alone, buildings account for:account for: 70% of electricity consumption70% of electricity consumption 39% of energy use39% of energy use 39% of all carbon dioxide 39% of all carbon dioxide (CO(CO22 ) ) emissions emissions 40% of raw material use40% of raw material use 30% of waste output 30% of waste output (136 million tons annually)(136 million tons annually)
12% of potable water consumption12% of potable water consumption
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
What is What is GreenGreen??
Green is an evolutionary conceptGreen is an evolutionary concept What is “What is “greengreen” today may no ” today may no
longer be “green” tomorrowlonger be “green” tomorrow Fundamentally, Green is about Fundamentally, Green is about
Quality!Quality!
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Two Business ReasonsTwo Business Reasons
Profit and/or ImageProfit and/or Image Profits are SupplyProfits are Supply Image is DemandImage is Demand
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One Personal ReasonOne Personal Reason
It’s the “right thing to do”, It’s the “right thing to do”, ConscientiousnessConscientiousness
DemandDemand
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Profit MotiveProfit Motive
Additional Cost of Construction vs. Additional Cost of Construction vs. Reduced Operating CostsReduced Operating Costs Green does not always cost moreGreen does not always cost more
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Profit Motive: Profit Motive:
Construction CostsConstruction Costs
MaterialsMaterials Green building costs may or may Green building costs may or may
not be higher than non-green not be higher than non-green costscostsDepends on level of planningDepends on level of planningGovernment sponsored financial Government sponsored financial incentivesincentives
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Profit Motive:Profit Motive: Construction CostsConstruction Costs
DesignDesign Once design is discovered and Once design is discovered and
learned, no additional costlearned, no additional cost
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Cost of Green vs Non-GreenCost of Green vs Non-Green
Langdon, Davis; The Cost of Green Revisited, July 2007
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Cost of Green vs Non-GreenCost of Green vs Non-Green
Langdon, Davis; The Cost of Green Revisited, July 2007
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Profit Motive: Profit Motive:
Operating CostOperating Cost
Utilities (Elect, Oil, Gas, Water, Sewage)Utilities (Elect, Oil, Gas, Water, Sewage) Maintenance (External building, Internal Maintenance (External building, Internal
building, Land)building, Land) Green features may reduce operating and Green features may reduce operating and
capital expensescapital expenses Which would increase net operating Which would increase net operating
incomeincomeWhich increases profits and valueWhich increases profits and value
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Profit Motive: Profit Motive:
Operating Costs Operating Costs
Maintenance and management Maintenance and management expenses may be reducedexpenses may be reduced
Operating and capital repairs may Operating and capital repairs may be reducedbe reduced
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Profit Motive: Profit Motive:
May Increase RevenueMay Increase Revenue
Relates to demand sideRelates to demand side Faster, higher priced sales and Faster, higher priced sales and
rentalsrentals Green buildings may have a different Green buildings may have a different
financial risk profile and investor rate financial risk profile and investor rate of return requirements of return requirements
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
ConscientiousnessConscientiousness
Environmentally FriendlyEnvironmentally Friendly Corporate Image & ConscientiousnessCorporate Image & Conscientiousness Private Conscientiousness, Internal Private Conscientiousness, Internal
MotivationsMotivations
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ValuationValuation
Three Approaches to ValueThree Approaches to Value SalesSales IncomeIncome CostCost
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Sales ApproachSales Approach Scenario OneScenario One
SubjectSubject Comp 1Comp 1
AdjustmentsAdjustments
Comparable Sale PriceComparable Sale Price $ 9,000,000 $ 9,000,000
Time:Time: -5%-5%
Location:Location: 0%0%
Size:Size: -5%-5%
Condition:Condition: 0%0%
QualityQuality TraditionalTraditional TraditionalTraditional
0%0%
Total Adjustment :Total Adjustment : -10%-10%
Final Adjusted Price :Final Adjusted Price : $8,100,000 $8,100,000
Scenario TwoScenario Two
SubjectSubject Comp 1Comp 1
$ 9,000,000 $ 9,000,000
-5%-5%
0%0%
-5%-5%
0%0%
GreenGreen TraditionalTraditional
25%25%
15%15%
$10,350,000 $10,350,000
DifferenceDifference $2,250,000 $2,250,000
Green PremiumGreen Premium 28%28%
Quality:Quality:DesignDesignFunctionalityFunctionalityAppealAppealMaterials Materials Etc.Etc.
