Page 194 - The Green Building Bottom Line The Real Cost of Sustainable Building

172 CHAPTER 6

downtown Savannah, Georgia. The third, which received LEED for Existing Buildings
certification in 2007, is the Crestwood Building, a twenty-two-year-old, multi-tenant
office building in Gwinnett County, Georgia, an area of suburban Atlanta that has
experienced tremendous growth in the past thirty years. The Crestwood Building is
located in a commercial area that includes office complexes, office parks, hotels and
restaurants, shopping malls, and strip shopping centers.
Built in 1986, the Crestwood Building has five stories and contains 93,554 square
feet of rentable office space. Competition for tenants in the immediate area includes
existing office buildings and newly constructed office buildings. The Crestwood
Building boasts a 92 percent occupancy rate (at 2007 year end) in a submarket with
an occupancy rate of 81 percent. The 5.57-acre property includes the building, wooded
areas of mixed pine and hardwood trees (19 percent of the site is shaded), areas land-
scaped with small trees and ornamental plants, and paved parking for 271 cars.
Melaver, Inc. purchased the Crestwood in 1998 for $9.4 million, at a time when the
company was looking for an opportunity to diversify its portfolio. Crestwood pre-
sented an opportunity to acquire both a sizeable office building and expand our hold-
ings in the Atlanta market. At purchase, $884,000 was allocated for improvements,
including a renovation of the existing first floor lobby, the addition of a conference
room, break room and fitness room, and furnishing and equipping the aforementioned.
An additional $452,000 was allocated to reconfigure Melaver, Inc.’s office suites oper-
ation on the fourth floor. Improvements included upgrades to the common areas to
facilitate a small break room, conference rooms, and management offices. Total capi-
tal investment in the building was $10.75 million. Table 6.1 provides an overview of
the initial capital costs involved in the acquisition and upgrades to the building.
There are some additional things worth noting in Table 6.1. For one thing, the analy-
sis reveals that at about $910,000 in net operating income, the building was showing a
return of about 8.47 percent, which conservatively is about one hundred basis points
higher than comparable office buildings nationwide. That’s a double-edged piece of
information. On the one hand, this gap between the returns on the building (8.4 percent)
and what the market would expect (7.5 percent conservatively) indicates that there’s
additional value-add of about $1.394 million. On the other hand, this additional value
doesn’t allow for a lot of room for major upgrades to the building. Any strategy for
achieving LEED certification would have to be shaped with due fiscal restraint. Every
$100,000 of green improvements would translate into an eight basis point reduction in
our returns. As you might expect in a company built around shared leadership, debates
over how much of an investment to make in green and how much of an immediate hit
we can afford to take on our returns are hot contests. Our CEO wouldn’t blink at spend-
ing the full $1.4 million, while our CFO is, well, more financially disciplined.
In our thought process, we needed to take into account:

1 a soft market with potentially greater vacancies and/or downward pressures on rents,
and
2 immediate cash flow needs for the property specifically and for the company as a whole.