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Green Buildings: What's The Difference and Does it Matter?

January 16th, 2012 8:59 AM

This article will introduce some of the elements of green building and the ways in which they may relate to appraisal practice.

This is a very large field, so the list is not exhaustive, but it does provide a place to start understanding green buildings. There has been a lot of talk recently about the popularity of residential, industrial, and commercial “green”, or environmentally responsible and resource-efficient, building structures. There have also been many published articles in which builders, brokers, and owners claim that appraisers undervalue green properties. As appraisers know, we don’t create the market for specific property types; we analyze available, appropriate market data to reflect the actions of the market. In the case of green buildings, however, perhaps some green building advocates may not clearly understand the systematic appraisal valuation procedure an appraiser follows to answer a client’s questions about real property value, and some appraisers don’t clearly understand valuation issues involved with green buildings.

Green building is relatively new in many parts of the country, but it has been around for decades. There are several different reasons for the recent interest in green building. Rising energy costs have made green building more attractive, but as we will see, energy efficiency is only one aspect of green building. Increased awareness of the principles of sustainability is another reason. Governmental support of green building measures, from storm water management codes to energy efficient appliance incentives, has also helped move green building into the mainstream.

What is Green Building?

One of the difficulties in understanding green building is the lack of a complete and accurate definition that is commonly accepted among the varied professions and organizations that deal with green buildings. One example of a green building definition comes from the US Environmental Protection Agency: “Green building is the practice of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building’s life-cycle from siting to design, construction, operation, maintenance, renovation and deconstruction. This practice expands and complements the classical building design concerns of economy, utility, durability, and comfort. Green building is also known as a sustainable or high performance building.”

Green building can generally be thought of as a building practice that that focuses on the building structure’s resource efficiency (i.e., high performance) and the health of its occupants and the environmental impact throughout the structure’s entire life cycle from its design through its occupancy and eventual deconstruction.

Viewing a building through its entire life cycle is not a new idea, but it can lead to different choices in the way it is constructed, and this is part of what distinguishes green buildings. These choices tend to gravitate to the following basic elements of green building: site, water, energy, materials, and indoor air quality. Although these elements are not exclusive to green building, the way in which green buildings address them is different from conventional buildings. By understanding these elements and how they differentiate green buildings, appraisers will attain the necessary competence in the valuation of green buildings and will also be able to participate in the growing conversation surrounding them. Recall that USPAP requires competency and being competent requires knowledge and experience to produce credible assignment results.

Site Element

Overriding site concerns are the preservation of open space and habitat protection when possible. In addition, green site planning and development focuses on the site’s proximity to transportation and other linkages, access to sun and/or shade as the climate dictates, and building placement on the site to take advantage of solar, water, or wind-oriented resources.

Appraisal Practice: The traditional view of location applies here in terms of access to amenities, but with additional emphasis on proximity to mass transportation, increased density, and open, or green spaces. This is because proximity to mass transit improves air quality due to lower vehicle emissions, and lowers fuel and energy consumption during occupancy of the building. Additionally, increased density can help protect open space.

Water Element

Water is a resource that is actively managed and conserved in many green buildings. Water that comes to the property from the local provider is conserved as much as possible inside and outside the building. Storm water is all the water that falls on the site as precipitation. In some cases, storm water is captured and retained for reuse, either inside or outside the building. Drought tolerant landscaping is also encouraged.

Appraisal Practice: In theory, water consumption and cost can be measured and thus quantified in most cases. Especially in arid portions of the country or areas with high sewage disposal costs, savings from reducing and reusing water in some cases can lead to operational savings.

Energy Element

Energy comes to most buildings in the form of natural gas or electricity. While it is only one of the elements of green building, it gets a lot of attention. This is because it is measurable, both in terms of consumption and cost, and because there are many incentives available for energy efficient materials, systems, and appliances. Unlike some of the other elements of green building, energy efficiency and related cost savings are important to cost conscious buyers in some areas of the country.

