the economics of green - sustainably built · green buildings were built for investment purposes....

The ECOnomics of Green!Putting a value on your green investment…!

A BGBG Brown Bag Presentation by!

Adam Stenftenagel!Sustainably Built!

Stu Galvis!Boulder Green Properties!

Defining the Lingo!

•  Payback!•  Return On Investment (ROI)!•  Modified Internal Rate of Return (MIRR)!•  Lifetime Cost!•  Perceived Value!•  Market Value!•  Appraised Value!

Payback!Payback is simply the number of years it takes for the

energy savings from an improvement to equal the upfront cost.!

Simple Payback: Cost ÷ Savings = Payback (in years)!

Modified Payback: This method incorporates an estimate of increasing energy prices, discount rates, and other factors to determine a more realistic value of the savings. !

Return On Investment!ROI is simply a measure of cash produced by an upfront

investment. We can look at ROI in many different ways, but the easiest method is the Benefit/Cost Ratio or Savings to Investment Ratio (SIR).!

SIR takes the total energy savings over the lifetime of the improvement (Present Value) divided by the upfront cost of the investment. This calculation may or may not include increases in energy prices or inflation rates.!

Modified Internal Rate of Return (MIRR)!The Modified Internal Rate of Return can be used to

compare an investment in energy savings to a financial investment such as a savings account or money market. !

If I invest $1000 in a bank account at 5% interest for 30 years, the value would be $4,321.!

If I invest $1000 in attic insulation, my savings after 30 years could be $6,073 which would equate to an interest rate of 6.2% if I were to put the money in a bank instead, and thus the MIRR is 6.2%.!

Lifetime Cost!The Lifetime Cost of an energy investment would

include the upfront cost of the improvement plus the total predicted energy costs for a specific time period. !

Depending on the period of time chosen, one energy efficiency measure could be more or less expensive than another measure. !

Lifetime Cost!

$12,500

$17,500

$22,500

$27,500

$32,500

$37,500

$42,500

3" Closed Cell Foam + 4.5” Cellulose

2" Closed Cell Foam +3.5" Cellulose

5.5" Dense Pack Cellulose

4.5” spray cellulose +3.5”

R‐13 BaD

2" Closed Cell Foam +3.5" Cellulose

4.5” spray cellulose +3.5”

R‐13 BaD (degraded)

5.5" Icynene 5.5" Cellulose (BASE)

Life%me Costs

30 Year Total Cost

15 Year Total Cost

7 Year Total Cost

Upfront Cost

Main Entry: 1 Perceived Value Pronunciation: \pәr-’sēv’d ‘val-(,)yü\ Function: noun Date: circa 1905

1: : Perceived value is a consolidated measure: either the difference between the perceived benefits that a product delivers and its perceived price, or the ratio of the perceived benefits and the perceived price.

Stu’s Pick: a. N. an emotionally based, factually unfounded, and often inaccurate sense of value specific to individual parties.!

Main Entry: 1 Fair Market Value Pronunciation: \’fer mär-kәt ‘val-(,)yü\ Function: noun Date: circa 1901

1: : a price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business

Stu’s Pick: a. N. What buyers in today’s market are willing to pay for.!

Main Entry: 1 Appraised Value Pronunciation: \ә-’prāz’d ‘val-(,)yü\ Function: noun Date: circa 1901

1: : The assessed value of real property in the opinion of a qualified appraiser. Often based on the sales comparison approach or the cost of replacement.

Stu’s Pick: a. N. The monetary figure on a specialized board closest to which the appraisers dart lands.!

The Chain of Value!

Must perceive value!

Buyer! Realtor!

Must communicate

value!

Appraiser!

Must be convinced of

value!

Underwriter!

Listens to the appraiser!

According to the Appraisal Institute:!

$1 : $20!

PITI+EW = PITI+EW!

The Geos Example!Cash Flow Neutral, Net-Zero Energy Homes!

$45,000 incremental

improvements!

$248 incremental mortgage Increase monthly!

$200 saved energy costs!

$46 tax savings!

Incremental monthly cash flows of Geos improvements!

