INTRODUCTION
Cost is the reason most often given by building owners for not pursuing energy efficient or sustainable projects. Most people believe that green or sustainable buildings cost more than traditional buildings. Some estimate a cost premium of at least 25%. Others maintain that green buildings actually cost less than conventional buildings. Recent studies indicate that there is no significant difference between the average cost of green buildings as compared to conventional buildings. How can the real costs of a green building be determined?
In order to accurately assess the cost of a green building, one needs to look beyond initial construction costs. Cost offsets, incentives, operating expenses, and income from the property also must be considered. In addition, increasing governmental emphasis on cleaner and more energy efficient buildings and the widely held expectation that energy and materials costs will continue to increase, indicate that the costs for not incorporating green elements into a building will almost certainly increase.
UP-FRONT COSTS
The construction costs of any building, green or otherwise, depend upon a whole host of factors, including: weather and regional climate; availability and cost of materials; labor costs; zoning and building code requirements; permitting fees; taxes; insurance premiums; utility hook-up fees and rates; building type; and site condition. Some cost factors can be controlled, others can't, but often there are ways to mitigate them. The following are examples of strategies that can help manage up-front costs:
1. Researching the availability and delivery time for materials, especially those that aren't standard stock, can avoid costly delays later in the project. Pre-purchasing materials can assure that they will be available in sufficient quantity when they are needed.
2. Considering the full range of available options for specific systems and materials.
3. Clearly identifying and communicating to the design team the owner's building requirements, priorities, goals and constraints.
CASE STUDY: An owner was interested in using an ice storage system, an energy efficient cooling system, to cool a building; however, the cost of this system exceeded its budget. Consequently, a conventional air conditioning system was installed. Had the owner told the design team that it wanted information on energy efficient cooling systems, including the ice storage system, rather than specifying only the ice storage system, the owner would have received information on other options, some of which would have been within budget. This example illustrates two points. First, having information on the full range of options increases the odds that an owner's goals will be met. Second, understanding and clearly communicating the property owner's needs, goals, priorities, and monetary and other constraints is critical to the success of a project.
4. Designing and constructing the building as an integrated whole optimizes the interaction between various building components and systems, each of which impacts the efficiency of the others. For instance, a building's envelope and interior design, windows, use of natural light, ventilation rates, and lighting plan, all affect ambient temperature, which in turn influences how much energy is needed to heat and cool the space. When all of these systems are designed as part of a whole, rather than in isolation, the gains in efficiency can be substantial. However, where they are designed independently, much redundancy or conflict between systems can occur.
CASE STUDY: The Children's Bureau Inc. recently completed its new building in Indianapolis (which is registered for LEED Silver certification). The building's integrated design allowed for the use of a variable refrigerant volume heating and cooling system that, according to the Children's Bureau, cost $120,000 less and uses 23% less energy than traditional heating and cooling systems typically used in buildings of similar size and design. The Children's Bureau's system also uses about 50% less mechanical room space than the average traditional system, thus freeing up floor space for other uses. (This could also have allowed for a smaller building footprint.)
5. Using a commissioning agent (which is generally accepted as a "best practice" and is a prerequisite for certification under the LEED green building rating system) can help manage costs. Commissioning agents check work in progress to verify that it conforms to the plans and specifications and that the building systems are properly installed and operate as specified in the construction documents. Although a commissioning agent's fee adds to the initial construction budget for a project, this strategy often results in the early discovery and correction of problems that would be much more costly to correct further into a project.
COST OFFSETS AND INCENTIVES
One of the Obama administration's stated priorities is American energy efficiency and energy independence. As a result, new incentives for energy efficiency are emerging virtually every day. Taking advantage of these incentives can reduce project costs.
