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Wells Fargo & Co.Wells Fargo & Co.
Real Estate Technical ServicesReal Estate Technical Services
James FinlayJames Finlay
Green Building Finance & Investment ForumGreen Building Finance & Investment Forum
The Coleman Center, New York, NYThe Coleman Center, New York, NY
September 9, September 9, 20082008
Valuation Valuation Issues of High Performance Issues of High Performance
Commercial Commercial Real Real Estate Estate
Discussion PointsDiscussion Points
�� Background to Wells Fargo Bank’s Background to Wells Fargo Bank’s environmental commitmentenvironmental commitment
�� High Performance / “green” High Performance / “green” Property Valuation Case Studies Property Valuation Case Studies
2 V 9
Property Valuation Case Studies Property Valuation Case Studies
�� Effective Management of the Effective Management of the Appraisal ProcessAppraisal Process
Wells Fargo Environmental Wells Fargo Environmental
Commitment Commitment �� July 2005 adapts 10July 2005 adapts 10--point Environmental point Environmental
Commitment including:Commitment including:
– Finance $1 Billion environmentally sensitive projects
over next 5 years
– Equator Principles (World Bank/international
financial corporations.) environmental & social risk
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financial corporations.) environmental & social risk
management : transparency = tracking & reporting
– Recycling, energy efficient operations
– Energy, greenhouse gas tracking, reporting
– Create Environmental Affairs Advisory Council
�� 2007 EPA Green Power Partner 2007 2007 EPA Green Power Partner 2007
�� Renewable energy Renewable energy [Nevada Solar One 64 MW], RECs [Nevada Solar One 64 MW], RECs
Financing High Performance, Environmental Financing High Performance, Environmental
Commitment ProjectsCommitment Projects
�� Prior to July 2005 Prior to July 2005 –– 11 projects, total: $590 11 projects, total: $590
millionmillion
– LEED: 5 projects, Loans - $250 million
– Brownfield, transit, other: 9 projects - $340 mil.
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�� Since to July 2005 Since to July 2005
-- 31 LEED projects, total loans $1.5 billion31 LEED projects, total loans $1.5 billion
-- Wide range of projectsWide range of projects
office, multi-family, SFR subdivisions, land,
mixed-use (off/resid), retail, hotel
��Wells lends money to people, not projectsWells lends money to people, not projects
�� LEED funding mostly to large LEED funding mostly to large commercial developer/users with commercial developer/users with relationships to Wells Fargo Bankrelationships to Wells Fargo Bank
�� LEED Homes partner, bank branch LEED Homes partner, bank branch design pilot with USGBCdesign pilot with USGBC
Relationship Lending StyleRelationship Lending Style
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design pilot with USGBCdesign pilot with USGBC
Preferential financing for LEED?Preferential financing for LEED?
No ; but we seek quality, reduced riskNo ; but we seek quality, reduced risk
Depends on the deal, relationship: expedited Depends on the deal, relationship: expedited
processing, fees, terms, underwritingprocessing, fees, terms, underwriting
Signature Centre, Golden, CO Signature Centre, Golden, CO Aardex LLC developerAardex LLC developer
LEED Core & Shell PlatinumLEED Core & Shell Platinum
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Signature CentreSignature Centre
�� 186,000 SF spec office, 186,000 SF spec office, 5 5 floor, floor, 45K 45K SF SF floor platesfloor plates, under, under--floor, chilled beams floor, chilled beams
�� LEED cost premium approx +1.8% of LEED cost premium approx +1.8% of first costsfirst costs
�� No rent premium. No rent premium. NNN NNN lease basis, lease basis,
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�� No rent premium. No rent premium. NNN NNN lease basis, lease basis, expenses $2/SF less than alternativesexpenses $2/SF less than alternatives
�� 100% pre100% pre--leased, 83% to Swedish leased, 83% to Swedish medical technology giant Gambromedical technology giant Gambro
�� Sold 1/2008 to IVG Institutional Sold 1/2008 to IVG Institutional Funds Funds GmbH, German investors; GmbH, German investors; ground lease ground lease in place at time of salein place at time of sale
Signature Centre, Aardex LLCSignature Centre, Aardex LLC
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Signature Centre, Aardex LLCSignature Centre, Aardex LLC
�� Emphasis on worker productivityEmphasis on worker productivity
Sustainability brandingSustainability branding
High quality workplace High quality workplace
design, Interior EQdesign, Interior EQ
Individual controlsIndividual controls
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State of art mechanicalsState of art mechanicals
raised floor, chill beamsraised floor, chill beams
ReRe--useable demising wallsuseable demising walls