Perceived Value !Cahners Residential Group (2000 – 2001): more than two-thirds would pay an additional $2,500-$5,000 (up front) for green features. An additional 20% would pay as much as $10,000 extra (in up front costs). !

 NAR (2003): 96% of home-buyers are willing to pay more (in up front costs) for a home with green features. ! American LIVES (2002): half of the respondents said they were willing to pay extra for healthy building materials. !

1. Homeowners are happier with their new green homes and are eager to recommend buying green to others.!

2. 85% of “green” homeowners stated that they were extremely happy with their new home versus their previous one.!

The Findings:!

3. 63% stated that lower operating and maintenance costs were the key motivation.!

4. Nearly half said that environmental concerns & family health were motivators.!

The Findings:!

Appraised Value – The CMA!

•  Only works if there are 3 similar properties sold in the past 6 months in the same neighborhood.!

•  Appraisers need to know how to make adjustments for Energy Efficiency – Cost Neutrality!

1. Most appraisers haven’t encountered sustainable buildings yet!

2. It will take 5-10 yrs for the data to be fully collected & processed!

5. Sustainable buildings perform differently!

3. Data gathering problem in commercial: less than 50 of almost 700 green buildings were built for investment purposes. Public buildings and corporations are rarely appraised. !

4. Appraisers need to be educated on green buildings, systems and terminology, and understand clients’ goals!

6. During the past 25 years, appraisal has been all financial analysis. Now its building performance.!

Excuses, Excuses !

1.  “Any benefits must reasonably affect market value.”!

2. Appraisal framework won’t change, appraisers need to enhance knowledge of key sustainable features & their benefits. !

3. Appraisers can employ the methods they currently employ when comps are limited.!

4. Enough data and resources exist today to value sustainable buildings!

5. Valuing Green Buildings – a new one day seminar by the Appraisal Institute to be released this fall!

6. It’s on the form!!!!!!!

Solutions, Solutions !

PITI+EW = PITI+EW!

"Appraisers are becoming “much more part of the strategy, making…decisions rather than just providing numbers.” Particularly early on in the process to provide cost-benefit analyses.!

Theddi Wright-Chappell, AI sustainability czarina!

More & Better Lending: EEMs!

• Finance up to 15% for EE retrofits!

• Lower mortgage interest rate!

• Reduced closing costs!

• Utility payments covered!

• More financing options!

The Chain of Value!

Must perceive value!

Buyer! Realtor!

Must communicate

value!

Appraiser!

Must be convinced

of value!

Underwriter!

Listens to the appraiser!

Value – Functional Obsolescence!

When a property’s value decreases due to its poor design, style or lack of modern facilities!

• GreenPoints compliance!

• Any future building regulations!

• Future standards for comfort, quality, durability, carbon reduction, etc.!

Typical Existing 2000 SqFt Home in Boulder!(Same Improvements as in EEM Report)!

Case Study!

Energy Costs!

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Residen%al Electricy Cost for Colorado

Energy Costs!

Natural Gas Cost for Colorado

Case Study!

Geos Neighborhood Net-Zero Energy Home (3%)!

Case Study!

Geos Neighborhood Net-Zero Energy Home (6%)!

Case Study!

Optimiser!

Externalities!A study was performed in Ontario where the government

pays for both power generation and health care system. !A direct correlation was performed between increased

health costs due to the existing coal fired power plant.!

Direct cost to generate electricity with coal: $37/MWh!Associated health care costs for that energy: $164/MWh.!

Complete study available at: www.energy.gov.on.ca!

Human Value!We use the tools presented today as a method to

determine the financial benefits of green. But really, what’s the value of comfort, health, safety, & protecting the environment?!

What’s the payback of an iPod, a new " " " """furniture, or a new car? !

What’s the value of your family’s health?!

Questions?

Stu Galvis!303-441-7469!

StuGalvis@kw.com!www.BoulderGreen.com!

Adam Stenftenagel!303-447-0237!

adam@sustainablybuilt.com!www.SustainablyBuilt.com!

Special thanks to Andy Bardwell and the Optimiser Team!!

the economics of green - sustainably built · green buildings were built for investment purposes....

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