Scotsman Guide - February 2009 Commercial Edition

Underwriting Sustainability

From a financial standpoint, green buildings can be a boon for borrowers and lenders

By Greg Murphy, vice president, Nova Consulting Group

For several years, property-developers, -owners and -managers have recognized the environmental and financial benefits associated with environmentally sustainable buildings. Adopting sustainability as a quantifiable element into commercial mortgage underwriting standards only recently has gained momentum, however. New guidelines may act as the bridge between environmentally sustainable development and credit-risk management.

This past September, the Capital Markets Partnership (CMP), a nonprofit collaboration of real estate investors, municipalities, investment banks and other financial institutions, adopted the American National Standard Institute’s Green Building Underwriting Standard. This standard aims to quantify the additional value that sustainable construction and property management and operations offer. It is intended as an overlay to existing core underwriting criteria and to reveal the value in risk reduction for debt and equity participants.

In fact, appropriate evaluation of these high-performance buildings may become just as valuable a base component of high-performance, sustainable mortgages as existing underwriting metrics.

The CMP has ensured that a property’s

sustainability rating considers environmental benefits and the tangible financial return that these elements yield to property-owners and managers — as well as the risk reduction for prospective mortgage lenders and secondary-market investors. Brokers are in a good position to help their clients find buildings that meet these standards, as well as lenders that consider these guidelines as part of their underwriting process.

Building blocks

The Green Building Underwriting Standard is derived from three sources:

1. The U.S. Green Building
Council’s Leadership in Energy and
Environmental Design (LEED) program;
2. The Environmental Protection
Agency’s (EPA) Energy Star energy-
performance-rating system; and
3. Carbon-neutral certification.

Synthesized into a single calculation, the result is the green-value score of one to 100. Because LEED-rated and carbon-neu-tral-certified buildings comprise a small percentage of all buildings in the United States, the Energy Star score — applicable to nearly all buildings — is emphasized.

Used alone, the Energy Star rating —

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also scored from one to 100 — can provide valuable information about a building’s energy consumption and efficiencies. A score of 50, for instance, indicates that the building’s energy efficiency is better than 50 percent of all similar buildings nationwide. Similarly, a score of 75 indicates that the building performs better than 75 percent of all comparable buildings.

Buildings with a rating of 75 or greater can receive the Energy Star label. According to the EPA, as many as 500 out of the 4,100 commercial buildings that have earned the Energy Star label use 50-percent less energy than conventional buildings. This reduction provides added control of operating costs, in effect insulating the building from future energy-price volatility.

Legislative efforts

In addition to the private sector’s voluntary efforts, state and federal legislation also may foster adoption of sustainability analysis.

For example, California Assembly Bill No. 1103 requires public utilities to establish and maintain the ability to upload the past 12 months of utility-bill data to the EPA Energy Star Portfolio Manager, the EPA’s Web-based calculator used to calculate the rating. The legislation also requires

all sellers of nonresidential properties in California to include this data in their disclosure packages to prospective buyers, lessees and lenders by this coming January.

Similarly, the District of Columbia’s Clean and Affordable Energy Act of 2008 mandates that all owners of commercial properties greater than 250,000 square feet must comply with Energy Star benchmarking and disclosure starting this year. Most buildings in the district should be phased

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Greg Murphy, a Leadership in Energy and Environmental Design (LEED)-accredited professional and registered environmental assessor in California, is vice president of Nova Consulting

Group, an environmental and engineering consulting firm specializing in real estate due diligence. Throughout his career, Murphy has participated in more than 8,000 environmental site assessments, subsurface investigations, property-condition assessments and seismic evaluations. Reach him at his San Francisco office at (415) 377-2431 or greg.murphy@ novaconsulting.com.