metrics for responsible property investing: developing and maintaining a high performance portfolio

8/9/2019 Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio

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November 2009

Metrics or Responsible Property Investing:

Developing and Maintaining A High-Perormance Porto

Paper or Presentation at 2009 ULI Fall Council Forum

ULI

[DRA

FTFOR

COM

MENT

]


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Acknowledgements

The authors are indebted to Scott Zengel o Bay Area Council and Nick Stolatis o TIAA-CREF or their

willingness to participate in the case study and to test the RPI metrics in the real world. Their insights were

invaluable. The authors would also like to thank Andrea Fernandez o Arup or her tremendous assistance

in researching indicators, interpretation o data, and editing.

Lisa Michelle Galley

Founder and Managing Director

Galley Eco Capital

Jean Rogers

Principal

Arup

David WoodDirector

Responsible Property Investing Center

Boston College


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Responsible Property Investment [RPI] is an

emerging investment strategy and discipline

concerned with integrating environmental,

social, and governance [ESG] data intoinvestment decision-making. Proponents

point to increased regulatory risk, resource

constraints, changing consumer preerences

and demographics all as they relate to the

increased importance o environmental and

social issues -- as drivers o change in the real

estate investment industry.

To date, however, the industry has yet to

develop standards to evaluate ESG data

that compare to its traditional evaluation o

portolio perormance. The emergence othird-party standards oer investors some

guidance especially on environmental issues,

but tend not to cover the range o RPI. In

any case, there has yet to develop a ully

elaborated set o issues, vocabulary, and

measurement that allow investors can use to

evaluate whether their portolios are achieving

their environmental and social goals, or that

enable investors to evaluate the relationship

between ESG data and nancial perormance.

One important step along these lines willlikely be the development o an industry-

standard set o metrics to evaluate ESG

perormance that allows investors to measure

perormance across their own portolios, to

enhance their acquisition and disposition

decisions, and to report their perormance to

investment partners, regulators, civil society

organizations, and other stakeholders.

For ESG analysis to become industry best

practice, some system o measurement will

need to establish rigorous standards that hold

investors accountable or their claims, and

oer investors the capacity to avor higher

perorming buildings and portolios in practice.

1 Introduction

These metrics must be rigorous enough

to allow or substantive analysis, but

fexible enough or investors to tailor them

to their specic needs. They have to becomprehensive enough to capture real

perormance, but simple enough to be usable

in the context o investments in the real world.

These challenges will require collaboration,

and a willingness to test ideal systems in the

day-to-day world o investing

This paper is a preliminary eort to address

these challenges. Ater reviewing the state o

real estate in the wake o the recent nancial

crisis, and the role o RPI in that context, we

oer a set o sample RPI metrics, along with2 case studies with actual investors (TIAA-

CREF and the Bay Area Fund o Funds). Our

hope is to catalyze a discussion on how to

make metrics that are rigorous and useul. We

want to raise the prole o this issue among

industry proessionals, and draw rom their

expertise and experience to develop a system

that helps the industry ace the imperatives o

key environmental and social challenges, and

capitalize on the opportunities that will come

with a transorming economy.

Real estate investment plays a undamental

role in determining how society uses

resources, how the built environment

shapes social lie, how economic activity

can be sustainable over time. As an asset

class, real estate oers especially tangible

demonstrations o the importance o ESG

analysis in creating value or investors and

society alike. We believe that a robust

metrics system can help shape the market

to better create sustainable outcomes or all

stakeholders.


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6

Institutional real estate is in the midst o a major downturn, as real estate perormance has

both driven and ollowed the plunge in US and worldwide economic activity. At their peak,

annual real estate returns or tax-exempt property owners (governments, pension unds,

etc), ranged rom 14%-20% rom 2003-2007

1

.

2 Institutional Real Estates Volatile Investment Environment

2008 will be remembered as a year where

property returns or institutional investors

ended at an estimated -6.46%, refecting

the impact o a national credit and housing

crisis, and speculative excess tied to real

estate investment. It is unclear to what extent

real estate investment will track economic

recovery, given the size o the bubbles that

have popped.Most in the economy clearly recognize

that credit and investment capital is highly

constrained and an easy credit environment

will not be back or a long time. Real estate

owners must become experts at economic

sustainability; conserving and organically

growing cash fow though long-term

investment strategies, while becoming more

ecient users o capital the next several years

to come.

Figure 1: Institutional real estates performance, as measured by the NCREIF Property Index as of 12/31/08

Hidden Rise o Un-Sustainability

The current credit crisis has exacerbated

other problems within commercial real estate

hidden during the boom years -- that have

only recently come to light.

During the real estate boom years o 2004

to 2007, low interest rates, easy liquidity and

increased debt leverage had combined to

help infate real estate prices. Many investors

ocused on these speculative returns at the

expense o attention paid to the real rise in

energy and water costs on their properties.

During that period, rising (and fuctuating)

energy costs, particularly within the past 36

months, have been increasing consumer

cost o living and weakening the business

sector through higher costs o operations.

In addition, uel costs or transportation

have also played a key role in the real estate

crisis, impacting with greater orce on thoseproperties in suburban areas or locations with

poor access to public transit.

The potential long-term risks o exposure to

climate-related regulation, changing consumer

sentiment, and even the simple operating

costs o buildings in their portolios have

become more apparent in recent years. As the

short term orientation o real estate markets

has suered, the long term implications o

sustainability have risen in importance.

1 Data rom the National

Council o Real Estate

Investment Fiduciaries as

o 12/31/08 (www.ncrei.

org; accessed on 4/6/09).

The graph shows the

returns or the NCREIF

Property Index (NPI) or

the nation, which includes

over 4,200 properties at

a market value exceeding

$150 billion. The NPI

income graph shows

the return rom the Net

Operating Income (NOI)

or the properties and the

NPI capital graph showsthe return rom gain in

value net o any. Returns

are calculated by NCREIF

quarterly based on

appraised values and are

shown on an unleveraged

basis as i properties were

all purchased on an all

cash basis.

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

-12%

78 82 86 90

NCREIF Property Index Total ReturnIncome Return

Capital Return

QuarterlyReturn

Year

94 98 02 06


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The very widespread problem o energy,

water, and uel supply and price risk helpedto propel environmental concerns to the

national agenda and even partially shaped the

outcome o the 2008 American presidential

election. Stakeholders rom regulatory

agencies to consumers have become more

aware o the negative impact o buildings on

the use o natural resources and the related

eects building siting and operations have on

communities.

Widely cited statistics note that 40 percent

o primary energy use, 72 percent o U.S.electricity consumption, 29 percent o

carbon dioxide emissions, and 13.6 percent

o potable water consumption are due to

buildings.

Against this backdrop, buildings constructed

using green building principles are present a

compelling alternative:

Energyuseingreenbuildingis29to50

percent less than non-green counterparts.

Greenbuildingsuseanestimated40percent less water.

Carbondioxideemissionsingreen

buildings are reduced by 33 to 39

percent.

Solidwasteattributabletogreenbuildings

is reduced by 70 percent.

2.1RPI in the Contemporary Real Estate Environment

More comprehensively, the built environment

shapes undamental decisions about whereand how to live, social inequity in the provision

o housing, and access to public and private

services.

Responsible Property Investing (RPI) is a

response to increasing public concerns

about the environmental and social

impacts o buildings, in conjunction with

a growing awareness among investors

that environmental and social analysis can

enhance their ability to assess building and

portolio perormance over the long term.

RPI acilitates a more comprehensive

engagement between investors, their

properties, and tenants by taking into

account social, ethical and environmental

factors in the selection, retention and

realization of investment, and the responsible

use of rights (.) that are attached to such

investments2. Responsible property investing

has emerged in response to the need or

investors to adopt responsible investing

principles, which are more tailored or propertyinvestments.

