LEED Certification Program Leads to Potential Profits

Building green has historically been seen as more expensive and less profitable for developers, but the true profits captured by using environmentally friendly techniques should get the attention …

Building green has historically been seen as more expensive and less profitable for developers, but the true profits captured by using environmentally friendly techniques should get the attention of serious investors. The Leadership in Environmental and Energy Design (LEED) certification program, created by the U.S. Green Building Council (USGBC) that standardizes and rates the overall sustainability of a building, is of particular note.

The LEED certification program has created standards of design and development for new construction, existing buildings, commercial buildings, residential homes and neighborhoods. It awards points based on site selection, water and energy efficiency, materials used and indoor environmental quality, including air quality.

For the new construction rating, buildings are awarded points on a 69-point scale and classified as certified (26 to 32 points), Silver (33 to 38 points), Gold (39 to 51 points) or Platinum (52 to 69 points).

Some of the financial benefits of investing in a LEED-certified building are more obvious than others. Installing energy and water efficient appliances saves on utility bills, a directly observable savings. Other benefits, such as the profits incurred from extra productivity in a workplace with better air quality, according to a study by the USGBC, are less observable, but just as important.

“If you can build a high-performing structure that saves the owner money, while also being better for the environment and also better for the people using the building, it just makes sense,” Ashley Katz, communications coordinator at the USGBC, said in an e-mail interview. “We need to build with the future in mind and we need high quality buildings that last, that are safe, that are healthy and that are also good for the bottom line.”

Studies have been undertaken to assess the total savings created by using sustainable design and construction. While there are ranges of returns because of the inherent differences among regions of the country, and uncertainty in quantitatively measuring externalities—the effects of an activity that aren’t taken into account in its price—it is clear that there are significant savings and returns associated with green building.

LEED-certified buildings have higher rental rates and lower vacancy rates than comparable conventionally built buildings. Green buildings generate 3.5 percent higher occupancy rates, 3 percent higher rental rates and have a 6.6 percent improved return on investment, Katz said. Additionally, green buildings see an average increase of 7.5 percent in building values compared to conventionally constructed buildings, according to a study by McGraw-Hill Construction.

These findings are shored up by anecdotal evidence from across the country. For instance, a LEED Gold residential apartment building in New York City, The Solaire, commands rents 5 percent higher than typical market-rate buildings, according to a 2004 article by Multifamily Executive.

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An initial sampling of LEED-certified buildings found the initial investment was returned in an average of 2.6 years and the buildings had annual net savings of more than $170,000, according to Buildings.

A similar program run by EnergyStar shows that energy efficient buildings sell for more than conventional buildings. A report by commercial real estate information company CoStar found that an EnergyStar building sold for an average of $351.60 per square foot in 2006, 30 percent higher than the $270.15 per square foot sale price of a conventional building.

The cost-effectiveness to gain a particular credit in LEED’s rating system can vary. Developers in New Orleans might have a difficult time attempting to receive credit for siting a building five feet above the FEMA-designated floodplain. However, the LEED certification program is looking to include those factors into its rating system.

“The LEED rating system is evolving in include regionally weighted credits, so that, for example, using solar panels in Arizona will be worth more than using solar panels in upstate New York,” Katz said.

The Green Building Finance Consortium—a group of corporations, real estate companies and trade groups that have joined together to gather independent research and analysis of investment in green or energy efficient buildings—has come up with figures for the cost increases associated with different levels of LEED certification.

The lowest level of LEED certification is associated with a 0.8 percent higher initial cost, according to a 2006 presentation by the Green Building Finance Consortium; LEED Silver buildings cost 3.5 percent more initially and LEED Gold buildings cost 4.5 percent more initially. LEED Platinum buildings have higher initial costs of 11.5 percent.

“LEED-certified buildings are able to recoup the costs within the first one to two years of the lifecycle of the building and after that, you are saving money,” Katz said.

On a building that would typically cost $500,000 to construct conventionally, attaining the lowest level of LEED certification would cost $504,000. To attain a Platinum certification, the same building would cost $557,500. These figures would vary based on an individual building.

For an investor to achieve the lowest level of LEED certification, seven required items must be completed and two mandatory energy performance points must be met. The mandatory energy performance points outline three ways that builders can achieve energy performance above and beyond their baseline, such as through using energy efficient appliances and lighting.

The seven required items include preventing pollution on the construction site; verifying that the energy systems are installed and perform correctly; establishing the minimum level of energy efficiency for the proposed building; reducing ozone depletion by phasing out or not using HVAC systems that use CFCs; providing a space for storage and collection of recyclables; establishing the minimum level of indoor air quality performance; and minimizing the exposure of building occupants to environmental tobacco smoke.

The 24 points remaining to achieve the lowest level of LEED certification can be earned using a variety of potential points from LEED’s rating system checklist.

Among the easiest to achieve are proper site selection, meaning that developers are not building on prime farmland, in a floodplain, on threatened animal habitat, too close to wetlands or bodies of water or on previously designated parkland.

Other site selection points can be gained by building in a high-density area or an area within walking distance of 10 basic services, including, banks, groceries, fire stations, libraries, parks, post offices and more. Additionally, developers can earn points by encouraging alternative transportation through locating buildings close to bus stops or subway stations and designating 5 percent of the total vehicle parking capacity of the site for low-emitting and fuel efficient vehicles.

Installing low-emitting paint, carpeting, wood products and adhesive can net developers one point each. Additionally, developers may find it worthwhile to re-use the walls, floors and roof of the previous building, or to use recycled material for construction, which may yield multiple points depending on how much material is used.

Each project is different and certain points will be more cost-effective for different projects. It may be worthwhile for investors to seek out LEED-accredited professionals—and not just for the point they will receive for hiring them. LEED-accredited professionals should be able assist investors in determining the cost-efficiency of certain items on a real estate project.

For more information about the improvements needed to achieve certification, please visit the USGBC’s page on LEED ratings.

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