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Greening Your Cash Flow
By MICHAEL GOTTLIEB
California Real Estate Journal Editor
You may not accept that going green will be a fiscal reality for California commercial real estate, but one fiscal reality you cannot deny is the need to support and enhance your properties' cash flow in today's market.
Commercial property values have now fallen more than 40 percent from their October 2007 peak, according to the Moody's/REAL All Property Type Aggregate Index for last month. While much of that value decline is due to the price exaggeration created by the overheated financing market, some of it is due to falling property fundamentals and property owners need all the cash flow they can get to hold on to their properties.
Enter green real estate. Much remains unproven about greening commercial real estate. While you can get appraisers to agree that a higher level of energy efficiency will help stave off early obsolescence, good luck on trying to get agreement on how sustainability affects valuations.
So set the value creation debate aside for the moment because we have clear examples of the direct benefits to the bottom line from green properties.
At last month's FutureBuildLA, the Los Angeles chapter of the Urban Land Institute's green conference, Thomas Properties Group Sustainability Manager Daniele Aquino shared some of the insights her firm has gleaned from operating the first high-rise office building in California to achieve the Platinum rating from the U.S. Green Building Council's Leadership in Energy and Environment Design.
According to Thomas Properties, the Cal/EPA building in Sacramento saves $1.50 per square foot annually in operating expenses thanks to energy efficiency, decreased water use, waste management and other operational improvements, which translates to a total annual savings of more than $1.4 million and a payback period of less than one year. Now that's a significant bump to the bottom line, which Thomas Properties estimates adds more than $17 million to the property's overall value based on an 8 percent cap rate.
This example means little if you are sitting on an energy hog of a building watching your cash flow go out the window in operating expenses. Yet, existing buildings also can buttress their bottom lines. Thomas Properties has invested large sums in turning around City National Plaza in downtown L.A. The 2.49 million-square-foot, circa 1972 property needed an update. But Thomas Properties also made a concerted effort to improve the energy efficiency of the building, so while occupancy has increased by 58 percent in the past five years, City National Plaza's total electricity consumption has increased by only 8.5 percent, using 35 percent less energy on an occupied RSF basis. That translates to a savings of $8.2 million in electricity since 2003 for a property that still is waiting for LEED certification.
Now you'll argue that if you barely have the cash flow to meet your debt service, how are you going to spend the cash to invest in your property. Done smartly, greening a property doesn't have to be cash intensive and the payback can be faster than you might think.
Simply evaluating and changing your operating practices and policies for greater sustainability can move a property that would not achieve LEED certification to a Silver and you can make more modest investments in human capital to advance your property further up the LEED certification ladder. When Adobe Systems Inc. achieved Platinum certification in 2006 for Adobe's West Tower headquarters building in downtown San Jose, it spent about $1.3 million. Coupled with $390,000 in rebates, Adobe saves $1.1 million in operating costs and exceeds a 100 percent return on investment, according to Cushman & Wakefield.
Nationally, just 200, or 8 percent, of all the 2,476 LEED-certified buildings as of April 2009 were certified under the LEED Existing Buildings Program. California has 53 LEED EB building, just 9 percent of all the LEED-registered projects in the state, according to the USGBC.
Considering that new construction constitutes just 1 to 2 percent of the total U.S. building stock, even if a small percentage of existing properties can easily adopt green practices and systems, then there is still a huge stock of properties out there that could quickly improve their cash flow by following the lead of some of commercial real estate's sustainability pioneers.
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© 2009 Daily Journal Corporation. All rights reserved.
California Real Estate Journal Editor
You may not accept that going green will be a fiscal reality for California commercial real estate, but one fiscal reality you cannot deny is the need to support and enhance your properties' cash flow in today's market.
Commercial property values have now fallen more than 40 percent from their October 2007 peak, according to the Moody's/REAL All Property Type Aggregate Index for last month. While much of that value decline is due to the price exaggeration created by the overheated financing market, some of it is due to falling property fundamentals and property owners need all the cash flow they can get to hold on to their properties.
Enter green real estate. Much remains unproven about greening commercial real estate. While you can get appraisers to agree that a higher level of energy efficiency will help stave off early obsolescence, good luck on trying to get agreement on how sustainability affects valuations.
So set the value creation debate aside for the moment because we have clear examples of the direct benefits to the bottom line from green properties.
At last month's FutureBuildLA, the Los Angeles chapter of the Urban Land Institute's green conference, Thomas Properties Group Sustainability Manager Daniele Aquino shared some of the insights her firm has gleaned from operating the first high-rise office building in California to achieve the Platinum rating from the U.S. Green Building Council's Leadership in Energy and Environment Design.
According to Thomas Properties, the Cal/EPA building in Sacramento saves $1.50 per square foot annually in operating expenses thanks to energy efficiency, decreased water use, waste management and other operational improvements, which translates to a total annual savings of more than $1.4 million and a payback period of less than one year. Now that's a significant bump to the bottom line, which Thomas Properties estimates adds more than $17 million to the property's overall value based on an 8 percent cap rate.
This example means little if you are sitting on an energy hog of a building watching your cash flow go out the window in operating expenses. Yet, existing buildings also can buttress their bottom lines. Thomas Properties has invested large sums in turning around City National Plaza in downtown L.A. The 2.49 million-square-foot, circa 1972 property needed an update. But Thomas Properties also made a concerted effort to improve the energy efficiency of the building, so while occupancy has increased by 58 percent in the past five years, City National Plaza's total electricity consumption has increased by only 8.5 percent, using 35 percent less energy on an occupied RSF basis. That translates to a savings of $8.2 million in electricity since 2003 for a property that still is waiting for LEED certification.
Now you'll argue that if you barely have the cash flow to meet your debt service, how are you going to spend the cash to invest in your property. Done smartly, greening a property doesn't have to be cash intensive and the payback can be faster than you might think.
Simply evaluating and changing your operating practices and policies for greater sustainability can move a property that would not achieve LEED certification to a Silver and you can make more modest investments in human capital to advance your property further up the LEED certification ladder. When Adobe Systems Inc. achieved Platinum certification in 2006 for Adobe's West Tower headquarters building in downtown San Jose, it spent about $1.3 million. Coupled with $390,000 in rebates, Adobe saves $1.1 million in operating costs and exceeds a 100 percent return on investment, according to Cushman & Wakefield.
Nationally, just 200, or 8 percent, of all the 2,476 LEED-certified buildings as of April 2009 were certified under the LEED Existing Buildings Program. California has 53 LEED EB building, just 9 percent of all the LEED-registered projects in the state, according to the USGBC.
Considering that new construction constitutes just 1 to 2 percent of the total U.S. building stock, even if a small percentage of existing properties can easily adopt green practices and systems, then there is still a huge stock of properties out there that could quickly improve their cash flow by following the lead of some of commercial real estate's sustainability pioneers.
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© 2009 Daily Journal Corporation. All rights reserved.
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