2 Mansley, defnition o

Responsible Investing

RPI takes into account the social,

ethical and environmental factors in the

selection, retention and realization of

investment, and the responsible use of

rights attached to such investments


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8

The United Nations Environment Programme

Finance Initiative Property Working Group

has dened RPI in terms o social and

environmental dimensions o real estateinvestment, including:

SmartGrowth(e.g.,transit-oriented

development, walkable communities,

mixed-use development

SocialEquityandCommunity

Development (e.g., aordable housing,

community outreach, air labor practices,

workorce development)

UrbanRevitalization(e.g.,goodsand

services provided to underserved

communities, inll development, fexible

interiors, browneld redevelopment)

EnergyConservation(e.g.,energyefcient

buildings, conservation retrotting, green

power generation and purchasing)

EnvironmentalProtection(e.g.,water

conservation, recycling, habitat protection)

WorkerWell-Being(e.g.,plazas,indoor

air quality, childcare on premises,

handicapped access)

HealthandSafety(e.g.,propertysecurity,

avoiding hazards, rst aid readiness)

LocalCitizenship(e.g.,aesthetics,

minimum neighborhood impacts,

considerate construction, stakeholder

engagement, historical preservation)

CorporateCitizenship(e.g.,regulatory

compliance, sustainability disclosure,

independent directors, and adopting

o independent voluntary codes such

as LEED, Energy Star, Green Seal, UNPrinciples or Responsible Investment, and

Global Reporting Initiative)

These principles highlight the range o RPI

issues, and also create a ramework or

applying ESG analysis to the real estate

asset class. In practice, these issues havebeen treated as vital by many investors RPI

oers a means to bring them together into a

coherent ramework.

Industry Practice Today

The application o responsible property

investing principles to institutional real

estate portolios can best be ramed by

understanding the current context or property

investment and investment metrics here in the

United States.The Real Estate Roundtable estimates the

size o the US commercial real estate market

at $5 trillion, with approximately $2.5 trillion

in assets owned by institutional investors.

The balance is owned by corporations.

Institutional investors can be public unds,

union/multi-employers, oundations,

endowments, healthcare, insurance

companies, high net worth individuals or

mutual unds.

Those investors utilize a diverse array onancial structures to achieve their investment

objectives, such as equity, xed income,

non-US equity or xed income, balanced

real estate or alternative investments. Each

o these nancial structures have distinct risk

and return proles.


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Proessional real estate investment operates

through the contract between the institutional

investor and the asset manager, also

called the real estate manager. The goal othe management contract is to establish

relationship guidelines, perormance goals,

and regulate investment discretion. The

typical selection criteria that institutional

investors use to select real estate managers

are:

Experienceandstabilitymanagingreal

estate

Competitivenessoffundperformance

Competitivenessoffees

Appropriatefunddiversicationanduseof

leverage

The classic measures o success, which

ultimately determine whether the institutional

investor is receiving satisactory perormance,

appear in portolio characteristics below

and in Figure 2, which are the most direct

measures o und perormance:

Portolio Characteristics

1. Fund strategy: core, value-added,opportunistic, etc.

2. Legal structure and und type: closed-end,

open-end, private REIT, etc.

3. Number o properties

4. Use o leverage

In other words, contemporary institutional real

estate investing happens through a diverse

array o nancial vehicles, managed by real

estate managers. These arrangements are

considered market standard because theyare thought to encompass nearly all o the

most relevant criteria and processes needed

to obtain market or above market rates o

return on an investment o institutional capital

within real estate.

RPI Metrics as Enhanced InvestmentAnalysis

The endgame o using metrics is to

provide real estate market participants with

transparency, benchmarking, risk assessment,

perormance evaluation, and an unbiased

way to compare asset managers investment

eorts.

The likelihood or reaching that endgame,

however, relies on one undamental, largely

unspoken, assumption, which drives many

o the explicit agreements and assessment

parameters that the current set o

inormation used by institutional real estate

investors is complete, and delivers predictable

orecasts o uture perormance. In other

words, the key assumption within the system

o perormance criteria and measurement

outlined above is that there are no new issues

or actors beyond that highlighted above,

which would aect the business system o

real estate including the results (returns) o the

investment process.

In the next section, we examine why that is no

longer the case.

FundDiversifcation

Lie CycleDiversifcation

PerormanceSummary

Figure 2: Market standard fund performance characteristics

Year

Quarter

Income

AppreciationGross total return

Net total return

Dividend paid out

Existing buildings

Redevelopment

Development

Land

Property type

Geographic

Property size


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10

Many experts have written extensively about

global sustainability challenges and theimpacts are now being observed in many

kinds o systems. The increased global and

2.2Impacts o Sustainability on Institutional Real Estate

Table 1: Sustainability Impacts on Real Estate

social awareness about sustainability in

general has sharply impacted institutional realestate in several interrelated ways, as shown

in the table below.

Sustainability-related Drivers Impacts on Institutional Real Estate

Opportunities Challenges

Global natural resource depletion in particularossil uels and water.

Green or resource-ecient buildings

Sustainable mixed use developments

Commissioning and retrotting green

Potential obsolescence o non-green buildings

Unreliable energy supply and pricing

Unreliable water supply and pricing

Increased building construction and costs

Increased regulation

Increased global atmospheric carbon levels Zero-carbon eco districts. Meeting zero carbon targets at building scale

Financing renewable on-site energy generation

Negative impacts o suburban land developmentpatterns

TOD, urban-inll properties

Adaptive reuse

Land use restrictions

Dearth o clean, economical public transportation Increased value o TOD sites Cost o public transit

Demographic trends toward urban environments TOD, urban-inll properties Increased competition or prime urban locations

Growth constraints due to municipal util ities Sel suciency:getting o the grid or powerand water

New nancing tools through ESCOs

Increased operating costs or power and water

Increased risk o business interruption due topower ailures

Limitations on development OR requirement tound adequate water and power supply acing

limits on supplyFinancing investment in sustainable water andenergy inrastructure

Bui ld ing energy label ing requirements Competit ive posit ioning or owners o EnergyStar rated buildings

Heightened legal compliance associated withdisclosure

Market leasing and sales risk, i disclosures areunavorable

Impending carbon legislation Monetization o carbon reductions rom energyeciency measures

Carbon tax on properties in the near to mid-term

Utilities acing renewable portolio standards On-site generation can be win-win(33% in Caliornia)

Contract risks

Space requirements or on-site generation

Insurers overexposed to climate chvange risks Green building policies oered through someinsurers (Firemans Fund, Travelers) Increasedattention on indoor environmental health

Lower insurance premiums or implementinggreen and/or energy ecient approaches

Higher insurance costs or a host o businessliability issues

Withdrawal o insurers rom some real estatemarkets

Some green building techniques perceived asrisky

Increased attention on indoor environmentalhealth

Green buildings with healthy materials,and good access to daylight and views

Decrease in tenant satisaction

Legal risks o poor indoor air quality


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The above are sustainability-related orces

which constitute risks and opportunities

or institutional real estate investors. At the

portolio level, these risks and opportunities

will express themselves in the ollowing

property perormance eatures:

Increasedorreducedrevenueandoverall

cash fow

Rentgrowth,occupancyratesand

ongoing investment cost management

Assetoperatingexpenseefciencyand

cost escalation management

Depreciationandobsolescence

Riskproleoftargetproperties

Discountandcapratesappliedto

properties

To the extent that a real estate portoliomay benet due to the presence o these

impacts, they constitute portolio perormance

opportunities. Nonetheless, most o todays

market standard portolio perormance

metrics do not directly account or any o

these orces, meaning that sustainability-

related opportunities and risks that may be

present within these portolios currently lie

outside the real estate business system,

unmeasured.

