By Scott McBride
Reflecting on the Rockville Building case I wonder what other tools can be used to help align incentives of landlords and tenants to invest in sustainable building, whether from an energy efficiency, carbon, or materials point of view. In the case there were several approaches for the landlord to recoup his investment through an energy service agreements (ESA) or managed services agreements (MESA), which focus on structuring the cash flows or by using an energy service company to complete the retrofit. This brings me to think about the impact of outside agencies such as LEED, Energy Star, or Green Globes that issue “green” ratings on buildings. Will these silver, gold, and platinum rated buildings help eliminate some of the uncertainty for landlords and enable them to achieve the “green premium” discussed in the case and if so will it be worth it after investing the time and cost of these certifications?
Looking at these green rating agencies I cannot help but think about the financial rating agencies like S&P, Moody’s, and Fitch. These agencies provide value by expressing an opinion on the creditworthiness of an entity and the financial obligations issued by an entity. LEED, the most widely known standard, provides a similar service about the “greenworthiness” of buildings. One question is: can multiple standards existing in building? Due to the complexity and expensive nature of certifying buildings it is unlikely there will be as many successful green rating agencies as financial agencies.
According to McGraw-Hill Construction’s 2009 Green Outlook: Trends Driving Change, tangible economic benefits to green (LEED and Energy Star) buildings include:
- Decreased operating costs of 13.6%
- Increased building values of 10.9%
- Improvement in ROI of 9.9%
- Increased occupancy of 6.4%
- Rises in rent of 6.2%
A study strictly about LEED showed that LEED-certified buildings garnered a 30% rental premium and a 60% sales premium. Factoring these, albeit generous assumptions, into the Rockville proforma the investment in energy savings becomes much more appealing if his building is able to claim LEED certification. As certifications such as LEED gain broader acceptance and there is more data to support these premium claims, the “green” certification avenue becomes another possible approach for landlords to pursue in recouping their investment in energy efficiency. A LEED certification could simply hold enough weight with potential tenants that the investment would pay for itself in rental premiums negating the need for complex energy service agreements or managed services agreements that aim to address the asymmetric nature of tenants reaping the financial savings of reduced energy costs.
LEED might not be the solution as it comes with its own host of criticisms including the high cost of certification, cumbersome process, and implementation where designers can “cherry pick” green points that add little in terms of sustainability. Regardless there certainly is value in a universally accepted standard that will help reduce the transaction costs and increase the transparency of investment in energy efficiency and “green” buildings.