Green Certification

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.

2 thoughts on “Green Certification

  1. I found this post very interesting. I had the chance to work both as a consultant and as part of an Energy Efficiency start-up on the issue of certification of buildings. I would like to comment on two issues: (1) The impact of value that Certification actually delivers and (2) The Certifying agencies.

    Firstly, in the real estate and energy efficiency industries there are mixed feelings about LEED and other certifications. Some real estate developers consider it a way to increase the value of the building (expressed mainly through the savings that you quote and a green “goodwill”). However, since most of the LEED buildings are commercial or part of the MUSH segment, some consultants indicate that the rent premiums paid are more associated with the actual value of the asset (e.g. monopoly, great location) than with the environmental upgrade. I believe Harvard Business School Housing could be a good example for this. At the same time, energy efficiency companies (ESCOs, Energy Efficiency design / build firms and contractors) believe that the LEED certification does not reach even 50% of the potential savings that a customized solution from an expert can reach. The main reasons for this is the difficulty in generalizing specifications for buildings, especially across geographies and usage.

    Secondly, I really like how you position certification agencies as enablers of driving energy efficiency upgrades for buildings. Some issues that we need to discuss have to do with how to enable these agencies to play a more important role. Definitely having multiple agencies is the first part to create a “market” related to certifications. However, given that buildings are heavily regulated (many standards related to safety etc), it might be difficult to have many independent agencies. I am also concerned about the cost of the certification. The complexity of a very specific assessment may confine the applicability to large buildings and in this way exclude the large number of small residential buildings. This brings us back to the discussion that although there may be big potential in energy efficiency, around 45% (based on the MckInsey GHG Abatement cost curve) is in the fragmented residential sector.

    This last point is what makes me feel that although building certification can play a significant role in some segments, it still does not solve the problem of scaling up energy efficiency to all the segments and hence does not address the issues we are currently facing.

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