The presence o these new orces within the

real estate universe means that institutional

investors and their managers will have to

expand their measurement and denition o

perormance to include an assessment o

these sustainability-related actors. By doing

so, they gain an understanding o portolio

perormance which refects important newtrends and comes closer to what they always

strive or: transparency, objectivity, and

credibility within the new context o investing.

In order to create measurements that are

meaningul across regions, sectors, and

investors, there is a need or a relatively

uniorm set o additional metrics which are

better suited or the new issues acing real

estate investing.

In 2008, the Global Reporting Initiative undertook a review o major

sustainability reporting eorts in the construction and real estate

sector. It aimed to understand the relative requency o which key

sustainability indicators were measured and reported by leaders

in the eld. Among those already producing detailed sustainability

reports, the review shows that portolio-level perormance is under-

reported and that no standard exists or metrics at this level. The

reporting requency o identied indicators varies widely across

the sample o investors, making valuable cross-industry analysis

impossible. Even many o the leaders in the industry report much

more on CSR and philanthropic issues than those o portolioperormance. We hope that the GRI Sector Supplement or

construction and real estate, now in development in coordination

with a quorum o participating industry leaders, will address these

concerns beore its anticipated release in 2011.


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12

A number o initiatives, both industry-wide and

investor-specic, have attempted to quantiyand report on sustainability metrics outside

the traditional scope o portolio analysis.

These include the Global Reporting Initiative

and Principles or Responsible Investing at the

industry scale, and, or instance, the Investa

Sustainability Indicators and CBRE Standards

o Sustainability at the individual company

scale.

To varying degrees, these eorts track (or

aid in tracking) data on natural resource use,

building perormance, environmental andcommunity impact, and other key indicators.

Many o them ocus on (or are derived rom)

an understanding o building perormance,

conducting analysis at an asset level rather

than a portolio level. In the meantime,

gaps at the portolio level are present to the

extent that sustainability data may be both

inconsistent and misrepresented, keeping

this valuable inormation rom reaching its

ull potential or investors, asset managers,

stakeholders, and industry analysts alike.The eld o RPI lacks a powerul, standardized

set o portolio-level metrics which is

recognized and used by investors and

managers across the real estate industry,

thereby dening and giving credibility to the

practice o RPI. Such a system would not

only create improvements in building and

portolio perormance, but would also allow

or benchmarking and development o a

database o comps. Currently, reporters

are selective about which metrics to includeor exclude, and data is not comprehensive

or comparable rom one portolio to

another. Even those rms leading the eld

o responsible investing and sustainable

asset management may report only one-o

examples o buildings or initiatives which

cannot be extrapolated to obtain a view o

portolio level perormance.

3 New Metrics or a New Era

3.1Gaps in current reporting eorts

Showcasing exemplary projects can be

helpul to outside parties and a great methodo generating positive eedback, but should

not be done without providing relative

perormance with respect to both the rest

o the portolio and the industry as a whole

(where possible). For example, two pages

o discussion in a report o a single LEED-

Certied building may mask the act that the

majority o the portolio consists o business-

as-usual properties. A unied system o

RPI metrics to measure perormance at

the portolio level would prevent thesediscontinuities and help establish standards

and best practices or high-perormance

portolios sector-wide.

In 2004, Paul Hawken studied the makeup o socially responsible

investment (SRI) unds against traditional unds and determined

that an SRI portolio had almost identical characteristics and

holdings as non-SRI investments. Furthermore, he ound that

there were no standards, denitions, or ormal codes o practice

or SRI. To continue to remain relevant, portolios aiming or RPI

achievement should have a markedly dierent, more sustainablemix o assets than non-RPI portolios. This dierence should be

quantitatively demonstrable, an aim which this system o metrics

can help to achieve.

RPI metrics, therefore, must use

vocabulary that is flexible enough to

allow for a variety of financial, social and

environmental advantages, and still be

able to differentiate responsible propertyinvesting from more conventional real

estate projects


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The scope o RPI is broad. It includes, or

example, deep green projects that ocus

on poor communities or environmentally

ragile areas, energy ecient buildings that

oer clear nancial advantages through

reduced operating costs, aordable housing

projects that draw upon local tax credits,

and now carbon reduction projects that

hedge risk and result in renewable energy

certicates. RPI metrics, thereore, must use

vocabulary that is fexible enough to allow or

a variety o nancial, social and environmental

advantages, and still be able to dierentiateresponsible property investing rom more

conventional real estate projects.

3.2Proposed metrics or RPI evaluation

Building o o the ten elements o social and

environmental impact and opportunity in real

estate as dened by the UNEP FI Property

Working Group, we have developed a set

o 26 quantitative metrics that can help

investors to nd, create and articulate value

through improving the economic, social, and

environmental prole o their investments. We

recognize, o course, that individual investors

will tailor their adoption and use according to

their specic investment strategies. These

metrics were selected or their ability to allow

real estate proessionals to better addressrisks and identiy opportunities or long-term

value creation. The metrics take two orms

to support dierent use cases: acquisition and

portolio management, as described below.

We envision three primary uses or RPI

metrics in practice: inorming acquisition

decisions, enhancing portolio management,

and reporting perormance. Metrics can be

used to guide investors across the lie cycle

o responsible property investment, rom

existing buildings to new development, rom

acquisition to disposition.

Because o their dierent purposes -- at the

acquisition stage (evaluation o one property)

or at the level o portolio management

(evaluation o the portolio o assets in its

entirety), RPI metrics take dierent orms

depending upon the use case.

3.3Use cases or RPI metrics

Reporting can happen in both instances:

characterizing the nature o an RPI

opportunity, or demonstrating or stakeholders

how investment values have been put into

practice in an RPI portolio, and how a

particular investment strategy can create value

over time.

Our case studies (see Appendices A and

B) test the validity o these use cases, and

establish links to value, where possible.


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14

RPI Metric Acquisition Portolio Management

Energy Conservation and Carbon Management

Energy Use Intensity For property, BTU/s Average across portolio, BTU/s

Total Annual Energy Use For property, BTU/yr Total across portolio, BTU/yr

Renewable Energy On-site generation at property location, % o totaldemand

On-site generation across portolio, % totaldemand

CO2 Emissions Intensity From energy use, or property, pounds/s/yr Average across portolio, pounds/s/year

Energy Star Rating Energy Star Score or Property Average Energy Star Score across Portolio

Retrocommissioning Perormed last 24 months, yes/no Properties on regular commissioning schedule,across portolio, %

Environmental Protection

Water Use Intensity For property, gal/occupant/day Averaged across portolio properties, gal/ occupant/day

Total Annual Water Use For property, MG/yr Total or portolio, MG/year

Recycled Water Use On property, % o total water use Average across portolio, %

Water Management Fees For property, combined water and wastewatercharges, $/yr

Total or portolio, $/yr

Solid Waste Generation For property, tons/yr Total or portolio, Million tons/year

Diversion Rate For property, % diverted rom landlls throughrecycling programs

Average across portolio, %

Green Leases In place on property, yes or no Properties in portolio operating under green leasestructures, %

Urban Revitalization and Adaptability

Browneld Yes or no % browneld properties in portolio

Inll Yes or no % properties in CBD in portolio

Smart Growth and Transit Oriented Development

Walkscore Rating Rating or property Average rating across portolio

Health and SaetyRisk Management Plans Prepared or property, yes or no % properties in portolio with risk management

plans in place

Vulnerable Location Yes or no % properties in coastal areas and/or earthquakezones

Worker and Tenant Well Being

Tenant Satisaction Survey Score on Kingsley survey Average score across portolio on Kingsley Survey

Social Equity and Community Development

Benets to CRA area Property located i n a CRA census tract, yes or no % o properties in census tracts designated by theCommunity Reinvestment Act (CRA)

Essential services Project brings essential services to an underservedarea, yes or no

% o properties in the portolio bringing essentialservices to underserved areas

Local Citizenship

Community Engagement Community Engagement Plan in place or property,yes or no

% properties in portolio with communityengagement plans in place

Public space Amount o public space maintained by the project,sq t

Amount o public space maintained, as % o totalarea in the portolio.

