Cost Benefit Analysis of LEED

Green Building Design and Construction

Tom Link

Youngtao Shi

Bill Morrow

What is LEED? www.usgbc.org

Leadership in Energy and Environmental Design Voluntary, consensus-based national standard to

encourage developing high-performance, sustainable “green” buildings

Green Building Rating system developed, administered, and monitored by US Green Building Council (non-profit 501c(6) trade association)

System only about 2 years old Currently:

• 500 projects under development applying for LEED Certification (9/2002)

• 31 Certified Projects (11/2002)

LEED Score card

LEED Score card -- Details

To Build LEED, or not?

Costs – what additional costs are involved?

Benefits – what additional benefits will come from a Green Building?

How do you measure Costs and Benefits?

Depends on who you ask!

For whom?Owner?

Developer?Lender?

Occupants?Society?

Most lenders and developers do not consider energy savings and worker productivity when deriving value of commercial real estate….

Increased First Cost

Decreased Life Cycle

Costs

Occupant Productivity

Value & Equity

Sustainability

Cost-Benefit Approach

Some Definitions:• First Costs/Benefits (FC): Year 0

• Cost/benefit of design, construction, marketing, etc.

• Life Cycle Costs/Benefits: After Year 0

• Future costs and benefits:

• energy savings,

• replacement costs,

• tenant health/productivity,

• maintenance costs,

• operating costs etc.

• Smaller “footprint” for the future to inherit (sustainability)

NPV & Cash Flows

• Cash flows = income (rent) – expenses – debt service

• Most commercial tenant leases pass on some or all utility and maintenance costs to tenants

So…• Cash flows typically DO NOT

include worker productivity/health, energy savings, or societal benefits

• Developers, & lenders care less about higher energy costs, worker health/productivity, etc. because these costs are passed on to tenants

VALUE

NPV of Future Cash Flows

Developer’s Dilemma

= $10,000,000 FC (w/o green design)

= $10,150,000 FC (w/ green design)

Lender

= $8,000,000 mortgage

? Where does the $150,000 come from? Will extra cost increase NOI?

Problem Boils Down to….

So …

Will increased FC increase NOI enough to increase NPV of future cash flows

and increase VALUE?

Yes, if…. A) Rent can be increased, B) debt service can be reduced, and/or C) operating costs decrease

Justifying increased FC by projecting higher NOI is difficult because cost savings and increased productivity of green design are often realized by tenants--- not developers.

When LEED Makes Sense Most Certified LEED Buildings are owner occupied

• Corporate Headquarters • Schools, Universities• Government buildings• Environmental Centers

Owner Occupied Buildings care about:• Energy Savings• Worker Productivity• Branding (image benefits of having a Green Building)

Owner occupied buildings will often have more equity in deals, thus less concerned with additional up front costs

Market will shift towards Green Building design as tenants demand lower energy costs and higher worker productivity and developers realize that Green buildings keep value longer than non-Green buildings

OK, Let’s do CBA!

QUESTION: how ? … what about those hard Costs and vague Benefits ?

ANSWER – Draw Boundaries – a Cost / Benefit to whom?• Contractor ?

• Owner / Operator of Building ?

• Occupant of Building ?

• Society as a whole ? Different Costs & Benefits apply to each of these

boundaries

CBA – Our approach

Contractor

Owner

Occupant Society

Pre-LEED

Costs & Benefits

Post -LEED

Costs & Benefits

How do we know Cost and Benefit amounts?

We Don’t ! Costs are easier to calculate because they are

finite, but until the building is built, they are only estimates

Benefits are difficult to count because they are less finite, and are therefore all ways estimates

How then can we compare costs to benefits ?

Matrix – Impact scale, not $

Scale Values for each LEED Credit

10 Huge Impact 9

8 7 6 5 Medium Size Impact

4 3

21 Small Impact

Appl

y to

Bot

h C

osts

& B

enef

its

What are Cost Impacts?

