Warning: Common Sense Lurks Behind Integrated Design

Have you ever been on a project team with or for a commercial real estate owner who had high expectations of their new green building project? Or maybe the better question is, who hasn’t?

Timothy Corbett, President of SmartRisk, recently cautioned an audience at the AIA’s conference on public space and design to carefully manage an owner’s heightened expectations of green buildings. If the finished product doesn’t meet their expectations, ‘then lawsuits and claims could follow’.

No duh.

When I read through Corbett’s examples of green building lawsuits and claims, I began to think that someone on those project teams also drove their car around with hot coffee between their knees.

Corbett is quoted as saying that the best way to manage the exposure to such claims is “direct contact with the client”.

Another duh.

All of the green building professionals that I know continually stress that an integrated design process from the very beginning helps to reduce the risk of misunderstandings about what the green building can and cannot deliver. They contrast that with the tendency of some owners to think of green as an added feature than can be plugged into the project at some later point, creating more costs and the potential for miscommunication.

The article’s title, indicating that ‘risks lurk’ in green building, as well as its appearing on GlobeSt.com, a website targeting real estate investors, unfortunately makes me think that GlobeSt was more interested in getting a few more clicks on their website by playing on investors fears about green building, instead of helping to educate them.

Click here to read the article and decide for yourself.

Photo credit: Flickr/Everydaylifemodern

LEED: Avoid Underwriting Misconceptions

Do you prepare your non-green project budget and then add your “green costs” on top of it? At which LEED-rating do you think you own a distinctive higher value green asset? Think that ‘integrated design’ is only interesting for the architects and engineers? Read on. I’ve blogged before about Davis Langdon’s update study on LEED-rated project costs and recently saw a talk by one of their architects, Lisa Fay Matthiessen, that went substantially beyond just concluding that LEED projects do not necessarily cost more than non-green buildings. She spoke in depth about the source of misconceptions about LEED project costs and shared a surprise that challenges our current knowledge of LEED-ratings and the associated project costs. Recap of Davis Langdon’s Findings In case the study is still sitting on your “weekend reading” stack, here are the Cliff Notes takeaways:

• Many projects are achieving certification within their budgets and in the same cost range as non-LEED projects.

• Construction costs have risen dramatically but projects are still achieving LEED certification.

• The idea of green as an added feature continues to be a problem.

The study conclusions were essentially preaching to the choir. Nothing new for the audience of mainly architects, designers and engineers – many of whom were LEED accredited. But when they drilled down into the ‘why?’ behind these findings, things got pretty interesting. Why Add Green Components When You Can Integrate Them? Matthiessen says that the false notion of being able to design and build a green project by adding the desired green components to an already planned non-green project is a deep-seated misconception. Moreover, this sets up the project team for another incorrect evalation approach: comparing the building to itself. When this happens, the project team compares the budgeted construction costs of the building without any green elements to the same budget with estimated costs to achieve the determined level of LEED certification. Naturally, the latter budget is often greater then the former, and individual green components get put on the fiscal "chopping block" instead of the team focusing more on better design and engineering solutions to optimize budget constraints. Matthiessen stressed the need for an evaluation based upon benchmarking costs from a pool of comparable projects, as was done in the study, meaning that the project costs of green buildings were compared with normalized costs for a larger array of similar projects with similar elements and criteria. Also, a heightened awareness about the potential economic benefits, or savings from an integrated design approach will help project teams to achieve their intended goal of the best LEED-rating for their budget. LEED-Gold Sometimes Costs Less Than LEED-Silver This was a surprise that was not discussed within the study text and that not many people know about. Davis Langdon’s data included several instances of LEED-Gold projects costing less than LEED-Silver projects, which the audience focused on quite intensely. While Davis Langdon did not study this observation individually, Matthiessen said that the study team concluded that the project teams for those less expensive Gold properties had met the challenge of attaining the required higher level of LEED points by having green elements perform several more functions for the project than normally expected. For example, the roof and building skin might provide more ventilation, heating and cooling assistance than would typically be required of such components. These multi-functional integrated elements not only help the project to qualify for the greater number of points needed for the higher LEED rating, Davis Langdon thinks that the bundling of so many functions within certain components actually saved money. This is good evidence that extending integrated design principles into the project budgeting process can deliver a financially competitive advantage: a project owner could come out with higher performing assets with higher LEED-ratings for less than assumed. And achieving that level of financial optimization has implications for financiers and capital markets investors. A standard investment underwriting process involves the preparation of linear spreadsheets, so that investors can evaluate project costs and revenue generation potential against their desired payback and return hurdles. Standard operating procedure involves judging specific line items against specific intended paybacks. But this type of process assumes that every single line item in can be tied to one measurable benefit. And that assumption is at odds with the premise and approach of integrative design. Optimizing your project to the point where you deliver LEED-Gold assets for less than the cost of LEED-Silver will take your financial underwriting to a whole new level. The capital markets are not that familiar with multi-tasking line items that simultaneously deliver multiple and overlapping quantitative benefits. In order to make the best assessment of such a project's potential investment value , investors – and their lenders – need to implement a holistic financial analysis based upon utilizing these cutting-edge green building best practices. When is a Green Building Really Better? This was an interesting side discussion, with Matthiessen relating her opinion that a LEED-certified or LEED-Silver project essentially represented a few good upgrades to a non-green building. However, the elements and engineering required to make a LEED-Gold or Platinum building greatly distinguish the building from its peers, to the point where she considers these properties to truly be several steps ahead in terms of quality and performance. A basic question for the new green investment funds and their partners is “At what point are we building or buying higher value real estate?” This opinion also points to the potential for more differentiation in asset pricing for those higher-rated properties. For example, if that opinion prevail with the current ratings system remaining in effect, speculative development of LEED Core and Shell projects would not be considered as more valuable simply because they are green. Taken together, Matthiessen's talk pointed to a needed paradigm shift for investment real estate analysis in order to fully assess and realize the value of green development. Project owners cannot stick with a ‘business as usual’ approach of appending green to the back end of their existing decision making process and expect to successfully compete in the market with green real estate investment strategy. Successful, high value LEED-projects will challenge professionals to employ a deeper, holistic financial evaluation much earlier in the project’s lifespan that goes beyond individual line item measurement. I tell my friends that, in today’s green age, the deal is done in the architect’s and engineer's offices, because environmental impact differentiation is the point of value and that’s where it occurs. That shift will continue to challenge our basic assumptions about the way we commercial real estate professionals do business.