Incorporating Energy
Efficiency Factors into the
Appraisal & Valuation Process
Andrew White
Cindy Zhu
Bruce Kellogg
Agenda
1. Energy and Why Appraisal Matters
DOE Efforts and Resources ~20 mins
2. An Appraiser’s Perspective ~20 mins
3. Q&A ~20 mins
Why Energy?
Commercial office buildings make up:
18% of total U.S. energy consumption
36% of U.S. electricity consumption
18% of nation’s carbon dioxide emissions
High Performing* buildings:
Consume 35% less energy
Have lower operational costs and command higher rent premiums
However, energy related equipment and energy performance are often not
valued effectively during appraisals and transactions.
*ENERGY STAR certified buildings, on average
Appraisal Process
Barriers
• Regulatory and market changes that increase commoditization
of appraisals
– Little budget or reward for making “unusual” adjustments, even when
warranted
– Fragmented, aging, and skeptical appraisal workforce
– Lack of confidence in addressing green buildings
• Poor communication of high-performance building features
amongst owners, lenders, and appraisers
• Lack of relevant education, training, and energy-related
knowledge amongst appraisers
State of the Industry
• Appraisers in the U.S.: 60,000
• Estimated commercial appraisers: 12,000
• Annual reduction in total workforce: 3%
• Appraisers over 50 years old: 62%
• Appraisers who are sole proprietors: 62%
• Appraisers not belonging to any
professional association: 66%
DOE Working Group
Commercial Real Estate
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CB Richard Ellis
Colliers International
Connecticut Green Bank
Cushman & Wakefield
Fannie Mae
GRESB
Home Innovation
Research Labs
Inspyrod
Institute for Market
Transformation (IMT)
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LaSalle Investment
Management
Lawrence Berkeley
National Laboratory (LBL)
MetLife
PNC
Security National
Mortgage Company
US EPA (ENERGY STAR)
USGBC
View Glass
Appraisal Industry
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Akerson & Wiley
DeLacy Consulting
Earth Advantage
Runde & Partners, Inc.
Sustainable Values, Inc.
The Appraisal Foundation
(TAF)
The Appraisal Institute (AI)
Appraisal Process
DOE High Performance Appraisal Toolkit
• Guidance for Owners—
Ordering Appraisals of
High Performance, Energy
Efficient Commercial
Properties
• Sample Scope of Work
Language for Appraisers
Valuing High Performance,
Energy Efficient Buildings
• Links to Case Studies,
Reference Resources,
Courses & Seminars
Action from Market Leaders
• CRE leaders are:
– Committing to providing energy information about their HP
buildings and requesting standard treatment of energy in
appraisal process
– Leveraging DOE HP Appraisal Toolkit to revise their own
Appraisal RFPs with an Appraisal Management Company
• Objective: Appraiser return SOWs requesting more energy information
– Working collaboratively to request similar changes in Appraisal
RFPs
Energy Training for Appraisers
• Developed Energy Matters!
training materials
• Conducted two in-person
training pilots (Washington, DC
& Atlanta, GA)
• Pivoted strategy converting
Energy Matters! to synchronous
online course with IDECC
• 7 CE approved in several states
Call To Action
Building Owners, are your High Performing buildings being
appraised effectively?
If Yes — Work with DOE on a Case Study, Get Recognized
If No or Not Sure —
Refer to ‘Owners Guidance for Ordering Appraisals’
Propose Updated Appraisal Process Changes to Clients/AMCs
Request Appraisers to have Energy Training
An Appraiser’s Perspective on Energy
and the Approaches to Valuation
Bruce Kellogg, MAI, FRICS
TAF Advisory #6 Valuation of Green
and High Performance Property:
Background and Core Competency
This Valuation Advisory is intended to offer voluntary guidance to
appraisers and users of valuation services seeking to determine
the necessary knowledge and skills required to competently value
green and high performance buildings.
USPAP* Requirements
*Uniform Standards of Professional Appraisal Practice
• Appraisers are required to:
• Be competent to perform the assignment
• Acquire the necessary competency to perform the
assignment; or
• Decline or withdraw from the assignment
USPAP Considerations –
Competency Rule
• Properly identify the problem
• Determine and perform appropriate scope of work
• Conduct relevant market research
• Use appropriate valuation methodologies
• Have or be able to acquire the knowledge
• Appraisers must possess – or take necessary steps to gain
- necessary knowledge to complete assignment
competently (exception – FNMA)
Competency Rule con’t.
• Insufficient Knowledge and Experience – Potential Issues:
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Assigning value, or no value, to green components without market
support
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Assuming impacts on value that may not be market-supported
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Overlooking green features
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Utilizing unsupported or inappropriate adjustments
• Problematic adjustments:
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Using a multiplier for energy-efficiency savings without adequate
market research and support
Caveat On Bias
• Bias is a clear violation of the USPAP ETHICS RULE:
• An appraiser must not perform an assignment with bias.
