Page 183 - The Green Building Bottom Line The Real Cost of Sustainable Building

LEARNING FROM A LEED PILOT PROJECT 161

to the center amounted to $7 million. Total cost of construction, including tenant
improvements, totaled $24 million, for a total project cost of $31 million. Because of
the enhanced value of our green portfolio (discussed in Chapter 4), we were able to
place debt of $30 million on Abercorn, leaving $1 million of our own equity in this
deal that has been producing just over $280,000 in annual cash after debt service.
Internal rate of return on Abercorn Common is just above 25 percent. A discounted
cash flow for Abercorn Common can be seen in Figure 5.7.
For seasoned real estate folks, the picture of having only $1 million of equity and
$30 million in debt (and positive cash flow!) might raise a few eyebrows. How does
one manage to have such little equity in Abercorn Common? As it turns out, shortly
after completing the project, we rolled Abercorn Common into a portfolio of green
properties that we refinanced (see Chapter 4). Abercorn Common was valued at $34.7
million (as opposed to its actual cost of $31 million). The company was able to extract
a value of $3.7 million from Abercorn Common and redeploy that capital for devel-
opment projects elsewhere.
This does, however, raise the question as to how the project will perform over the
long term. Let’s imagine that we decide to sell Abercorn Common in Year 10, utiliz-
ing a terminal cap rate of 7 percent on net operating income of $2.5 million for the
sales price (equates to $36.2 million) and paying off the balance of the long-term loan
(roughly $28 million). This analysis (see Figure 5.8) indicates an internal rate of return
of approximately 39 percent.

4 5 6 7 8 9 10
10 TOTOTALSALS
0
281,800
281,800
281,800
281,800
281,800
281,800 281,800 281,800 281,800 281,800 281,800 281,800 2,818,000
281,800
2,818,000
281,800
0 0
281,800
2,818,000
281,800
281,800
281,800
281,800
281,800
281,800 281,800 281,800 281,800 281,800 281,800 281,800 2,818,000
281,800
0 0 0 0 0 0 0 (1,000,000)
(1,000,000)
281,800
281,800 281,800 281,800 281,800 281,800 281,800 281,800
281,800
281,800
281,800
281,800
281,800
281,800
0.424
0.386
0.683 0.621 0.564 0.513 0.467 0.424 0.386
0.564
0.467
0.513
0.683
0.621
192,473 174,976 159,069 144,608 131,462 119,511 108,646
159,069
131,462
174,976
144,608
108,646
192,473
19,51