Integrated design teamIntegrated design team
Reduced operating costs Reduced operating costs
(waterless urinals)(waterless urinals)
Hunter Industries, Distribution Hunter Industries, Distribution
Center, San Marcos, CACenter, San Marcos, CALEED NC (New Construction) LEED NC (New Construction)
Silver/Gold (pending)Silver/Gold (pending)
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Hunter Industries, San Marcos, CAHunter Industries, San Marcos, CA
�� 130K SF, 27% headquarter office, balance 130K SF, 27% headquarter office, balance
warehouse/distribution center warehouse/distribution center
�� 100% owner user facility100% owner user facility
�� Owner does advanced water conserving Owner does advanced water conserving
irrigation equipment & controlsirrigation equipment & controls
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�� Daylight harvesting light wellsDaylight harvesting light wells
�� Conventional skylights required by fire/safetyConventional skylights required by fire/safety
�� 100 kilowatt (kW) photovoltaic integrated into 100 kilowatt (kW) photovoltaic integrated into
daylight harvesting for warehousedaylight harvesting for warehouse
�� Motion and lumen sensors to control lightsMotion and lumen sensors to control lights
Hunter Industries, San Marcos, CAHunter Industries, San Marcos, CA
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Hunter Industries, San Marcos, CAHunter Industries, San Marcos, CA
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Hunter Industries, San Marcos, CAHunter Industries, San Marcos, CA
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Hunter Industries, San Marcos, CAHunter Industries, San Marcos, CA
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Design is site specificDesign is site specific
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Natural resources for power generation/saving Natural resources for power generation/saving ––wind, sun, water, tides, geothermalwind, sun, water, tides, geothermal
Plus human Plus human –– Utility districts, transit, densityUtility districts, transit, density
High Performance High Performance
Value Elements / IssuesValue Elements / Issues
�� Superior design process Superior design process –– replace replace
DesignDesign--BidBid--BuildBuild with with Integrated DesignIntegrated Design
1. Lower energy 1. Lower energy (conservation), (conservation), maintenance maintenance
–– exploits natural systems, sensors, state exploits natural systems, sensors, state –– exploits natural systems, sensors, state exploits natural systems, sensors, state
of the art materials, monitoringof the art materials, monitoring
2. On2. On--site distributed power systems site distributed power systems ––
solar PV, solar thermal, heat pumpsolar PV, solar thermal, heat pump
3. Operations: fast, low cost re3. Operations: fast, low cost re--tenanting, tenanting,
plug & play, replug & play, re--useable demising wallsuseable demising walls
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Plug & play, under floor HVAC& Plug & play, under floor HVAC&
rere--useable demising wallsuseable demising walls
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from:from:
DIRTT Envir.DIRTT Envir.
HaworthHaworth
Distributed Distributed Power, Energy SystemsPower, Energy Systems
�� A A new valuation issue for most RE new valuation issue for most RE
appraisers, Machinery & Equip analysisappraisers, Machinery & Equip analysis
�� High High efficiency efficiency HVAC, lighting, waterHVAC, lighting, water
�� BIM (Building Information Modeling) BIM (Building Information Modeling)
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�� BIM (Building Information Modeling) BIM (Building Information Modeling)
sensors, sensors, remote remote facility managementfacility management
�� Power Grid: TimePower Grid: Time--ofof--Use metering, Use metering,
power power Give Give Backs, peakBacks, peak--use use tier tier pricingpricing
�� NonNon--realty realty –– tax credits, PPA, rebatestax credits, PPA, rebates
Ground & water source heat Ground & water source heat
pumps pumps “Geoexchange” ; Geothermal“Geoexchange” ; Geothermal
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Same Appraisal Process for High Same Appraisal Process for High
Performance/LEED Performance/LEED BuildingsBuildings
�� Investments Investments -- Income Approach PrimaryIncome Approach Primary
�� Use regulatory “market value” definition Use regulatory “market value” definition
�� Some Intangibles OK (trophy value, Some Intangibles OK (trophy value,
branding) branding) if valued by the next buyerif valued by the next buyer
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branding) branding) if valued by the next buyerif valued by the next buyer
�� Usually ignores tax events, credits, Usually ignores tax events, credits,
accelerated depreciationaccelerated depreciation
�� Ignores effects external to the property Ignores effects external to the property