Appraisal Practice: Like water, energy consumption is measurable, so if less energy is consumed by a property, that savings may be a benefit that accrues to the property. It is also a benefit that will keep paying forward throughout the life of that building or that particular energy efficient system or appliance.

Materials Element

Green building materials have entered the mainstream in many areas of the country over the past several years. These materials again focus on resource efficiency in their composition, like being made of recycled materials; in their production, such as being locally made or minimally processed; or in their use, meaning that they can lead to less energy consumption while in place in a building.

Appraisal Practice: Some green materials may be more durable than their conventional counterparts, leading to less maintenance over time. This can lead to lower operational costs and also perhaps to a longer physical life. The proper material to use, green or not, depends on the application.

Indoor Air Quality Element

Indoor Air Quality (“IAQ”) has been getting a lot more attention lately, but it has always been an integral part of green building. Particularly with commercial and governmental buildings, landlords, tenants, and owners have become interested in the effects of good IAQ on workers. Studies are also looking into the effects on student performance in school buildings with superior IAQ.

Appraisal Practice: If IAQ becomes measurable in some way, then its positive effects on occupants may enter into the appraisal process using paired sales or statistical analysis. Pending the availability of that type of measurable data, it is still possible, indeed appropriate, to consider a qualitative technique known as “relative comparison analysis” when using the sales comparison approach.

Relative comparison analysis is defined as: “A qualitative technique for analyzing comparable sales; used to determine whether the characteristics of a comparable property are inferior, superior, or similar to those of the subject property.” (Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. [Chicago: Appraisal Institute, 2010]).

Benefits versus Market Reaction

When integrated effectively in a structure, the elements of green building may lead to several benefits which include a lower impact on the environment than conventional buildings, benefits to society, and lower occupancy costs. Currently, however, not all of the benefits of green building are quantifiable or are recognized by market participants to accrue to a particular property. Because of this, and because green building remains in its infancy in many areas of the country, in some cases it is difficult to determine market reaction to these buildings and to apply appropriate methods and techniques in appraisal practice to address the differences in the valuation process between them and traditional buildings.

Challenges for Appraisers

The emergence and development of green building in many parts of the country has led to more attention being paid to it by appraisers than ever before. This in turn has led to some interesting appraisal practice questions that are worthy of attention, including:

• How will mandates such as local code changes for energy efficient buildings be reflected in the market?

• How do incentives for green buildings affect builder costs, and how do appraisers reflect this in the appraisal process?

• To what extent do green building elements contribute to the value of the whole property and to what extent does the absence of green building elements detract from the value of the whole?

• What are the regional and local buying trends for green buildings on improved and proposed properties, and how do appraisers best access and analyze this information?

The key to answering these questions and arriving at credible and accurate value opinions for real property improved with green buildings lies in the appraiser’s competence. Competency requires being able to first identify the salient differences between green and conventional buildings and how those differences relate to possible benefits. As is the case with any other appraisal problem, USPAP’s Competency Rule requires an appraiser to have the ability to fully understand the particular issues related to the problem (i.e., properly identify the problem) and the local market reaction to those issues (i.e., the knowledge and experience to complete the assignment competently).

It is an exciting time to be interested in green buildings. Their benefits are leading to changes in buyer attitudes in many areas as well as to legislative and building code changes that specifically address green building issues. Further, it is likely that green building will represent an increasing share of the construction market in the near future. It is thus incumbent upon professional appraisers to recognize this trend in the market areas in which they practice and to acquire competency to perform assignments appraising these complex properties.

