When I started investing in real estate a little over 10 years ago, I was told there was only one color that mattered, GREEN, as in money. In today’s ever progressing world, society has becoming more aware of the environment, ecology and the economy. New terms like carbon footprint, emission credits and eco-friendly, have once again proven that the color GREEN may still be the most important term to real estate investing.
What is GREEN you ask? When building any property, a great number of materials and products will be used during the construction and in the finished product. The essence is to use less virgin material and more recycled material during the actual construction phase of the project; however, this is only one portion of the equation. Many times a product may not be GREEN in of itself, but the manner it which it is used or location where is produced may contribute to the overall GREEN of the project. Example, the wood materials used in the project may not be GREEN; however, due to the fact it is produced and shipped a small distance to our location reduces emissions of the transport company to the environment, thus contributing the overall GREEN of the project.
When many homeowners consider building GREEN, there are motivated by psychological beliefs to reduce waste, increase efficiency and save mother earth. However, when considering building GREEN as an investor, motivations are guided more by financial reasons rather than the psychological reasons. These reasons should not be construed as cold and heartless simply because they are guided by the purse strings rather then the heartstrings. Keeping GREEN on the top of your mind when investing in real estate is not only smart but has become critical to further an investor’s return of investment.
As an investor of real estate, the prime consideration for any project, residential or commercial, is to produce a positive income that covers all the expenses required to operate, any debt service incurred plus a sufficient return to the owner. That is accomplished in one of two different manners, either by increasing the incoming monies or reducing the outgoing monies. When a strategy comes along that allows for an investor to accomplish both increase the incoming money and decrease the outgoing money, it must take a position in the forefront of his investing due diligence.
When completing due diligence on a potential investment property an investor must consider the ramifications of being GREEN. There are three areas that the investor can benefit from GREEN investing; his job is to find a way to quantify these benefits to truly considering the property for any sustainable portfolio:
- Direct benefits
- Indirect benefits
- Philosophical benefits
Direct benefits are a primary financial reason for builders, investors and homeowners that are considering GREEN. The financial benefits of GREEN properties include lower energy, waste disposal, and water costs, lower environmental and emissions costs, lower operations and maintenance costs, and savings from increased productivity and health. The amount of resources alone can be easily quantified and calculated into the overall profit of any GREEN project. The materials and utilities consumed in any active property can be easily measured and monitored to determine the exact amount of savings generated from high-efficiency appliances, low-use water facilities or reduced cost of recycled materials used in the building of the property. All of these facets can produce a more GREEN property and save precious amounts of money that can be seen directly on the “bottom line” of any investment property.
What about the increased building cost you ask? Greg Kats, principal of Capital E, a Washington, D.C. consultancy focusing on clean energy, has come up with some concrete answers to the question of cost. A report engaged by Mr. Kats on 33 different GREEN new-build properties that the average premium for all 33 studied green buildings was slightly less than 2% ($3 to $5 per square foot). This premium can be easily overcome by direct benefits alone on most investment properties within the first two years of active service.
The second benefit of going GREEN are considered indirect and sometimes harder to quantify and place directly on the “bottom line.” A major indirect benefit of a GREEN property is the stabilized income from constant tenancy throughout a lease period. By lowered utility costs for tenants make it possible for them to spend more money (consistently) on rental payments and less chance of the tenant’s move out due to high utility bills. A stabilized renter provides less vacancy and thus less income that the owner must inject for mortgage payments, expenses and other issues. Once again, this indirect stabilization of income can be transferred directly to the investors “bottom line” and creating a higher return of investment property than with a comparable non-GREEN property. Other indirect costs that are harder to quantify and thus capture on your “bottom line” are the amounts of emission saved from using products in the property that are produced near-by. The shipping of products over a smaller distance does reduce emissions from carbon-based vehicles such as cars, trucks, and trains. An added indirect cost is by purchasing products from other eco-friendly GREEN companies that produce less waste, use less energy and create a smaller carbon footprint during the production of any products that go into building a property.
The third benefit and nearly impossible to capture is the philosophical benefits of going GREEN. These benefits are not taken into consideration for many investors when looking at a property as a single stand alone entity and can only be realized when an investor “sees the big picture.” The overall feeling of well-being and goodness that an investor feels by doing the environment good is something that can only be realized by the investor himself and can not be shared or translated to other people. These benefits are for the greater good and not at all captured on any financial report, income statement or expense record. Often times these benefits are based upon a moral ethic contained within the investor and not for financial reasons at all.
“We believe the green movement will continue to gain momentum as pressure from governments, tenants, customers, shareholders, and the public continues to grow in the coming years,” said a report authored by James Feldman, Alexander Goldfarb, Jeffrey Spector and other analysts.
The GREEN “movement” is not a fad and will continue to grow and be a significant part of any investors thoughts, concerns and determination of choice investment properties.
