Monday, February 23, 2009

LEED Certification: Is it Worth It?

In this week's blog posts, we will dedicate our discussion to examining LEED certification, the pros, the cons, and ultimately whether or not its worth it. Today, we will provide background information on what LEED is all about, and give you a better sense of the market for it. Wednesday, we will interview an expert on going green, regarding the important questions in a challenging market. On Friday we will give an overview, try to navigate its value, and ultimately give our verdict on whether it pays green to build green.

The Basic Facts:

The Leadership in Energy and Environmental Design (LEED) Green Building Rating System™ encourages and accelerates global adoption of sustainable green building and development practices through the creation and implementation of universally understood and accepted tools and performance criteria.

LEED is a third-party certification program and the nationally accepted benchmark for the design, construction and operation of high performance green buildings. LEED gives building owners and operators the tools they need to have an immediate and measurable impact on their buildings’ performance. LEED promotes a whole-building approach to sustainability by recognizing performance in five key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.

LEED certification can be awarded in four levels: certified, silver, gold and platinum. Each level, of course, requires more points, and thus will be more expensive to obtain for a property. As an investor in or developer of a potentially LEED certified building, one would certainly need to figure out what the costs will be, and what the potential return will be.

Market Sustainability:

The biggest return for owners, developers and investors in these properties will certainly lie in the marketing and desirability of their property to tenants. The first thing to consider is the level of demand for such properties in a given marketplace. A simple check could be whether or not you have a Whole Foods or Trader Joe's store nearby. If there is one near you, then chances are there are a good number of environmentally and health conscious people, and therefore prospective tenants, around who would be willing to pay for a property with LEED certification.

All things being equal (including net effective rent) most prospective tenants would choose to locate in a LEED certified building, however, due to the extra cost involved in making a project "green," this usually involves a landlord having to demonstrate value for the tenant, usually by reducing the portion of operating expenses that a tenant might pay for in order to justify higher rents to comparable "non-green" options in the marketplace.


Aussie said...

I think it's definitely worth it. I have seen a steady increase in the the demand for LEED AP. It's only logical to expect to see more as more and more builders aim to conform to green building standards. I will be participating in a LEED class in March by Clean Edison, a leader in the industry, but I really do believe it gives professionals a "one-up" on the competition.

Ted L. said...

While I would love to say that LEED is worth the cost, in many cases it doesn't make sense.

(I am speaking purely in regards to multi-tenant investment properties- an owner-occupied property may glean some public goodwill through LEED.)

We recently conducted a LEED-EB study of one of a 133,000 sf office building we have in Central Florida. The costs were high to retrofit the property but not atypically so. In a survey of our tenants, many liked the idea of leasing in a LEED certified building, but these tenants were not compelled to renew based on this factor. Our tenants were (much) more sensitive to rental rate, expenses, location, and cosmetic appeal. Sure, LEED can cut some tenant expenses depending on how the leases are written (electricity for example), but these reductions usually occur only after a major capital expenditure, for example, a new HVAC system or roof. There are smaller things that can be done, such as implementing motion sensors for common area lighting, but these have little impact. All in all, it is difficult to recover LEED costs or see a return on investment that makes sense.

Without supporting infrastructure (such as reclaimed water lines, public transportation, etc.) or financial incentives (tax rebates, etc.) retrofit costs, as the author indicated, must be recovered via tenants willing to pay higher rents and/or recoveries to be in a LEED certified building. In regards to the likelihood of tenant-based cost recovery, I found this an astute comment: "A simple check could be whether or not you have a Whole Foods or Trader Joe's store nearby." A solid observation, that I believe holds water, or at least used to. Still, this points almost exclusively to primary urban markets. Tertiary and most secondary markets (such as our area) do not have these types of retailers, excepting the occasional Mom & Pop grocer, etc.

While most people (including me) believe that LEED certifications, green buildings, etc. are a good thing, they are not willing to pay up for it. Again, it comes down to rents. Will a LEED certification sway a tenant away from a cosmetically nicer, or better located building? Sure, LEED serves as a differentiator in a competitive (usually primary and urban) market with many similar offerings, but in most cases tenants will simply not pay more to be in a LEED property.

The best case today is that landlords might be more likely to keep tenants or land a new tenants (althought at the same price point as a non LEED certified building) based on LEED's marketing power. Having said that, there has been discussion that governmental tenants (GSA) may assign some weight to LEED or Energy Star rated properties in determining their locations, but as of today, it hasn't made a tangible difference in our bottom line.

Unless you are an owner occupant promoting a 'green' corporate image or are operating on a small scale, it's just not compelling to go after LEED these days.

So how might LEED work be encouraged? One method of encouraging more LEED projects can occur on the financing side. Perhaps governemnt sponsored entities (GSEs) will eventually create specific lending products for LEED based capital improvements at incentivizing terms. Or perhaps the stimulus spending juggernaut that is our government might pass legislation to provide incentives to banks or private lenders to fund these types of projects. Debt is a major factor in moving forward with LEED retrofits or new construction.

Right now, the dollars don't add up for LEED to really work on most properties, and tenants can't support a landlord's investment on the rent or reimbursement side. I'd rather put the cash into tenant improvements or incentives to secure a credit tenant than put that same money into canopies to shade an asphalt parking area just to secure a LEED point or two.

For most of us, even those of us with the best of intentions, LEED will have to wait.

LD said...

Yes, it is definitely worth it

had a hard time finding the time to dedicated to studying but having passed the test and knowing
how difficult it was I'm glad to help others.. Glad to see I'm not alone! I fortunately had the
help of Clean Edison..took one of their two day intensive courses which I was able to get at a
discount..they really are awesome at what they do and deserve an award for helping ME pass.”