Overview of the high-performance valuation process

April 2016

How does one know whether it is worthwhile to invest in high-performance building features?

Potential investments in high-performance building features should be evaluated carefully. It is best practice to examine the parameters of the possible investments methodically, first individually and then in a bundled fashion, in order to assess a suite of high-performance features. This is illustrated in the sometimes complex way in which high-performance features impact buildings. The engineering analyses produced for high-performance investments must effectively show a variety of potential outcomes to building owners. These outcomes need to cover both individual improvements and bundled, integrated improvements.

Regardless of the particular high-performance investment scenario, the procedures outlined in this article will enable the management team to develop the most robust and relevant valuation analysis to achieve their end goal.

Collect Baseline Cost and Consumption Data

This first step in developing a valuation analysis requires the property or facilities manager to work effectively with the facility team, engineering vendors, and others in order to generate relevant and quality data for use in a valuation analysis. For example, baseline cost and consumption data for an existing chiller in a building might include utility energy audit data that provides current annual energy consumption (in kWh and kW) and the cost of running the old chiller.

Review and Adopt the Investor’s Performance Criteria

Once baseline cost and consumption data have been determined, the next step is to determine how the investor calculates financial performance. Some of these calculations may be derived through formulas for determining return on investment (ROI), net present value, and internal rate of return. Additionally, it will be important to know the investor’s preferred discount rates, among other financial considerations. In pursuing this step, the property manager should insist that engineers and vendors comply with ROI-type parameters, such as property hold period and payback criteria of the investment decision maker. He or should also require use of industry standard engineering calculations, such as ASHRAE guidelines or templates for energy audits.

Collect High-Performance Scenario Cost and Consumption Data

Once it is known which calculations need to be made to provide the investor with the desired data, the next step is to work with the facilities team, engineering staff, product vendors, and others to determine costs, savings, and benefits of high-performance investments. Returning to the example of making a case for a new, high-performance chiller, in this step, the property or facilities manager should obtain vendor equipment cost quotes and energy savings estimates for a chiller upgrade.

Use Available Tools to Generate Cost and Savings Outputs to be Plugged into the Valuation Analysis

With cost and consumption data in hand, the property or facilities manager should next take the raw baseline and high-performance data, along with investor’s financial metric preferences, and plug the data and parameters into existing government and third-party calculators to determine energy cost and savings estimates for high-performance versus business-as-usual scenarios for both single and bundled groups of investments, including lifecycle impacts. Examples of these government and third-party calculators include the US Office of Energy Efficiency and Renewable Energy (EERE) Energy and Cost Savings Calculators, as well as Energy Star’s Cash Flow Opportunity Calculator (CFOC), Financial Value Calculator (FVC), and Building Upgrade Value Calculator (BUVC).

Calculate the Quantitative Impacts of Tangible High-Performance Investment Benefits

A number of resources may be used to determine the quantitative impacts of the benefits of high-performance investments. It is important to try several calculators and test various discount rates or bundled and lifecycle scenarios in order to have several options for matching specific calculation scenarios with specific market-based conditions that justify either a higher or lower premium on high-performance. In addition, it is beneficial to consider the impact of split incentives, where investments create benefits for other stakeholders, but may disincentivize investors unless their benefits are revenue recoverable.

Estimate, Indirectly Derive, or Identify the Quantitative Impacts of Intangible High-Performance Investment Benefits

Once the quantitative impacts of tangible high-performance investments have been determined, it is advisable to use proxy indicators for value. For example, one might correlate high-performance with tenant satisfaction or reduced number of comfort calls, or with increased sustainability brand recognition within a city.

Translate How High-Performance Financial Outputs Impact the Standard Industry Valuation Approaches

The next step for the property or facilities manager is to articulate the scope of public, intangible, and tangible benefits of the high-performance investment, in addition to addressing owner and tenant split incentives. This step may be facilitated through the integration of calculation outputs into relevant building valuation approaches, including the market comparison approach, cost depreciation method, and income approach. In order to demonstrate value alignment, it is important to qualify, weight, and adjust values to reflect market and investor perspectives.

Ensure and Communicate Measurement and Verification Procedures in Advance of Implementation of High-Performance Features/Investments

In the final step of the development and communication of a valuation analysis for a high-performance investment, the building professional puts in place measures to ensure maximum performance potential of the investment. Achieving this goal is facilitated by making sure that measurement and verification procedures are in place before the investment is implemented. In this way, there should be no confusion over time as to how to determine if the investment is resulting in the anticipated benefits.

While these procedures for assessing, calculating, and valuing high-performance investment impacts provide a strong framework for management teams needing to develop valuation analyses, critical tools to focus on are:

  • Financial calculations
    The spectrum of industry-standard formulas for calculating financial performance address, in different ways, both capital outflows and inflows associated with investments, mainly ROI, present value, and net present value (NPV).
  • Lifecycle analysis (LCA)
    The high-performance adjustments to outflow and inflow calculations should be used to capture the costs and benefits of each investment scenario over the lifetime of the project.
  • Investment bundling
    The benefits to be derived from high-performance investments can be maximized by implementing two or more complementary high-performance investments simultaneously. When projects are bundled, the benefits to be derived are often additive.
  • Real estate valuation
    High-performance adjustments, including LCA and bundling, can be applied to industry standard commercial real estate valuation approaches for buildings, mainly sales comparison, cost depreciation, and income valuation approaches.

This article is adapted from BOMI International’s new course High-Performance Sustainable Building Investments, part of the High-Performance certificate program. More information regarding this course or the other High-Performance certificate courses is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.