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Appraising Green (LEED Certified) Buildings

by Administrator on Mar 18, 2009 Property Appraisal 1172 Views

High performance sustainable "green" buildings are by definition buildings that conserve land, water, materials and energy. A national non-profit organization, the United States Green Building Council (USGBC), developed the Leadership in Energy and Environmental Design (LEED) System(TM) which has attempted to establish standards for "green" buildings. The System provides not only a guideline but a rating system for "green" buildings. Only a group of states have, however, adopted the LEED standards, so a "green" building in most areas may have adopted only some of the LEED standards. It is incumbent upon real property appraisers to identify how many "green" standards have been meet, and whether or not the building has been LEED certified.
Many appraisers have been faced with building plans that include one or more innovations, like an advanced air conditioning system, that will be included in a new building, and then asked to form an opinion of value based on the information provided.  The expectation is that net operating income will increase over time relative to other buildings and thus returns to the building investment will be higher.  While the argument makes sense savings have not been proven for the entire group of Green buildings.
Standard appraisal methods are generally sufficient to appraise "green" buildings, and a short discussion of some notable differences between typical building appraisals and "green" building appraisals has been outlined in the following paragraphs:
Cost Approach
"Green" buildings are generally more expensive to build than buildings with average construction. The cost services that I reviewed indicated that "green" residential buildings are up to 15% more expensive to construct and "green" commercial buildings are up to 10% more expensive to construct than typical or average buildings. Since some items in a "green" building will be atypical you may have to make adjustments to individual components using the Segregated Cost Method.
Income Approach
Since "Green" buildings are touted to provide a healthier environment, a rental premium would be expected for them. On the expense side, "green" buildings usually consume 25% to 30% less energy (Green Building Costs and Financial Benefits). The slightly higher potential income and the clearly lower energy costs should generally lead to a higher net operating income (NOI) for "green" buildings.
Market Approach
In most small to medium sized market areas there have been only a relatively few "green" buildings constructed over the last few years, and thus there are generally few sales. Thus, lacking a sufficient quantity of similar buildings to analyze, some appraisers have elected to opt-out of the sales approach. Using comparable sales that are not "green" and making an upward adjustment to inferior building makes more sense, but establishing the size of the adjustment is difficult.
With energy costs increasing, appraisers can expect to see many more “green” buildings in their future, and recognizing the unique differences of these buildings is an important part of the appraisal process.
This article is not meant to be a comprehensive or all inclusive reference for appraisers working on "green" building appraisals. It does provide limited information regarding what "green" buildings are it identifies some differences between typical and “green” buildings.
2012 Update: Had a call from a LEED Certified building owner who got an appraisal and said that there was $ 0 added for his LEED improvements.  His property was appraised for the same price per square foot as the non-LEED Certified buildings in the market (they were used as comparable).  He noted that the appraiser failed to consider his additional $ 1 million in costs.  The appraiser did a sales approach and an income approach.  Maybe he should have done a cost approach, do you think?  I asked the caller about the income approach, and the appraiser made no effort to identify lower expenses.  I told him that if nothing else, he could focus on the fact that his building was supposed to save nearly 20% in energy costs clearly the appraiser could factor that into his NOI calculation and give him some credit.  Maybe the cap rate should be a bit lower as well, less risk owning a building that saves money.  I don't know how it turned out, but I think that as appraisers we should step back and consider the fact that green buildings are not just politically "green" they save money and that benefits an owner in real dollars.
2013 Update: As expected LEED certified buildings, even though they are costly to construct, are getting to be typical and not the exceptional or rare occurrence.  Retrofitting older buildings is also becoming popular.  Appraisers are still tasked with the consideration of the additional cost of construction and attempting to gauge whether or not value has been added by the market to a Green building versus a building with standard construction.
For more appraisal information contact Glenn Rigdon, MA, MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website.
 

Article source: http://www.appraisalarticles.com/Real-Property-Appraisal/552-Appraising-Green-LEED-Certified-Buildings.html

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