For Each Credit, There is a Cost – (Boundary around Contractor)

• Construction

• Architecture & Engineering

• Construction Management

• Materials / Equipment

• Construction Time

What are Benefit Impacts? For Each Credit, there are Benefits –

• Life Cycle Costs (Boundary around Owner)

• Energy• Water• Material

• Externality Benefits

• Occupants (Boundary around Occupants)

• Productivity• Health

• Non-Measurable Societal (Boundary around Society)

• Societal Sustainability• Building Marketability

Estimates – The ∆’s

∆Cost = Cost post-LEED – Cost Pre-LEED

∆Benefit = Benefit post-LEED – Benefit Pre-LEED

Sign Convention

∆Cost = (+)Increase; (-) decrease

∆Benefit = (+)Increase; (-) decrease

Cost Impacts

α x ∆ Construction (Post – Pre LEED)

β x ∆ Architecture & Engineering (Post – Pre LEED)

ε x ∆ Construction Management (Post – Pre LEED)

ζ x ∆ Materials / Equipment (Post – Pre LEED)

η x ∆ Construction Time (Post – Pre LEED)+

= ∆C (Total Impacts from Costs)Where:

α, β, ε, ζ, and η are all weighting factors used to correct for inequalities in each item’s respective importance

Life Cycle Benefit Impacts

θ x ∆ Energy (Post – Pre LEED)

λ x ∆ Water (Post – Pre LEED)

μ x ∆ Material (Post – Pre LEED)

+

=∆BLC (Total Impacts from Life Cycle Benefit)

Where:

Θ,λ,μ are all weighting factors used to correct for inequalities in each item’s respective importance

Societal Benefit Impacts

ξ x ∆ Occupant's Productivity (Post – Pre LEED)

φ x ∆ Occupants Health (Post – Pre LEED)

ψ x ∆ Societal Sustainability (Post – Pre LEED)

ω x ∆ Building Marketability (Post – Pre LEED)+

=∆BS (Total Societal Benefit Impacts)

Where:

ξ,φ,ψ,ω are all weighting factors used to correct for inequalities in each item’s respective importance

The Algorithm – Total Costs and Benefits for all boundaries

Cost

Benefits Now ask:

“which year ?”

Big Picture – What we think it might befor Year 0

-10-8-6-4-202468

10

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71

Cost

Benefit

Credit (ordered according to cost with Benefits shown as negative)

mat

rix

LEED Credits (Cost vs. Benefit) Year 0

Certified LEED (26 credits)

Silver LEED (33 credits)

Gold LEED (39 credits)

Platinum LEED (51 credits)

large First Cost

Small benefits

Big Picture – What we think it might befor Year 3 +

-10-8-6-4-202468

10

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71

Cost

Benefit

Credit (ordered according to cost, second order according to Benefits; benefits are shown as negative)

mat

rix

LEED Credits (Cost vs. Benefit) Year 3

large Net

Benefits

Small O&M Cost

-1

0

1

2

3

4

5

6

Year1

Year2

Year3

Year4

Year5

Year6

Year7

Year8

Costs

Benefits

Log. (Benefits)

Log. (Costs)

CBA – First few years (our guesses!)

Anticipated Conclusions:Provided all Benefits are

counted, Benefits will pay for

additional Costs

Supporting Examples

Conde Nast Building: New York City• $600 million dollar project

• Cost 5%-10% more to build green

• 10% less to operate (energy savings)

• Additional capital expense should be paid off in 10 years

Greater Pittsburgh Community Food Bank• LEED Silver certified

• $5.8 million dollar project

• $31,000 annual energy savings

Conclusions We believe that LEED buildings will net a positive boost to the

overall US economy. Building LEED can make sense when building financer not only

owns and occupies the building, but additionally values externalities like productivity, and sustainability

However, the challenge is helping non-owner, non-occupant builders finance the building of LEED certified building in a society that mainly values bottom lines.

If worker productivity and increasing societal sustainability are not valued, then LEED buildings are more difficult to justify.

BUT … we still have to do the work and obtain results. QUESTION .. Are our conclusions correct? .. We will see!

Questions?