Voluntary Certifcation

Third Party Certication Property is certied under USGBC LEED, EnergyStar, or other green building rating system, yesor no

% o properties in the portolio with third partycertication underway or in place

Governance

Reporting Perormance Perormance o the property is reported againsttriple bottom line metrics, yes or no

Is the perormance o the portolio reported againsttriple bottom line metrics?

Alignment o Incentives Property manager is evaluated on triple bottomline perormance, and it is tied to compensation,yes or no

% o property managers evaluated andcompensated on the basis o triple bottom lineperormance

Table 2: Proposed RPI Metrics


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3.4.1 Energy Conservation and Carbon

Management

Metrics relating to energy conservation

and renewable energy generation have

the advantage o being tied directly to

reduced operating costs. Thereore, it is no

coincidence that the metrics surrounding

building energy use and associated

greenhouse gas emissions have been the

ocus o many green building initiatives

to date. However, these are generally

communicated as gross totals across

investments rather than in normalized orpercentage terms which allow comparisons

between properties and between portolios.

When evaluating a portolio, it is most useul

to set targets and interpret perormance by

building types and climate zone. Recently

enacted EPA GHG reporting requirements

and legislative initiatives promoting net zero

buildings (Caliornia Energy Commission) will

drive adoption o metrics such as these or

portolio management.

3.4Discussions o proposed RPI metrics

An Energy Star rating o 75 is needed to get

an Energy Star certication and or LEED-

EB. 85+ is good, and 90+ is very good. The

score is essentially the percentile compared to

the rest o the EPA database, so 95% would

mean only 5% o buildings perorm better.

For an oce building (based on Commercial

Building Energy Consumption Survey, or CBECS

data) typical energy use (energy and gas) is in

the range o 90 kBtu/s/year (electricity use o

17 kWh/s/yr = 59 kBtu/s/yr plus gas use o

32 kBtu/s/yr). O course, energy use is climate

specic, but a well designed low energy oce

building might achieve 30 to 50 kBtu/s/yr total.

A net zero energy building might beat code

baseline by 60% and then make up the rest with

renewable and osets. While energy intensity

is a metric that can identiy underperorming

buildings, total energy use or the portolio is

also important. This indicates the magnitude o

the value opportunity or even small increases in

energy perormance.

RPI metrics take different forms

depending upon the use case:

acquisition or portfolio management


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16

3.4.2 Environmental Protection

The management o other resources used

or generated by properties, namely water

and waste, is also a key issue or investors to

consider or their portolio. These parameters

have direct links to value, with reduced water

potable use, reduced wastewater and solid

waste volumes resulting in reduced operating

costs.

According to the DOE, commercial buildings

consume 88% o the potable water in the US4.

A typical oce building can use up to 60 gals/s/year, or 70 gals/person/day or indoor use,

cooling, and irrigation5. This is compared to

a highly water ecient building, which can

achieve up to 10 to 15 gals/s/year or gals/

person/day through water ecient xtures,

xeriscaping, and use o recycled water. While

potable water savings represent signicant cost

savings, wastewater charges can be double

to quadruple water charges in some areas

with limited capacity and aging inrastructure,

or communities with new wastewater plants

that must be amortized. Thereore, reducing

wastewater volumes is even more important to

the bottom line that reducing potable water use.

4 http://www.buildings.

com/ArticleDetails/

tabid/3321/ArticleID/6461/

Deault.aspx

5 http://www.seco.

cpa.state.tx.us/

waterconservation.pd

6 SFPUC 2009-2013

proposed water and

wastewater rate package

7 Caliornia Integrated

Waste Management

Board, Estimated Solid

Waste Generation

Rates or Commercial

Establishments,http://www.ciwmb.

ca.gov/WasteChar/

WasteGenRates/

Commercial.htm

In San Francisco, commercial rates or potable

water and wastewater are escalating, with rates

proposed at approximately $10.00 per cc

(hundred cubic eet = 748 gals)6 or provision o

water and wastewater services by 2012. So,

a 30 storey oce building with a foor plate o

30,000 s could save over $50,000 per month

by investing in conservation and eciency

measures.

Solid waste generation can be 0.08 lb/s/day

or 1.24 lb/ employee/day7 or a typical oce

building. However, diversion rates o 75 % or

more can be achieved or an oce building

with robust sorting, recycling, and composting

programs in place. With solid waste collection

and disposal rates approaching $150/ton, the

magnitude o the value opportunity or even

50% diversion signicant (or our hypothetical

30 storey oce building it could be over

$1M per year). Green lease arrangements tie

tenant eorts to conserve resources directly

to the savings realized by such eorts, so that

investors, managers, and tenants alike eachhave motivation to maximize reductions.

3.4.3 Urban Revitalization and

Adaptability

Focusing investments on sites and propertieswhich return browneld sites to productive

use or which take advantage o under-

utilized urban space reduces the need or

greeneld development and encourages land

conservation. Additionally, government and

market incentives are increasingly directed

toward investments which make ecient use

o space as opposed to conventional sprawl.Some real estate unds invest exclusively

in browneld properties (e.g. Cherokee).

However, most unds do not report the scale

o these types o investments at the portolio

level either as a percentage o properties or a

total square eet in the portolio.


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3.4.4 Smart Growth and Transit

Oriented Development

Compact, walkable communities are the

solution to some o our biggest shared

challenges, rom childhood obesity to social

isolation, rom crash deaths to disappearing

armland, rom the high price o gas and GHG

emissions, to the architectural blight o strip

malls.

Investing in areas with existing density and

access to essential services and public transit

is one o the principal ways that RPI can

support smart growth. Walkscore ratings can

serve as a proxy measure or smart growth

and transit orientation, since with density

comes public services and walkability.

Measuring the walkscore or a property is

a simple as putting in the address into the

walkscore calculator (www.walkscore.com).

The property walkscore is a number between

0 and 100. General guidelines or interpreting

the score are as ollows:

90-100=WalkersParadise:Mosterrandscan be accomplished on oot and many

people get by without owning a car

70-89=VeryWalkable:Itspossibletoget

by without owning a car

50-69=SomewhatWalkable:Some

stores and amenities are within walking

distance, but many everyday trips still

require a bike, public transportation, or car

25-49=Car-Dependent:Onlyafew

destinations are within easy walking

range. For most errands, driving or public

transportation is a must

0-24=Car-Dependent(DrivingOnly):

Virtually no neighborhood destinations

within walking range. You can walk rom

your house to your car!

Similar to the manner in which some portolio

managers aggregate EnergyStar ratings and

establish a portolio wide target, walkscore

ratings can also be aggregated across a

portolio, providing a useul view into the

character o the properties in the portolio.

The eect o walkability on property value

was the subject o a study by Dr. Gary Pivo,

proessor o planning and natural resources

and senior ellow at the University o Arizona,

and Dr. Jerey Fisher, proessor o real estate

and director o the Benecki Center or Real

Estate Studies at Indiana University8.

Dr. Pivo and Dr. Fisher pulled real estate

data going back a decade rom the Nation

Council o Real Estate Investment Fiduciaries

(NCREIF) and obtained walkability ratings or

nearly 11,000 buildings using a Walk Score.

For each o the property types analyzed

oce, retail, multi-amily and industrial higher

walkability scores equated to higher overallproperty values and net operating incomes.

