Green Real Estate Law Journal » CoStar

RICS Study: No Premium for LEED-Certified Commercial Office Buildings

Stephen Del Percio — Tue, 07 Apr 2009 02:08:47 +0000

Last week, the Royal Institution of Chartered Surveyors (“RICS”) released the results of a study authored by Piet Eichholtz and Nils Kok of Maastricht University and John Quigley of Berkeley. Titled “Doing Well By Doing Good? An Analysis of the Financial Performance of Green Office Buildings in the USA,” the purpose of the study was to determine whether investors are currently willing to pay any premium for green (Energy Star- and LEED-certified) commercial office buildings and, if so, what that premium is. The authors identified 1360 buildings- 286 LEED-certified, 1045 Energy Star-certified, and 29 certified under both systems- and were able to obtain complete building characteristics and monthly rents from CoStar for 649 of them, as well as sales data for 199 buildings that swapped hands between 2004 and 2007. To create a pool of peer buildings, the authors used the CoStar database to identify all other office buildings within a quarter mile radius of the subject green building to create a “cluster” of buildings for each of the 893 subject buildings. The average cluster contained 12 buildings; overall, 8182 buildings were included in the rental data study and 1816 for the sales study. The study concluded that “the type of label matters. We find consistent and statistically significant effects in the marketplace for the Energy Star-labeled buildings. We find no significant market effects associated with the LEED label. Energy Star concentrates on energy use, while the LEED label is much broader in scope. Our results suggest that tenants and investors are willing to pay more for an energy-efficient building, but not for a building advertised as ’sustainable’ in a broader sense.”

The authors used a standard commercial real estate valuation formula that related the logarithm of the rent per square foot or sales price per square foot of each building cluster to a variety of hedonic building characteristics, including quality, amenities, age, and location. Some pertinent conclusions as set forth in the report are as follows:

“The results suggest that the LEED rating has no statistically significant effect upon commercial rents, but the Energy Star rating is associated with rents higher by 3.3 percent.”

With respect to sales price, “[w]hen the certification is reported separately for the Energy Star and the LEED systems, there is no evidence that hte latter certification is associated with higher selling prices.”

“The premium in rents and values associated with an energy label varies considerably across buildings. It is positively related to the intensity of the climate surrounding the rated building; a label appears to add more value when heating and cooling expenses are likely to be a larger part of total occupancy cost.”

I am extremely curious to see the reaction to the RICS study in the coming weeks. Already, several major media outlets have reported that it demonstrates “certified green buildings rent and sell at a higher price than non-certified buildings,” failing to note the study’s conclusions about the role a LEED rating may play in obtaining that higher price.

I look forward to your comments on the merits of the study once you have had the opportunity to review it; the study is available for download via the link below.

Doing Well By Doing Good Study (RICS)

Green Building Litigation Notable Omission From CoStar’s Top 10 Green Building News Stories of 2008

Stephen Del Percio — Wed, 07 Jan 2009 13:52:10 +0000

Andrew Burr of the CoStar Group recently listed his top ten green building stories from 2008. I thought a glaring omission from his compilation was his failure to include any discussion of either of the green building litigations that surfaced during the course of the year. Shaw Development v. Southern Builders and AHRI et al. v. City of Albuquerque may ultimately become seminal green building law cases, so I was disappointed that Burr’s list focused on mostly cosmetic, feel-good stories like “the LEED economy” and “green building trumps recession,” the latter of which has most certainly not been true in New York City over the past couple of months as a number of green projects have stalled or been canceled outright.

The importance of Shaw cannot be overstated; the use of form contracts on green projects is a recipe for disaster, particularly in jurisdictions where green building legislation- in the form of either a mandate or incentive – may apply. AHRI may ultimately have even broader repercussions for the industry, as Judge Vazquez’ decision, grounded in federal preemption doctrine- and the plaintiffs’ willingness to bring the lawsuit in the first place – may end up spurring other legal challenges to state- and local-level green building legislation in 2009, particularly if the federal government takes a more proactive regulatory role once Barack Obama takes office. Here’s hoping that 2009 commands a much more robust discussion of the liability aspects of building green amongst industry stakeholders.

Top 10 Green Building News Stories of 2008 (CoStar)
Anatomy of America’s First Green Building Litigation (gbNYC)
District Judge Grants Injunction in AHRI (gbNYC)

Green Building Liability Piques Interest of Residential Sector

Stephen Del Percio — Mon, 22 Dec 2008 00:40:24 +0000

Much of the discussion with respect to the liability issues surrounding sustainable building has focused on the commercial sector, so I was interested to see my friend Brian Anderson, a real estate partner in the Madison, Wisconsin office of Whyte Hirschboeck Dudek S.C, quoted in a brief article suggesting risk management best practices for home builders in a recent article posted by Professional Builder. The article suggests that LEED for Homes and NAHB’s National Green Building Program may soon open the doors for insurance claims and litigation arising out of green projects that do not perform as promised. In the article, Mr. Anderson actually describes a matter his office handled where a builder did not obtain the anticipated level of certification for a residential project. “We were struggling to determine the value of the certification when the claim settled,” he told PB.

At least in the commercial context, a jumping off point for plaintiffs who assert these types of claims could be the studies- many of which are promulgated by the USGBC and its constituents- that tout the higher leasing and purchasing figures for LEED-certified buildings. I have started to see the beginning of this inquiry in my own practice and recently pointed a client to the CoStar study in order to assist it in attempting to translate a lost LEED rating into a quantifiable dollar figure (litigation has not resulted – yet – in this particular matter).

It is obviously a bit different in the residential context and I do not believe there is a study comparable to CoStar’s out there just yet. However, I do agree with Mr. Anderson’s conclusions in the PB piece that the most critical threshold issue for green construction in either sector is contract language that clearly defines the parameters of a project’s anticipated green features. While litigation is always a possibility no matter the type of project, matching the parties’ expectations through tight contract language that clearly defines the term “green,” among other definitions, can help reduce the risk that sustainable design will increase the potential for a lawsuit or claim on a green building project.

Green Lawsuits, What It Could Mean for Home Builders (PL)
Critique of CoStar Study (gbNYC)