Page 167 - Green Building Through Integrated Design

GROSS COSTS AND NET COSTS 143

fees or “impact fees” by reducing or eliminating stormwater outflows from the site.
Again, the design team or the owner may overlook these savings and rule out a rain-
water collection and treatment system for cost reasons and, by so doing, actually add
cost to the project! These are not far-fetched examples; I’ve seen them happen on sev-
eral projects.

“PAYBACK” VERSUS “RETURN ON INVESTMENT”
Engineers (and to some extent, architects) are often unable to present economic infor-
mation to higher-level decision-makers who prefer to speak the language of business,
not design. A good example occurs in the world of energy savings. For example, sup-
pose it cost $300,000 extra to secure annual energy savings of $100,000. This is a typ-
ical circumstance. An engineer might say that this measure has a “3-year payback”
($300,000/$100,000), in terms of how long it takes to recover the initial investment
from the annual energy cost reduction. (This is what they remembered from the one
course in “engineering economics” they had to take in college.) A more business-oriented
person would say that this measure has a “33 percent, inflation-protected return on
investment,” because payback is measured in terms of today’s energy costs, which are
quite likely to increase in the future. Which approach sounds more inviting—waiting
3 years just to get your money back, or making a very high-return investment? Both
use the same data, but one is more likely to get approval, don’t you think?
Let’s take the same situation into the world of commercial real estate. Commercial
properties are typically valued as a multiple of “net operating income,” typically deter-
mined by dividing the income by a capitalization rate expressed as a percentage (think
of how a corporate bond is valued; it’s the same approach). If I reduce annual energy
costs by $100,000, a typical “cap rate” of 6 percent would yield an incremental
increase in value of $1.67 million ($100,000/0.06). So the same investment in energy
efficiency (in a commercial situation) would create a 566 percent immediate return on
investment ($1,667,000/$300,000)! Quite a difference, don’t you think, between a
33 percent return on investment (which of course sounds pretty good) and a 533 percent
immediate increase in value! If engineers and architects learned how their clients
make and talk about money, it would make it far easier to “sell” sustainable design
investments for many projects. Again, the basic message is that design and construc-
tion professionals need to get out of their “comfort zone,” to become more effective
advocates for high-performance buildings.