Comparing properties with a Walk Score o

80, dened as very walkable, to properties

with a score o 20 (car-dependent), the

study ound that the walkable properties were

29 percent to 49 percent more valuable and

generated 34 percent to 71 percent more NOI

per square oot.

The positive correlation between walkability

and property value and NOI was expected,

Dr. Pivo and Dr. Fisher said in the study.According to Dr. Pivo, the premiums suggest

higher rents, occupancy and general market

demand or walkable properties.

8 http://www.u.arizona.

edu/~gpivo/

Walkability%20Paper%20

8_4%20drat.pd


18/43

18

3.4.5 Resiliency

Properties that endure are inherently

sustainable. Properties can be vulnerable

to all kinds o disasters which in turn could

jeopardize the sustainability o the occupants

and/or community. Additionally, rebuilding

damaged properties has an enormous

environmental impact. Looking at the age

o buildings in a portolio is revealing, as

building codes have become more stringent

over time. However, dDesigning to code

protects lie saety, but does not protect the

asset. Thereore, a portolio manager shouldassess the resiliency o the portolio to risks

associated with climate change, earthquakes,

other natural disasters, and security. Rather

than establishing metrics or perormance

o the asset against specic risks, having

a risk management plan in place serves

as a proxy or perormance. As investors

become more sophisticated, they can begin

to look into specic risk parameters with the

potential to aect health and saety such as

location: climate, foodplain, or earthquakezones, structural stability, lie saety systems,

aade integrity, or business continuity plans.

Adequate knowledge and mitigation o risks

increases disaster resiliency and overall

sustainability by improving the durability and

longevity o properties. With certain risk

mitigation measures in place, appraised value

can be higher and insurance premiums can

be lowered, thereby establishing a direct link

to value.

3.4.6 Worker and Tenant Well-being

Taking an interest in the personal health and

wellbeing o tenants not only demonstrates

a dedication to RPI, but can bring benets

in the orm o increased property values

and occupancy rates. Occupancy surveys

provide valuable eedback on the occupant

experience in a building and can lead to a

better understand o what makes occupants

satised. Numerous studies have ound

benets in monitoring and improving occupant

comort, particularly in productivity gains.

Providing services such as childcare and

wellness programs on-site are another way

to improve worker well-being, and aiming to

institute these types o programs across a

portolio is a valuable RPI commitment.

We have chosen the property score on the

Kingsley survey as a metric that can establish

occupant satisaction across a broad range

o actors, and be aggregated across the

portolio. The Kingsley Index is the largest

and most comprehensive perormance-

benchmarking database in the industry.

Compiled rom over 20 years o analyzing the

perormance o real estate industry leaders,

the proprietary Index represents the standard

or measuring tenant, resident, employee and

client satisaction, as well as broker relations

and operational eectiveness. Many portolio

managers, such as TIAA-CREF, routinely

conduct Kingsley surveys or their properties.Scoring high on occupant satisaction has a

direct link to value, as tenant turnover will be

lower.

3.4.7 Social Equity and Community

Development

Three pressing and interconnected issues

have caused increasing amounts o concern

or real estate development as urban land

has become scarcer: gentrication, housing

aordability, and exclusionary policies andpractices. In low income areas, sustainability

equates to jobs as a rst priority. Underserved

areas typically need not only buildings, jobs,

transportation and green space, but access

to essential services, including local markets

or ood and sundries, health care, places o

worship, community centers, and day care

services. Investment practices can help to

bring essential services to underserved areas,


19/43

either through direct investment in retail, ood

markets, or urban agriculture, or through

inclusion o space or essential services as

part o a development program. By tracking

the ability o properties to create jobs and

provide services or underserved areas,

investors can lower risks associated with

regulation and community opposition as well

as setting an example o social sustainability.

For existing assets, the two metrics we

selected to represent this element o RPI

include investment in a CRA area (CommunityReinvestment Act), and the amount o space

allocated to essential services provided to

an underserved area as part o the project.

These metrics are easily tracked across a

portolio but are currently under-reported,

even or unds that have a stated goal o

targeting low to moderate income census

tracts or benetting CRA areas.

3.4.8 Local Citizenship

Buildings even green buildings oten lacka close connection to their surrounding area

and community. Developing Community

Engagement plans on a site-by-site basis

allows projects to be sensitive to the needs

o the citizens and areas in which they are

constructed. Understanding issues such as

site context, cultural resources and concerns,

and potential or shared use agreements

ensures that negative impacts and public

opposition to projects will be minimized.

These plans should also include provisionsor the public use o private space, which has

well-documented success in San Francisco

and other cities. Across a portolio, investing

in projects that positively contribute to the

community in which they are anchored

creates a positive image, minimizes, risk, and

improves social sustainability.

3.4.9 Voluntary Certifcation

LEED has established itsel as the

predominant green building certication or

new development in the United States and

several other parts o the world, with its

marketability and value being realized by many

investors and managers across the country.

Still, many green building initiatives and LEED

certication achievements are reported as

single-property accomplishments and the

true sustainability impacts o the portolio

remain hidden . Because o the time,

complexity and cost o LEED certication,

many portolio managers have indicated an

unwillingness to make LEED certication a

portolio-wide policy. Energy Star is emerging

as the premier portolio wide approach or

certication o energy perormance, due to

low cost o certication, ease o use o the

Energy Star Portolio Manager sotware, and

ocus on value drivers. Portolio manager can

manage energy and water consumption or

all buildings, help set investment priorities,identiy underperorming assets, veriy

eciency improvements, and receive EPA

recognition or superior energy perormance.

TIAA-CREF, or example, has set a goal o

Energy Star labeling or 100% o their oce

buildings. Setting a goal o certiying most

or all o a portolios properties and tracking

progress toward this goal makes a proound

statement o a companys true commitment

to sustainability, reaching much beyond the

demonstration o the systems benets in a

single building.


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20

3.4.10 Governance

This category represents the degree to which

metrics have been adopted and institutionalized

within the portolio management process.

Reporting perormance on RPI metrics is

a shared responsibility between property

managers and portolio managers. Systems

must be put in place to track perormance

In order to make sense o the perormance o a

portolio with respect to RPI metrics, portolios

must be characterized according to their

asset composition, geography, strategy, and

other actors. This can help in benchmarking,

review o progress against goals and in

identiying trends over time. In order to have

a complete picture o perormance, progress,

3.5Portolio characterization

and opportunities, certain measures need to

be understood at the outset and tracked along

with the perormance metrics. We have called

these attributes characterization indicators.

They are quite useul or normalization and

comparison o perormance data. They take a

slightly dierent orm or acquisition vs. portolio

management, and they are shown below.

o individual assets, with the capabilities to

aggregate and view perormance across theportolio. Finally, incentives must be aligned

with goals, i a commitment to RPI is to be

diused throughout the portolio. This means

that property managers must be not only

evaluated, but compensated, on the basis o

triple bottom line perormance.

Characterization Acquisition (Asset) Portolio

Asset type Property s and type (oce,

industrial, retail, apartment)

Asset type in portolio by s

Size Gross s o property Total gross s held in portolio

Climate Zone CBECS zone % property held in each CBECS climate

zone

NCREIF region NCREIF region or property % property held in each NCREIF region

Occupancy rate Most recent quarter

occupancy rate

Most recent quarter occupancy rate

(average across portolio)

Age o Buildings Age o building Average age o buildings in portolioOwnership structure For building Within portolio (direct or commingled)

Property Manager (s) For building Number o property managers working

with portolio

# o Distinct Properties In investment opportunity In portolio

Strategy Core, value-added or

opportunistic

% o portolio invested in core, value-

added, opportunistic

Return on Investment Targeted or deal Targeted or portolio

Table 3: Portfolio Characterization


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The development o the RPI metrics or

acquisition and portolio management wasundertaken by piloting an original, longer

set o drat metrics with two real estate

undsTIAA-CREF and Bay Area Fund o

Funds. Individual case studies are presented

in the Appendix. The pilot testing sought to

determine i the metrics are valid, reasonable,

inormative, linked to value, and relevant or

decision-making. The metrics presented in

this document refect the ndings o this pilot

testing.

