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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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