Sustainable Property Appraisals: Getting the Most Green From Your Investment

Sustainable and energy-efficient commercial properties continue to be trendy, but not every so-called “green” investment will necessarily pay off for owners and developers. Fortunately, the Appraisal Institute (AI) has published an optional form that provides some helpful clues about the green components that qualified appraisers are most likely to consider when valuing a property.

Key definitions

The AI created a new form, “Commercial Green and Energy Efficient Addendum,” to help appraisers analyze commercial buildings’ energy-efficient features. The form defines green building as “the practice of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building’s lifecycle.” It also distinguishes between green and high-performance building. According to the AI, high-performance building “integrates and optimizes all major high-performance building attributes, including energy efficiency, durability, life-cycle performance, and occupant productivity.”

In addition, the addendum identifies six elements of green building: site, water, energy, materials, indoor air quality, and maintenance and operations.

Relevant documentation

The addendum lists a variety of documents and information an appraiser will need to assess green building features, including:

LEED checklist. The checklist addresses the six elements of green building. If your property was certified by another program (for example, Green Globes© or ENERGY STAR®), provide that certifier’s checklist, as well. While a property may be green without a certification, you must document the physical, economic and locational attributes that qualify it as environmentally responsible and resource-efficient.

Energy modeling results with estimated energy savings. These projections can be critical in analyzing cost implications related to various green energy strategies or components.

Plans and specifications. These help identify what green components are found at the property. Appraisers often will ask the owner to provide product descriptions from manufacturers.

Intended goals of construction or retrofit. You should document specific quantifiable goals for existing buildings that have been upgraded or retrofitted.

Commissioning report. Commissioning is a third-party verification process that evaluates whether the systems are designed, installed, functionally tested and capable of being operated and maintained to perform according to the owner’s project requirements. You’ll need this for high-performance building systems and solar photovoltaic systems.

Tenant leases. Among other things, the contracts show who benefits from energy-efficient improvements — the owner or the tenant. It also helps the appraiser determine whether the leases are similar to and competitive with the leases at comparable properties.

Incentives. Incentives that are substantially monetary in nature or that result in monetary, direct and exclusive benefits for the project or owner will likely affect the property’s market value. Examples include property tax rebates and utility rebates or incentives. Note that these incentives shouldn’t include income tax effects, such as accelerated depreciation, federal investment tax credits or renewable energy credits.

Financing benefits (or burdens). The appraiser must determine the extent that a loan that stays with the upgrade package may be below- or above-market and attractive (or unattractive) to assume. He or she also should balance the nonfinancial attributes of the green project to determine how many, if any, property rights are burdened. For example, financing products such as Property Assessed Clean Energy (PACE) might come with priority liens that survive ownership transfers of the property.

Operating expenses. Historical and pro forma operating expenses shed light on the ongoing operating expense effects of green or high-performance property. In addition to the typical two or three years of expenses, appraisers might require more detailed reporting of individual expenses.

Finally, you’ll need to provide the contact information for LEED consultants, architects, builders, charrette members and engineers. The AI addendum emphasizes that, depending on the valuation assignment, an appraiser may need additional data and information not specified in the form. 

A ripe future for green appraisals

Green building features are here to stay, and property appraisals will increasingly take such features into account. In fact, what’s now considered a “green appraisal” may simply become a routine part of every valuation.

Why green features matter for all properties

You may have been skeptical when the green trend first came on the commercial real estate scene, but it’s clear now that environmental and energy-efficient features aren’t just a fad. They can mean higher revenue (from higher rents and fewer vacancies) and lower utility costs.

Not only do tenants demand green features, but they’re also increasingly being mandated under local building codes and regulations. As such, nongreen properties could be at risk of becoming obsolete if they don’t comply with the green standards that other buildings in the relevant market meet.

Of course, green features aren’t relevant to a property’s value unless they have a measurable financial impact. Features that don’t affect a property’s expected cash flow or sales price shouldn’t drive up its appraised value.

© 2018