Use o Metrics to Screen PotentialAssets during Acquisition

Successul property acquisition rests on

equal parts judgment and execution. While

investment managers have to make sure

that their due diligence is accurate, the

most successul develop a reputation or

closing in a t imely and reliable ashion. Unlike

portolio management which is an on-going

monitoring unction, acquisition evaluation is a

collection o one-o evaluations that must be

accomplished within a very limited timerame.

So the use o responsible property investing

metrics has to t the timing o real estate

acquisition.

Our work indicates that an investor can

develop decisions and execute on a potential

investment utilizing many o the proposed

metrics. Moreover, the inclusion o RPI

metrics within the acquisition process may

strengthen a key objective: identiying the

areas o potential value enhancement within

the investment.

3.6Case Study Results

For many o the issues covered within the

realm o RPI, the acquisition decision is themost critical stage in dening perormance

achievement, as improvement may depend

on outside actors (such as CRA location

or walkability) or quite simply, the metric is

static (such as browneld site or vulnerable

location). It is essential then that perormance

results or these metrics be at an acceptable

level at the acquisition stage.

Several categories contain RPI metrics

which investment managers could directly

tie to value either through their indication odecreased operating expenses or indirectly

aid in obtaining higher rents, lower vacancy or

selling the property at a higher price. Other

categories do not link directly to asset value,

rather allow the investor to property determine

the correct ESG measures which must be

in place in order to achieve maximum RPI

benets.

The key to obtaining the biggest benets

rom RPI metrics during acquisition is to

conduct the review o the right metrics atthe right stage o the acquisition process.

Some metrics are more easily obtained

during the pre-LOI stage, others require more

investigation and so can only be obtained

during ormal due diligence. A ew might not

be available until post-closing.

No matter when perormance is measured, it

is clear that the RPI metrics lend themselves

to the classic investment process and can

supply valuable inormation or both classic

and triple bottom line acquisition decisionmaking.

The inclusion of RPI metrics within the

acquisition process may strengthen a key

objective: identifying areas for potential

value enhancement


22/43

22

Use o Metrics or Portolio

Characterization and Management

Managing a real estate portolio requires

measuring and monitoring a variety o nancial

undamentals, including asset value, operating

income, occupancy rates, and others. Use o

ESG metrics can provide insight into risks and

opportunities across the portolio, however,

the burden o additional data collection

requirements must be balanced with the

potential insight to be obtained. Metrics

must point to potential actions to take, or

indicate the results o those actions, or they

are not worth the additional cost and time.

Our work indicates that RPI metrics can be

incorporated into standard procedures or

portolio management, even where multiple

property managers exist. The perormance

results help to drive strategies or improving

perormance across the portoliobeginning

with low hanging ruit, such as no cost

and low cost measures to improve energy

eciency, to measures that may involve more

signicant capital cost but deliver greater

payback.

A view into ESG perormance across the

portolio helps to prioritize investments that

can be implemented portolio wide. Our

research indicates that once ESG metrics

are in place portolio widemanagers take a

horizontal rather than a vertical approach

to greening the portolioin other words,

rather than greening one building at a time,

strategies are enacted in tranches across the

portolio. Moving to a horizontal portolio

management approach is one o the best

ways to achieve valuevalue creation rom

the initial measures can help to make the

business case or subsequent measures.

Additionally, leveraging the size o the

portolio can mean economies o scale or

implementation.

Prudent portolio managers will look to

enter into portolio wide contracts or

commissioning, eciency, renewables, and

other measures to improve perormance,

and use RPI metrics to track the value o

improvements portolio wide.

The ability to benchmark ESG metrics

portolio wide provides deep insight. While

external benchmarks are helpul, the ability to

evaluate progress over time and characterize

the changing nature o the portolio is viewed

as even more benecial.

Once RPI metrics are in place, portfolio

managers take a horizontal rather than

a vertical approach to greening the

portfolioimplementing strategies in

tranches across the portfolio

Environmental metrics are perceived as having

more direct links to value, however social

metrics are seen as helpul in characterizing

progress on advancing the social agenda o

the und, while maintaining nancial returns.

Environmental metrics are more malleable

than social metricsin other words, most

environmental metrics can be improved over

time across the portolio, whereas social

metrics are oten determined at the point o

acquisition, and remain static (walkability, CBD

properties, etc.) Over time, both environmental

and social metrics may help drive investmentstrategy and portolio management, by setting

targets or certain parameters.

In summary, tracking RPI metrics in addition

to standard nancial metrics can provide

added insight into risks and opportunities

(useul or all investors), and can provide

tangible evidence o a socially responsible

investment agenda.


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4 Implications or Reporting and Management

4.1Adapting or higher perormance

Implementing a system which tracks all o the

key perormance indicators recommendedor RPI will take some investment and require

changes to current reporting and management

processes. However, implementing these

changes will contribute positively to long-

term portolio perormance and help oster

better relationships between investors and

asset managers around RPI and sustainability

objectives. Additionally, reporting across RPI

metrics will help to develop a new literacy

o investment criteria and perormance.

Portolio managers, property managers,and stakeholders will be able to engage in

a dialogue regarding value created across

the triple bottom line through responsible

investment practices.

Adapting portolio reporting processes to

include RPI metrics involves:

1 Establishing a commitment to

obtaining, managing and reporting

on the metrics

A concrete commitment to tracking a new

set o metrics at the investor level is an

important rst step toward realizing benets

or the portolio, as well as toward gaining

acceptance or the metrics industry-wide. An

investment o time and resources should be

put toward understanding existing available

data, establishing a baseline, benchmarking,

and perorming a gap analysis to target key

improvement areas. Examples o this type o

action are available rom industry leaders who

have proven that this approach has benets orreporting and perormance9.

In 2007, Lend Lease released a

ramework or tracking and assessing its

progress in reaching key sustainability

targets. Among these was a

commitment to ensuring that energy,

water, and waste data are measured and

monitored in a comparable way across

all assets under management. This

commitment is an essential rst step

toward using the metrics to improve

perormance.

2 Implement a system or tracking

and updating the listed metrics

To ensure ease o collection and interpretation

o the additional data, systems should be put

into place to ensure the metrics are tracked

at each property and easily aggregated to the

portolio level. This should generally align well

with current inormation-gathering practices,

though may require improved relationships

with managers to be ully eective (discussed

below). Furthermore, having an individual

or team dedicated to RPI and sustainability-

related analysis and management would helpthe metrics reach their ull potential as portolio

improvement tools.

9 Responsible Property

Investing: What the

leaders are doing, UNEP-

Finance Initiative, 2008I

Reporting across RPI metrics will help

to develop a new literacy of investment

criteria and performance


24/43

24

3 Institute education programs

with managers to increase

awareness o needed changes at

the property level

Many key improvements at the portolio level

rely heavily on improvements occurring at the

property level through design and siting as

well as operations. Creating a standardized

education program tailored specically toward

managers, promoting awareness o new

metrics and their implications should provide

or participation and consistency across

the portolio. Eective relationships witheducated managers will greatly improve the

accountability associated with many o the

operational issues in particular, and improve

perormance in the long-term .

Use o new KPIs to characterize portolios

is akin to creating a new language- a way to

articulate value beyond nancial perormance,

using standardized metrics and benchmarks.

Over time, property managers and portolio

managers alike will become fuent in this new

language o RPI.