By Taylor Watkins, Certified Residential Appraiser

Taylor Watkins is a Certified Residential Appraiser, and is a member of the Appraisal Institute, the United States Green Building Council, and the Northwest EcoBuilding Guild. Watkins & Associates specializes in data collection on and appraisal of green properties in the Portland area and provides valuations for individual properties as well as appraisal consulting services. Taylor has developed a series of continuing education courses on appraising green residential properties, and he is also the developer of the Appraisal Institute’s new “Introduction to Green Building” course. Watkins is also the President of www.GreensightValue.com, an online education and data resource center on green valuation for real estate industry professionals. For more information contact Taylor at taylor.watkins@comcast.net.

Posted by Bryan Kent Shelman on January 16th, 2012 8:59 AMPost a Comment (0)

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What’s Nu, The Friction in Home Sales

March 31st, 2011 8:58 AM

What’s Nu, The Friction in Home Sales

Back in the day at Centennial High School, my physics teacher often asked the class, “What’s Nu?” The answer was and still is friction! That is, the Greek symbol (µ) Nu in the mathematical formula for friction (it’s pronounced nu). I keep going back to that thought in my head when trying to explain the idea to home buyers and sellers and colleagues alike, when we discuss why it is so hard to get a real estate transaction to happen.

Consider that interest rates to finance homes are at an all time historic low and there is huge inventory of homes available. Also, there will always be buyers and sellers needing to sell homes so long as life happens. Life goes on and so does the market, but getting a deal to happen these days is growing with continuing complexity, it’s like trying to drive a car with an anchor dragging behind it. In today’s real estate market there are a growing number of hurdles that need to be cleared each and every day. Let’s look back in the not so distant history, the concept of getting two parties (a buyer and a seller) to agree upon the price and terms was mostly what you needed to make a deal happen. The sales contact was at one time just a single page, the lender had a few pages to sign, even the appraisal was on all of two pages, add in a few more for title work and deeds and one could sell a home with only killing one tree or less. The number of people directly involved with the sale was often about six including the parties of the sale.

Today, I believe it takes at least two trees to die and be turned into paper for each and every real estate transaction to happen, the number of pages of paper is easily in the triple digits! The number of people involved has soared into the double digits. In our new modern age of efficiency of cell phones, email and multiple media, are we are really getting any more efficient at this, maybe not? In a recent FHA sale I brokered, it took two real estate agents, two different inspectors, an insurance agent and his inspector, a septic tank inspector, an electrician and a plumber, the lender and their appraiser who had to make two trips to the property, and the title company just to name the people who came in direct contact with the property and/or the buyers and sellers. I consider this deal just an average transaction and not a particularly complicated one; we even did it in less than 30 days. Negotiating the deal was about the easiest part of it.

Now enter the wonderful world of “Distressed Sales”. These are commonly known as a “Foreclosure Sale” when it is the lender or a “Short Sale” when it’s the private home owner, that is selling a home and they are not typically motivated. This is because either the lender or the individual selling the home knows they will have to sell the home for less that the mortgage that was attached to the home and either the lender or the individual or both will take a beating financially for the difference. It’s hard to get motivated for that. These types of sales can easily double the amount of paper work needed and often double or even triple the amount of time need to complete one of these transactions.

So a term is needed for all this added activity and administrivia to sell a home. So I’m calling it FRICTION. It is a force that requires additional work or effort to get a real estate sales transaction to happen. Buyers , sellers and real estate professionals across the country are struggling with all of this newly added “Friction”. I believe it is one of the major forces that is retarding the number of sales happening everywhere.

The more friction a sale has the more likely the buyers and their agents will look elsewhere for lower hanging fruit. This causes homes with high sales friction to stay on the market longer and ultimately sale for less money. In fact, home sales today are parting into two distinct markets, those with low friction and those of considerably higher friction, most notably the distressed sales are in the latter camp. The two buy types for each of these are the typical owner occupied buyer and the investor buyer. The owner occupying buyer may be ready and willing to buy but often is just barely able to qualify to buy a home. They can ill afford to deal with all of the added friction of a distressed sale. On the other hand the investor buyer is more sophisticated and has the time to deal with distressed sales and all the friction associated with distressed sales, so they can demand a better deal or discount when buying real estate. The investor then makes a profit from not only from rehabbing the property but by reducing the friction to an acceptable level for the owner occupying buyer. This is a successful Fix and Flip scenario.