(like greenhouse gases, transit load)(like greenhouse gases, transit load)
Managing the Appraisal ProcessManaging the Appraisal Process
�� I hire an interested, local appraiser ; I hire an interested, local appraiser ; LEED experience is rareLEED experience is rare
�� Define scope of work, supply expertise, Define scope of work, supply expertise, documents, interview the “champion”documents, interview the “champion”
�� Discuss issues with appraiser, but do not Discuss issues with appraiser, but do not
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�� Discuss issues with appraiser, but do not Discuss issues with appraiser, but do not direct valuedirect value
�� Maybe my own DCF per energy, rebatesMaybe my own DCF per energy, rebates
�� Write review, add supplemental Write review, add supplemental information (risk, noninformation (risk, non--realty, tax breaks)realty, tax breaks)
�� Generally works well, but often low valueGenerally works well, but often low value
Cost ApproachCost Approach
��First costs: Little extra for LEED to Silver First costs: Little extra for LEED to Silver level; 0%level; 0%-- 2% (Davis Langdon)2% (Davis Langdon)
��Perception that “green is too expensive” Perception that “green is too expensive” still widespread, but now generally untruestill widespread, but now generally untrue
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still widespread, but now generally untruestill widespread, but now generally untrue
��First Cost are still generally more than First Cost are still generally more than appraised market value appraised market value –– When are costs When are costs really investments?really investments?
Sales Comparison ApproachSales Comparison Approach
�� Most difficult to apply to LEED Most difficult to apply to LEED
high performance buildingshigh performance buildings
�� Mostly establishes the market Mostly establishes the market
range of “Super Class A”range of “Super Class A”
�� Set top of the marketSet top of the market
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Income Income Approach is Primary Approach is Primary
��Most important for commercial REMost important for commercial RE
��Audits, real time commissioning : Audits, real time commissioning :
BIM, frequency & accuracy of monitor + BIM, frequency & accuracy of monitor + manage = accurate value conclusionmanage = accurate value conclusion
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��Feedback loop = behavioral modification Feedback loop = behavioral modification
Lucid Design Group, Precourt Inst. StanfordLucid Design Group, Precourt Inst. Stanford
��Argus/DCF software inputs provide most Argus/DCF software inputs provide most appropriate LEED appraisal modelappropriate LEED appraisal model
Argus/DCF Inputs Show BenefitsArgus/DCF Inputs Show Benefits
~ ~ IncomeIncome –– Market rent, growth rate. Currently Market rent, growth rate. Currently
little premium in market; lease basis (“green”)little premium in market; lease basis (“green”)
~ ~ VacancyVacancy –– Initial leaseInitial lease--up, stabilized vacancy, up, stabilized vacancy,
tenant retention %, rolltenant retention %, roll--over lag vacancy over lag vacancy
~ ~ ExpensesExpenses –– Reduced energy, insurance, Reduced energy, insurance,
maintenance. But higher monitor/control $ maintenance. But higher monitor/control $
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maintenance. But higher monitor/control $ maintenance. But higher monitor/control $
Who benefits? Leases NNN or expense stopsWho benefits? Leases NNN or expense stops
~ ~ RiskRisk –– Discount rate, terminal cap rate, OAR Discount rate, terminal cap rate, OAR
with direct cap, energy hedge, economic life, with direct cap, energy hedge, economic life,
building recycle costs. Mold, occupant healthbuilding recycle costs. Mold, occupant health
~ ~ Intangibles, nonIntangibles, non--realty line itemsrealty line items –– tax credits, tax credits,
depreciation, branding, depreciation, branding, (carbon, water coming)(carbon, water coming)
Looking AheadLooking Ahead
�� Creative public sector, utility financing:Creative public sector, utility financing:
CA CA AB 811AB 811 –– “Energy Assessment District” “Energy Assessment District”
financing energy conservation/efficiency and financing energy conservation/efficiency and
distributed power upgrades to existing buildingsdistributed power upgrades to existing buildings
�� ReRe--commissioning, remote monitoringcommissioning, remote monitoring
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�� ReRe--commissioning, remote monitoringcommissioning, remote monitoring
�� Carbon offCarbon off--sets sets –– the end of cheap coal the end of cheap coal
power. Disproportionate impact on REpower. Disproportionate impact on RE
�� Watch the UK Watch the UK -- Energy audits for all Energy audits for all
commercial buildings by end 2008commercial buildings by end 2008
U.S. is World’s Largest GHG Emitter
Red border = China.
