Page 137 - The Green Building Bottom Line The Real Cost of Sustainable Building

116 CHAPTER 4

cycle cost of utilizing newer technologies, operational savings, and savings from insur-
ance and finance underwriting. Longer-term and more intangible cost reductions include
reduced risk exposure from liability and regulation. Short-term and more tangible rev-
enue creation entails the additional business that accrues from anticipating market
demand for green, enhancement value of assets, easier access to capital, and increased
productivity. The fourth area, longer-term and more intangible value creation—at least
as far as our own company is concerned—is clearly relevant but is more challenging to
document objectively. I will only briefly consider this fourth aspect of value creation.

Short-Term and More Tangible

Cost Reductions

OPERATIONAL SAVINGS
As real estate developers, we are handicapped when it comes to recapturing the cost
of our investment through operational savings. First, we are a service-based business
and not a manufacturing company, and as such are not heavy direct consumers of
energy and water. Second, most of our investment in green materials and technologies
is directed at our tenants and accrues to their benefit, not ours. Because of the way the
market traditionally structures leases, it is challenging to recapture a considerable
amount of our investment in green through reduced costs. Let’s consider this second
issue in slightly more detail.
An industrial lease (for warehouses) is typically structured as a triple-net lease,
which means that the tenant pays a base rent to the landlord and then the tenant is
responsible for paying taxes, insurance, all operational charges including its utilities
and cost of common area maintenance. Unless it is specifically covered in a lease, the
landlord/owner’s investment in high-performance materials and technologies is paid
for by the owner, but the benefits accrue to the tenant through operational savings,
higher productivity, etc.
A similar situation occurs in retail leases, where the tenant pays the landlord base rent
and its pro-rata share of taxes, insurance, and common maintenance fees, but is directly
responsible for paying its own utility bills. Here again, while owner investment in high-
performance technologies will result in lower utility bills, the savings in operational
expenses accrues directly to the tenant and not the owner. It is interesting to note that sev-
eral of our national retail tenants are reporting that their stores in our green developments
are among the highest performing stores in the nation, with their profitability owing
directly to reduced operational expenses. You don’t need an advanced degree in eco-
nomics to realize that it is much easier for a business to increase its profitability by reduc-
ing its overhead than by increasing its sales. And that is precisely what our retail tenants
are seeing—great for them and perhaps, eventually, great for owners as well, once standard
leasing structures are modified to account for the growing attention to green development.
But for now, the operational savings for retail development accrue to our tenants, not us.