As both a real estate broker and an appraiser in the local Pueblo, Colorado market, I keep sampling the market coming up with a number for this discount of around 15 to 20% of lesser value for distressed sales. I’m also predicting this number will grow larger over the next year or so. Why? Because there seems to be a major shift going on, buyers a year ago were asking agents to just to find them a good deal and today those buyers are asking for a good deal but without all the friction. They don’t often know the term, but they know they want to avoid it as much as possible. I may not be the first to coin the term “Friction in Real Estate Sales”, but I thought we all need to know what to call it. So now you know “What’s Nu in Real Estate”…

Kent Shelman is an Associate Broker with RE/MAX Pueblo West and a Licensed Real Estate Appraiser and Owner of Colorado Realty Reports.

Posted by Bryan Kent Shelman on March 31st, 2011 8:58 AMPost a Comment (0)

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Pueblo West Property Values Will Decline with Loss of COA

September 9th, 2008 12:13 PM

Much like our own financial tightening to the family budget, budget crunches are impacting the Pueblo West Committee of Architecture. With the down turn in new residential construction application in Pueblo West, comes reduced revenues to fund the Pueblo West (COA). Those funds are used to operate and staff the Committee of Architectural. Pueblo West Sunset

The funds are used not only to review the new construction starts but to manage and enforce all of Pueblo West's Covenants, Codes, and Restrictions (CC&R's) set forth by the original developer's master plan. If funding is not secured for the COA's operation in the coming years (2009 and beyond) the Committee may go defunct and "Pueblo West's CC&R's" will become unenforceable. The impact of this loss will be irreversible and have a sizable negative impact on Pueblo West's property values in my opinion, as a real estate appraiser and broker.

All of the COA services that the residents of Pueblo West have come to depend upon will effectively go away. Potential home buyer's and business owners will choose to locate in other well planned, pristine communities with with their Covenants, Codes, and Restrictions intact instead of Pueblo West. Pueblo West will loose it's competitive advantage in attracting and retaining property owners, that will surely effect property values and our quality of life as residents of this community.

Examples of the services we will loose are; ensuring residential and commercial properties are properly maintained, landscaped and utilized in harmonious compatible ways with neighboring properties. Enforcement of weed control, eliminating junk cars and debris from home sites will simply not happen. Land uses (residential and commercial) will not be as compatible and complementary as before. For example, lower quality manufactured housing would be allowed to pop up next door to premium homes in even the most established neighborhoods such as Liberty Point and the Desert Hawk Golf Course Area.

Another issue is approximately 2/3rds of Pueblo West is zoned Agricultural, the least restrictive zoning available. This means property owners on acreage sites will be able to operate businesses such as construction and trucking companies, automotive repair shops, small farms and live stock operations next door to established residential homes. I would expect Pueblo West would eventually have a patch work of older premium homes, lower end homes and small businesses all intermixed without any continued benefit of the Pueblo West original master plan, making it similar to the Pueblo County Mesa area and all of it's notorious planning issues. Pueblo County government is currently under staffed with only one land use inspector and no additional funds to begin to manage the needs of Pueblo West's nearly 30,000 residents. So even the enforcement of the greatly reduced, minimal zoning standards by the county is very impractical.

Funding of the COA, should it not be always self sufficient, was provided for years ago (in the 1980's) for just this scenario by the developer and it's successors. Back then the balance of the developer's unsold properties were deeded over to the Pueblo West Metro Board and a the board passed a resolution stating that a portion of the land sale proceeds were to go to fund the COA as needed and then to other needs such as road improvements. Since the COA had been self sufficient up until this last year (2007) all of the land proceeds have been put into the the Metro Boards general fund and spent on other needs such as roads and other special projects. No "rainy day funds" of the millions of dollars of decades of land sales were ever set aside and now land sales have also been greatly reduced with the down turn of the real estate market. Additionally there is a diminishing supply of the developers available lots for sale today.