(now approx = to USA)
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World Resources Institute
Thank You !Thank You !
Comments, questions :Comments, questions :
213213--614614--48504850
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213213--614614--48504850
James.F.Finlay@WellsFargo.comJames.F.Finlay@WellsFargo.com
Linked InLinked In
ExtrasExtras
�� Two appraisal case studiesTwo appraisal case studies
�� Sources of further informationSources of further information
�� Websites, organizationsWebsites, organizations
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Energy value analysis sampleEnergy value analysis sample
�� Solar Case #1, appraiser “A” Solar Case #1, appraiser “A” ––
System Cost System Cost -- $1.3MM; 100kW PV; Other items$1.3MM; 100kW PV; Other items
Net cost after rebates & credits: $571KNet cost after rebates & credits: $571K
Year One est. energy savings: $117K/yrYear One est. energy savings: $117K/yr
Simple payback 4.88 years x 1Simple payback 4.88 years x 1stst year savingsyear savings
Appraisal value: $470K Appraisal value: $470K –– 4.0 x 14.0 x 1stst yr savingyr saving
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Appraisal value: $470K Appraisal value: $470K –– 4.0 x 14.0 x 1stst yr savingyr saving
applied in cashflow as a $0.025/SF NNN adjustmentapplied in cashflow as a $0.025/SF NNN adjustment
BUT, my calcs show 20 yr NPV energy saved BUT, my calcs show 20 yr NPV energy saved $1.46MM using:$1.46MM using:
+5%/yr (+5%/yr (--0.5%/yr) energy escalation, 9% 0.5%/yr) energy escalation, 9% discountdiscount
No accelerated depreciation, unleveraged, no No accelerated depreciation, unleveraged, no RECs, no forgiven property taxes RECs, no forgiven property taxes (on $1.3MM)(on $1.3MM)
Energy value analysis sampleEnergy value analysis sample
�� Solar Case #2 , appraiser “B” Solar Case #2 , appraiser “B” ––
Solar System Cost Solar System Cost -- $3.4MM; 503 kW PV, other items$3.4MM; 503 kW PV, other items
Less NPV 5 yr CA Solar Initiative rebates: $2.2MMLess NPV 5 yr CA Solar Initiative rebates: $2.2MM
Yr One energy projected savings: $134K/yrYr One energy projected savings: $134K/yr
Simple payback 16.4 years (yr 1 savings)Simple payback 16.4 years (yr 1 savings)
Solar system appraised value: $580K or 4.3 x 1Solar system appraised value: $580K or 4.3 x 1stst yr savingsyr savings
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Solar system appraised value: $580K or 4.3 x 1Solar system appraised value: $580K or 4.3 x 1stst yr savingsyr savings
applied as reduced NNN line itemapplied as reduced NNN line item
BUT my calcs show 30 yr NPV energy saved = $2.45MMBUT my calcs show 30 yr NPV energy saved = $2.45MM
+6%/yr (+6%/yr (--0.5%) energy escalation, 8% discount rate0.5%) energy escalation, 8% discount rate
Appraisal excluded $950K Fed Solar Inv. Tax Credit, Appraisal excluded $950K Fed Solar Inv. Tax Credit,
accelerated 5accelerated 5--yr depreciation. No RECs, no forgiven yr depreciation. No RECs, no forgiven
property taxes (on $3.4MM)property taxes (on $3.4MM)
Information Information -- WebsiteWebsite
US Green Building Council, US Green Building Council, ResourcesResources
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Information Information -- NewslettersNewsletters
�� EERE Network NewsEERE Network News, www.eere.energy.gov, www.eere.energy.gov
35
Information Information -- NewsletterNewsletter
�� GreenBiz.com GreenBiz.com ClimateBiz News ClimateBiz News
www.greenbiz.comwww.greenbiz.com
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Information Information -- ReportsReports
CoStar CoStar
37
RREEFRREEF
Nov 2007Nov 2007
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