USPAP defines bias as: “a preference or inclination that
precludes an appraiser’s impartiality, independence, or
objectivity in an assignment.”
• Example of bias:
• Assuming that green characteristics and/or certifications
always add value.
Expectations For Appraisers
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Overall competency will depend upon a variety of factors
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Property type
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Geography
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Time
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Intended use of appraisal opinions and conclusions
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Competency for a particular assignment dealing with green or EE
features will depend upon the appraiser’s ability to accurately*:
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Identify subject’s specific green/EE characteristics
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Verify these characteristics through documentation and/or third party
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Analyze market to determine if specific characteristics contribute to Market Value
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Develop and report a credible opinion of value
Energy In The Appraisal Process
• In what sections of an appraisal might a discussion of the energy
characteristics of a property be appropriate – or indicated?
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Letter of transmittal
Executive Summary
Scope of Work
Sector Analysis
Property Description
Taxes
Zoning
Highest and Best Use
Any/all of the three approaches: Cost, Sales Comparison, Income
Scope Of Work Rule*
• Identify the problem to be solved
• Determine and perform the scope of work necessary to develop
credible assignment results; and
• Communication with the client is required to establish most of the
information necessary for problem identification. However, the
identification of relevant characteristics is a judgment made by the
appraiser that requires competency in that type of assignment.
• Disclose the scope of work in the report
* The Uniform Standards of Appraisal Practice 2014-2015 Edition, The Appraisal Foundation, pgs. U13-14
Highest and Best Use
• Physically possible
• Legally permissible
• Financially feasible
• Maximally productive
The Three Approaches to Valuation
• Cost
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Cost benefit analyses for various strategies/systems
Unique attributes and how they should be analyzed; impact on value
Potential indications from Asset Score (reasonableness)
• Sales Comparison
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Comparisons of subject with peer set
Implications of energy strategies on perception of risks/rates
Comparison of subject building performance with peer set in BPD
• Income
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Thorough cost/benefit analysis of EE features (if appropriate) & impact on
expenses, other factors
Could gain info from Asset Score, Portfolio Manager and BPD
Sales Comparison Approach
• Based on comparison of peers to the subject
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Should include direct comparison of energy features to comps
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Not unusual to find there are no or limited comparable properties in the
immediate market
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To date, limited sales data has been problematic
• Energy Efficiency Measures (EEMs) may create a unique unit
of comparison
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If direct comparison not supportable, could lead to implications for
Income and/or Cost Approaches
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May be forced to rely on operational performance to quantify differentials
Sales Comparison Approach, con’t.
• Some of the Most Common EEM upgrades*
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Interior and exterior lighting retrofits
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Occupancy sensors
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Energy management system installation or expansion
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Thermal energy storage installations
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Demand-controlled ventilation
• If EE savings identified in Income Approach, economic
benefit should be applied consistently in all three approaches
*Courtesy NYSERDA, New York State Energy Research and Development Authority
Income Approach
• Most appropriate approach to accurately assess costs and
benefits of various EE strategies/upgrades as well as other
high performing and ‘green’ characteristics
• Offers ability to capture and quantify potential upside (or not) of
applicable EE strategies
• Systems costs and savings can be directly incorporated into
cash flow projections
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Energy Modeling
Income Approach con’t.
• Differentials that are result of policies or procedures may
result in differentials in lease structures
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Tenants and landlords may share in costs and benefits of
measures
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Types and methodology of recoveries may be unique
• Most significant could be choice of discount rate and/or
cap rate
• If EE savings identified in Income Approach, economic
benefit should be applied consistently in all three
approaches
How Are Cap Rates Derived and/or
Discount Rates Selected?
• Band of Investment
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Mortgage and equity components
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Land and building components
Debt coverage ratio/analysis
Analysis/comparison of yield capitalization rates
Surveys – Investor/market/owner/tenant
Probably the most effective for new trends, market practices,
technologies and/or building elements
Wrap Up - Outputs Most Relevant to
Appraisals
• ENERGY STAR Score / EUI
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Puts building performance in context
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Normalized for weather and operational variations
• ENERGY STAR Certification
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Identifies top performers who, on average, use 35% less energy
• Sharing and Reporting
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Statement of Energy Performance
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Goals and Progress Report
Key Takeaways and Discussion
• Energy is often not effectively valued
• Building Owners can take action via many existing
resources
• Appraisers apply energy info throughout the valuation
process
Contact Us
Andrew White
JDM Associates
[email protected]
Cindy Zhu
US Department of Energy
[email protected]
Bruce Kellogg
MG Valuation
[email protected]