There are many tough questions to answer about the future of the Pueblo West Committee of Architecture and hopefully the community will see the need for it's continued operation and funding. I encourage residents and business owners of Pueblo West to voice their support of the COA to the Pueblo West Metro Board.

Posted by on September 9th, 2008 12:13 PMPost a Comment (0)

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Is Pueblo In A Declining Real Estate Market?

March 9th, 2008 12:49 AM

Much of the the local and national buzz in the appraisal industry is about the declining residential housing markets. So, how about Pueblo Colorado and other Southern Colorado housing markets?

Why all the fuss? The huge mortgage lenders (not your local mortgage broker/lender or bank) created loan programs for lending money to home buyers and those refinancing with little or no credit or equity. They misjudged their risk, while telling their investors everything was fine, now their stock is plummeting. This is the single most important factor, by far, why there is a growing number of foreclosures and REO resales happening in the Pueblo and national residential housing market today. It is not directly related to any local unemployment rate, the price of gas, the price of tea in China, or the value of the dollar on the world market.

The market expanded to account for all of these junk loans, designer loans, sub-prime loans, and adjustable rate loans. They became a significant part of the market. Now they are gone... We now have too much housing inventory for very few qualified home buyers in the market place.

The mortgage lenders now need to compensate for these junk loans and they have tightened up their requirements for obtaining a loan. Not only will you once again need good a credit history, but if your home is identified as being in a "Declining Market", you will typically need an 5% additional collateral in the hunt. This means where once you only needed to have 5% (or less) as down payment, you will now need 10% maybe more depending on your credit.

This new policy considerably dries up the pool of qualified borrowers out there, both for purchases and refinances. It also kills any chance for someone who got in over their head on a loan and is headed for foreclosure to refinance. So with no financial asset to protect in a home, many homeowners are simply walking away from their loan obligations and loosing the home to the lender through the foreclosure process.

Now back to determining what a declining market is. We first need to define what a declining market means. Fannie Mae nor Freddie Mac have came up with a solid definition. Does decline pertain to value or sales volume, or both? What period of time do we measure it by, year to year, year to date, quarter by quarter? I believe every reader of this blog will have a different definition, but I thinks it's safe to say the market has slowed down recently or it has cooled off some, but how much that depends on how you define the market.

Remember too, the golden rule of real estate, "Location, Location, Location". What happens in Pueblo will be totally different that the market in Florida or California or Denver of just across town. Now of course what we all really want to know is, "what will the market be tomorrow"? Is measuring the past the best way to predict the future?

Maybe we should just use a crystal ball? As appraisers we often joke that clients really just want us to have a crystal ball, so we can tell them what will happen. They can then make a lending decision.

Here is my prediction. Pueblo never saw the run away appreciation that other markets have had in recent years. We have not grossly overbuilt our new construction inventory. Unemployment is relatively low and not changing. People here and everywhere across the county will keep living, loving, having kids and changing their family structure. This creates genuine demand for housing. The lenders have pretty much stopped giving away money to borrowers that have marginal credit and little no collateral. So, I believe in the long run we are in pretty good shape here in Pueblo.

Posted by Bryan Kent Shelman on March 9th, 2008 12:49 AMPost a Comment (0)

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Will we see another refinance boom with these new low interest rates?

February 7th, 2008 11:47 AM

My lender clients tell me most borrowers are sitting on the fence. Waiting to see if the rates will go lower.

I really think the rates are at or near the bottom. Considering the economy and the Presidentual Elections coming up. they will stay down until we get some movement in housing sales, probably in early 2009.

What do you think?

Posted by on February 7th, 2008 11:47 AMPost a Comment (0)

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