4 Educating appraisers and

seeking support or increased

appraisal values where

appropriate

Investments which improve perormance

across key RPI metrics, particularly in areas

such as energy perormance, GHG emissions,

resource management, and connection to

transit and essential services, may bring an

added value compared to standard assets

without such considerations. As energy

prices fuctuate and government regulations

become increasingly stringent, these benetswill bring risk reduction, reduced operating

costs, and other benets which are generally

not accounted or in the current standard

appraisal process. Though these may be

dicult to quantiy directly in the short term,

making a case or their incorporation into the

appraised value o assets in some orm is one

o the most important ways or investors to

realize their value across a portolio .

The chicken and egg situation should be

avoidedsome portolio managers want tosee clear links to value beore committing

the additional time and energy to reporting,

while reporting on these metrics over time

is the only way to demonstrate clear links

to value. A common complaint o investors

who are committed in principle to RPI is that

appraisers are slow to recognize value beyond

BAU. Appraisers are oten unclear how to

value specic sustainability techniques or

atypical assets. Appraisers notoriously deault

to comps to assess property, and the onlyway to create a comparable database o

sustainable properties is to begin reporting on

those metrics that matter, beyond traditional

nancial metrics or real estate valuation. This

situation may improve with the emergence o

the new National Green Building Underwriting

Standards, a tool that can be used to assign a

green value score to a property.

In 2008, CB Richard Ellis established

its Standards o Sustainability which

create a minimum set o sustainability-

related actions to be completed or all

o its oce buildings. These include

seeking ENERGY STAR certication or

any eligible buildings, providing relevant

training at each building, and reporting

internally on sustainability perormance

each month to ownership. These

standards align well with RPI goals,

and could be very powerul i applied

successully at the portolio level.


25/43

4.2High-Perormance Portolio Dashboard

Ideally, a unied approach could also be taken

to visualizing, analyzing, and managing thedata obtained or individual metrics, building

upon the action items mentioned above

to create a dashboard or monitoring and

improving portolio perormance in the context

o RPI and investor and stakeholder interests.

In the short-term this would take the orm

o a standardized aggregation o data rom

properties across the portolio (gathered

quarterly or monthly) which could be analyzed

or specic trends. This data should be airly

easily accessed, particularly once relationshipswith managers are streamlined. This would

allow quick identication o the winners and

losers in a portolio with respect to the RPI

metrics. From this analysis, best practices

rom the winners could be applied to

underperorming properties to maximize the

perormance o the portolio as a whole.

Finally, in the mid- to long-term there is

potential or real-time inormation monitoring,benchmarking, and analysis across a portolio.

Sensors exist which are capable o monitoring

building resource use and transmitting this

data or analysis and visualization or every

minute o the day. This technology, combined

with regular manager reports and occupant

surveys, can give an incredibly a timely and

accurate picture o perormance across a

portolio, and lead to new realizations and

improvements.

There are many useul sotware tools on themarket- rom EnergyStar Portolio Manager

(mentioned previously) to proprietary systems

such as Tririga (www.tririga.com). Tririga

combines portolio management tools with

portal views or property managers, and

acilities management unctionality. This

helps to integrate goals and establish

common metrics rom asset to asset, which

roll up to a portolio wide view o costs,

benets, and perormance.


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26

The benets o committing to RPI are

potentially signicant, but a lack o uniormmetrics which can be adopted industry-

wide has hindered the potential impact o

RPI on the real estate sector. By adopting

the metrics listed above and ollowing the

suggested implementation program, individual

investors can realize substantial gains which

could be quantied and managed without

signicant additional reporting burden. The

most notable o these gains are:

Long-termvaluecreationthrough

increases in assessed value o property

Greatlyreducedoperatingcostsbydriving

environmental metrics

Minimizationofriskinseveralkeyareas

during acquisition

Improvedpublicimageandinvestor

condence

Improvedrelationshipbetweeninvestors

and asset managers

Increasedvisibilityandtransparency

Demonstrationofvaluesinpractice

5 Notable Benets and Conclusion

Through adoption o these KPIs, investors

can become literate in responsible propertyinvesting. RPI literacy is powerulit

enables us to nally begin to articulate the

connection between the values o mission

driven investing, the actions that are taken

by investors to shape a sustainable portolio,

and the resulting perormance o the portolio.

And literacy enables us to communicate

our shared values in a shared language

managers with investors; investors with

shareholders. In a changing and volatile

investment environment, there is a uniqueand urgent need to better understand

the benets o making a commitment to

responsible property investing. The potential

or improvements at the portolio level is

great, with benets accruing to investors,

the industry, and society as a whole, and the

potential or these considerations to improve

the industry as a whole is even greater. There

is no better time or their adoption than now.

RPI literacy is powerfulit enablesus to finally begin to articulate the

connection between the values of

mission driven investing, the actions

that are taken by investors to shape a

sustainable portfolio, and the resulting

performance of the portfolio


27/43

Metrics Case Study:

Acquisitions

APPENDIX A


28/43

28

Objectives

The objective o this case study was to trial

the drat metrics or assessing a property

acquisition according to the principles

o Responsible Property Investing. The

drat metrics were developed through a

collaborative research eort between the

Responsible Property Investing Center, Arup

and Galley EcoCapital. The ndings rom the

trial were used to rene, streamline and evolve

the metrics into a nal set that best refected

the RPI principles and a triple bottom line

approach to investing.

The Bay Area Council Family o Funds (FOF)

oered to participate in the trial by testing the

metrics on three recently acquired properties.

The study considered:

WhichRPImetricscanprovidethebest

indicators o value during the acquisition

process?

WhichRPImetricscanbemosteasily

applied by investment acquisitions sta

during the acquisitions process? WouldtheuseofRPImetricsmaterially

change the investment acquisitions

process?

About the Bay Area Council Family oFunds

The Bay Area Council Family o Funds is a

regional eort developed by the Bay Area

Council to attract private capital into low-to-

moderate income (LMI) neighborhoods o the

San Francisco Bay Area. FOF acts as a FundSponsor and Special Member or several

commercial real estate investment unds.

It works with Kennedy Wilson, the Fund

Manager, who manages the investments on

a day-to-day basis.

Using Metrics in Property Acquisitions:

Bay Area Council Family o Funds Case Study

Portolio Strategy

The three properties studied are part o FOFs

Smart Growth Portolio o Funds, which are

two private real estate equity unds, with a

combined size o approximately $191 million.

The Funds have a 10-year term. They are

comprised o 17 assets, totaling 1,971,172

square eet commercial space and 1,066 or-

sale homes and 514 rental units.

The Smart Growth Portolio o Funds

objectives are two-old:

Firstbottomlinereturns:toseekmarketreturns rom oce, industrial, retail and

multiamily properties in low-to-moderate

income submarkets, generally located

along transportation corridors. The Fund

believes that these assets are typically

under-managed and that insucient

organized competition plus enjoys

the support o local government and

community groups or investment in these

areas.

Secondbottomlinereturn:tobenetthecommunities the investments are made

in, by ocusing on improving jobs, housing

and environmental impact.

The Smart Growth Portolio o Funds

investment parameters are to ocus on LMI

census tracts within the nine county Bay Area

region, provide equity to real estate projects

and invest mainly in value-add opportunities,

with a no more than 20% o und capital being

made available or new development.

Per FOF, the expected

combined target size

o the unds will be $191

million.


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Current Use o Metrics

The FOF has a dened strategy and process

or assuring double bottom line outcomes

on its investments. The FOF, as Sponsor,

has the ormal responsibility o establishing

the double bottom line strategy or each

o its investments. The Sponsor and the

Fund Manager have joint responsibility or

implementation o the established double

bottom line strategy. Within implementation,

the Sponsor and Fund Manager track the

progress o the double bottom line actors

on all investments on a quarterly basis. The

ollowing criteria are among the criteria that

are part o the double bottom line strategy

that the Sponsor and Fund Manager may

adopt:

Overall,qualitativeassessmentof

environmental return/impact

EconomicImpact:Catalystforincreased

economic activity and value creation in

the priority neighborhoods, particularly or

current residents.