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Traditional
$/Annual
Gross Income
Rent PSF $25.00
Rent $1,250,000
Less: Vacancy & Credit Loss Rate 10.0%
Effective Gross Income $1,125,000
Operating Expenses
R.E. Taxes $20,000
Utilities $30,000
Operating Expenses $125,000
Reserves Rate 4.0%
Reserves $45,000
Management Expense Rate 5.0%
Management Expense $56,250
Total Expenses $276,250
OER 24.6%
Net Operating Income $848,750
Capitalization Rate Calculation
Nominal Interest Rate 7.50%
Loan Term 20
Loan to Value: 75.00%
Equity Rate: 12.00%
Indicated Cap Rate, rounded 10.25%
Capitalized Value $8,280,213
Green
$/Annual
$30.00
$1,500,000
9.5%
$1,357,500
$21,000
$20,000
$150,000
4.0%
$45,000
5.0%
$56,250
$292,250
26%
$1,065,250
7.50%
20
75.00%
11.75%
10.05%
$10,598,569
Indicated Value rounded
Traditional$8,280,000
Green $10,599,000
Difference $2,319,000
Green Premium 28%
Income Approach
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Cost ApproachCost ApproachScenario 1
Traditional
Base Cost $175
Adjustments $0
Depreciation
Physical -4%
Functional, Super Adequacy 0%
Economic 0%
Value via Cost $168
Scenario 2
Green
$225
$0
-4%
-5%
0%
$205
Scenario 3
Traditional
$175
$0
-4%
0%
0%
$168
Scenario 4
Green
$225
$0
-4%
0%
0%
$216
$50 Cost to Cure
27%
Curable Functional Obs
$205Value after Cure, via Cost
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
ValuationValuation
Market evidence is neededMarket evidence is needed Education is neededEducation is needed
Federal Appraisal and Consulting LLCFederal Appraisal and Consulting LLC
Vancouver Valuation Vancouver Valuation AccordAccord
Appraisers MustAppraisers Must identify the relevant components of a sustainable property;identify the relevant components of a sustainable property; provide information resources for green buildings and projects provide information resources for green buildings and projects
data;data; evaluate the initial costs in context with the longer-term evaluate the initial costs in context with the longer-term
benefits;benefits; analyze capital and operating costs relative to net income analyze capital and operating costs relative to net income
from operations and reversion;from operations and reversion; analyze the relevance of green features in the marketplace;analyze the relevance of green features in the marketplace; assess market and investment risk(s) relative to potential assess market and investment risk(s) relative to potential
rewards;rewards; identify who pays the costs and who receives the benefits for identify who pays the costs and who receives the benefits for
the sustainable elements incorporated; and the sustainable elements incorporated; and provide a competent and reliable estimate of market value in provide a competent and reliable estimate of market value in
the context of available datathe context of available dataSteve Bergsman, Sustainable by all accords: the recently signed Vancouver Valuation Accord marks agreement among industry leaders to address the interrelationship of sustainability and value, Valuation Insights & Perspectives, Spring 2007
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Cost premium statsCost premium stats
Delloitte and Lockwood, Dollars and Sense of Green Retrofitting p.4
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Where are the problems?Where are the problems? The government The government is at fault, some say, for not leading the is at fault, some say, for not leading the
way by providing more financial incentives for green way by providing more financial incentives for green building, and for not investing more in alternative building, and for not investing more in alternative energies like solar.energies like solar.
Builders Builders are to blame for sticking to their old energy-are to blame for sticking to their old energy-wasting patterns, all in the name of maximum profits with wasting patterns, all in the name of maximum profits with minimum risk.minimum risk.
Appraisers Appraisers are to blame, some say, for not aggressively are to blame, some say, for not aggressively seeking out and valuing green building features.seeking out and valuing green building features.
Homebuyers Homebuyers are guilty of shortsightedness when are guilty of shortsightedness when favoring a slightly smaller purchase price over vastly favoring a slightly smaller purchase price over vastly lowered monthly utility bills lowered monthly utility bills