WealthCreation:Home,businessand

real estate ownership, better quality

community shopping centers, and access

to mainline nancial services (e.g. local

banking), particularly or current local

residents.

CommunityImpact:Jobcreation,

aordable housing and home ownership,

joint ventures with community developers,

and local and minority contracting.

CommunityEngagement:Incorporation

o community input in projects through

the entitlement process and/or other

community participation vehicles.

EnvironmentalImpact:Energy

conservation, waste reduction, recycling,

pollution prevention, alternative energy,

and green building construction and

operations.

It should be noted that, while double bottom

line results are critical to the FOF investment

thesis, the Sponsor indicates that it does

not set double bottom line targets per se

or its acquisition and portolio management

process. This is because the potential or

double bottom line impact or any given

investment can vary widely by type and

amount mainly due to local market actors,

and so decision making on individual assets

can require tradeos between equally good

options that are very hard to quantiy.

Methodology or pilot test

The pilot test was carried out by providing

the Smart Growth Fund investment manager

with a worksheet containing a drat large set

o RPI metrics that could be used to evaluate

property acquisitions. The investment

manager selected three recently acquired

properties to test the metrics so that a

minimum base o observations could be used

to draw common themes about the exercise.

The investment manger was asked to:

Identifyperformancedataforeach

indicator

Assespotentialforimprovement

(post-acquisition)

Assessvalueimpact:

a. Does this metric currently actor into

your due diligence? (Yes/No)

b. Do you think this metric can directly

or indirectly impact the propertys

value? (Directly, Indirectly, No Impact,or Not Sure)

c. Link to Value (i possible, list where you

would account/budget or the impact

on value)

d. How important is this ino or acquisition

decisions? (1=no importance, 2=some

relevance, 3=critical)


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30

Property Characterization

The three properties studied were o dierent asset classes and in dierent urban locations within the

San Francisco Bay Area.

Application o the Metrics

The table below summarizes the results o applying the metrics to the three properties.

Property A B C

Asset Class Oce Retail Multiamily

Location San Francisco Marin Richmond

Age 1958 1995 Late 1980s

Square Feet / Units 124,980 182,000 712 units

Tenancy Multi-tenant Multi-tenant Multi-tenant

Certied Green or Energy-Star Labeled? No No No

Located In CRA-designated census area? Yes Yes Yes

Energy Mix Gas & electric Gas & electric Gas & electric

RPI metric Currently

Tracked?

Data

available?

Perceived

link to Value

Perceived relevance

or acquisition decisions

Energy conservation and

carbon mangement

No No Yes High

Environmental protection No Some tYes High

Urban revitalization No Yes No Medium

Smart growth / TOD Some Some Yes Unknown - medium

Health & Saety No Yes Yes High

Worker and Tenant Well-being No No No None

Social Equity and Community

Development

Some Some No High

Local Citizenship No Some No Medium

Voluntary Certication No Yes Yes Unknown


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Other specic insights include:

Interestingly,onprojectsAandB,value

potential through decreased vacancy

allowance/rent concessions was perceived

to be linked to the percentage o tenants

with green leases and quality o green

space.

Onesetofdatathatwasreadilyavailable

is the walkscore, which relies on an

external data source. Properties A

and B had walkscores o 80 and 97

respectively. Property C had a walkscore

o 52. The properties distance to public

transportation ranged rom 0.25 miles to

0.75 miles.

Findings

1 The use o responsible property

investing metrics during acquisition

can help pinpoint opportunities to

improve an assets tangible value and

its environmental and social profle at

the same time.

FOF indicated that opportunity analysis during

prospective acquisitions is a critical task o the

investment manager, particularly opportunities

to improve asset value. They indicated that

the perormance benchmarks and indicators

o many o the metrics within the ollowing

categories directly and indirectly linked to

asset value as well as provided helpul or even

critical inormation or acquisition decision

making.

Energyconservationandcarbon

management

Environmentalprotection

Smartgrowth/TOD

Voluntarycertication

Healthandsafety

2 Some RPI metrics correspond to

double bottom line characteristics

already in use during acquisition

screening process.

FOF would be able to build on that oundationi they chose to broaden their RPI approach.

A metrics-based approach works better

i there is a oundation o compatible

assessment criteria to build upon. We

determined that FOF already uses some RPI

metrics as acquisitions assessment criteria:

Distancetopublictransportation

ManagementreportingonESG

characteristics

Tenantsub-metering(oncertainproperties)

Minorityandwomen-ownedbusiness

contracting


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3 RPI Metrics should be grouped

according to acquisition stage.

Upon use o the metrics, it becameimmediately clear that certain types o

inormation is made available to the

investment manager at dierent stages o

the acquisition process, and so some metrics

could be evaluated in the initial, pre-LOI

stage, while many would be evaluated later

during ormal due diligence. A ew, such as

worker and tenant well being would only

be obtainable post-closing. The investment

manager indicated that separating the metrics

according to their applicable acquisition stagemade the evaluation process much easier. An

easier process makes or more likely use o

the metrics in investment decision making.

4 Consider adding or revising some o

the metrics or better acquisition review

FOF also recommended that certainchanges to the metrics helped them to

deliver more insights to the acquisitions

personnel. O primary interest were metrics

which more clearly helped to identiy value-

add opportunities, such as opportunity or

commissioning, or opportunity or upgrading

energy and water systems. This sort o

assessment ts well with the typical objectives

o an acquisition analysis.


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RPI Metric Acquisition Property A Property B Property C

Energy Conservation and Carbon Management

Energy Use Intensity For property, BTU/s Not available Not available Not available

Total Annual Energy Use For property, BTU/yr Not available Not available Not available

Renewable Energy On-site generation at propertylocation, % o total demand

0% 0% 0%

CO2 Emissions Intensity From energy use, or property,pounds/s/yr

Not available Not available Not available

Energy Star Rating Energy Star Score or Property No No No

Retrocommissioning Perormed last 24 months, yes/no No No No

Environmental Protection

Water Use Intensity For property, gal/occupant/day Not available Not available Not available

Total Annual Water Use For property, MG/yr Not available Not available Not available

Recycled Water Use On property, % o total water use Not available Not available Not available

Water Management Fees For property, combined water andwastewater charges, $/yr


Solid Waste Generation For property, tons/yr Not available Not available Not available

Diversion Rate For property, % diverted rom landllsthrough recycling programs


Green Leases In place on property, yes or no Not available Not available Not available

Urban Revitalization and Adaptability

Browneld Yes or no Not available Not available Yes

Inll Yes or no Yes Yes Yes

Smart Growth and Transit Oriented Development

Walkscore Rating Rating or property 97 80 52

Health and Saety

Risk Management Plans Prepared or property, yes or no Not applicable Not applicable

Vulnerable Location Yes or no Yes Yes Yes

Worker and Tenant Well Being

Tenant Satisaction Survey Score on Kingsley survey Not available Not available Not available

Social Equity and Community Development

Benets to CRA area Property located in a CRA censustract, yes or no

Yes Yes Yes

Essential services Project brings essential services to anunderserved area, yes or no

Yes Yes Yes

Local Citizenship


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Conclusion

This was a very insightul exercise or Bay

Area Council Family o Funds, which revealed

a deep sensitivity to achieving the goals o

double bottom line investing. The rm is

already oriented towards the principles o

responsible property investing, with a dened

strategic and implementation process or

achieving its double-bottom line

metrics for responsible property investing: developing and maintaining a high performance portfolio

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