Currently, most cash incentives for green or sustainable buildings are only available to governmental units and schools. The American Recovery and Reinvestment Act of 2009 ("ARRA") allocates nearly $10 billion for modernization, renovation and repair of public school and public university facilities consistent with a green building rating system and $4.5 billion to the General Services Administration ("GSA") to convert federal facilities into high performance green buildings. However, the ARRA also allocates funds to State Energy Programs ($42 million to Indiana) and the Energy Efficiency and Conservation Block Grant Program ($68 million to Indiana) to be used by states and municipalities to support energy efficiency and renewable energy initiatives such as building energy retrofits and financial incentive programs for energy efficiency improvements on private property. More recently, an additional $53.5 million in funding was approved under the Commercial Buildings Initiative to increase from approximately 25 to up to 75 the number of partnerships with major companies that design, build, own, manage and operate large fleets of buildings to achieve exemplary energy performance.
"Negative incentives" also may encourage wider adoption of energy efficiency and sustainable practices. An increasing number of federal regulatory and legislative measures mandate minimum levels of energy efficiency which would turn previously voluntary upgrades into requirements. For instance, on June 30, 2009, new federal standards were announced for household and commercial lamps and lighting equipment. Effective in 2012, these rules require that all products made or imported for use in the U.S. meet new energy standards. In addition, $72.5 million in federal funding has been approved for use in "preparing the design, construction and enforcement community to implement commercial building energy codes that require a 30% improvement in energy efficiency over the 2004 code in 2010." This funding came three days after the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 (or the Waxman-Markey Bill) which would create a carbon emissions cap and trade system that could penalize building owners for failing to reduce greenhouse gas emissions. Both Waxman-Markey and the American Clean Energy Leadership Act of 2009 currently being considered by the U.S. Senate would establish national minimum energy efficiency standards and building codes aimed at increasing energy efficiency in buildings, major equipment and appliances.
Other incentives available for private projects include federal tax credits and deductions such as the investment tax credit for up to 30% of the cost of qualified property, the energy efficient building deduction of up to $1.80 per square foot of building space for qualified properties, and the accelerated capital expenditure depreciation of up to 50% for qualified properties put into service in 2009. Small businesses may also be eligible for tax credits for Energy Star® appliances and equipment as well as a 5-year carry back for net operating losses.
Indiana also has provided some state and local incentives for energy efficient projects. These include a 3-year investment tax deduction for qualified property, and the Hoosier Business Investment Tax Credit of up to 10% of a qualified investment expedited plan review, approval and permitting processes, and credits against permit fees or lower permit fees for certain types of projects or for the use of certain strategies related to issues such as storm water management.
Finally, there may be private incentives available in some areas. Some utility companies offer loan programs or cash rebates for purchases of high efficiency equipment or rate schedules that vary depending upon the level of energy consumption. Some energy service companies ("ESCOs") will enter into energy performance contracts with building owners whereby the ESCO pays for all or part of certain energy efficiency improvements and recovers the costs through the energy savings over time or by selling power back to the owner at an agreed upon rate. Some utilities provide net-metering whereby the utility buys the excess energy produced by on-site renewable energy sources at the building such as turbines or solar panels. Recently "green loan programs" and "green banks" have started to emerge in certain parts of the country that focus on providing financing to green businesses and green building projects. The U.S. Small Business Administration also offers a 504 loan program to small and midsize businesses for projects that decrease energy consumption by at least 10%.
Not all projects will be eligible for all of the available incentives and offsets, but all projects should be able to take advantage of some of them, with the cumulative effect being a reduction in the total cost of the project. Building owners should consult with an attorney, accountant or other professional with knowledge of these incentives as early in the project planning process as possible to determine which incentives it may be eligible for and to ensure that all necessary steps are taken to obtain those incentives.
RETURN ON INVESTMENT
People tend to look only at initial construction costs when considering a green building project. However, to accurately assess the true cost of a project, one must consider not only cash outlays against available incentives and offsets, but also the income and other returns that can be expected from the project.
One of the primary variables in the rate-of-return equation is operating costs. Green buildings offer opportunities for substantial savings in operating costs. These buildings are more efficient and use less energy, resulting in lower utility bills. And, when the building is properly maintained and operated, the utility savings should last for the life of the building. Studies show that buildings that earn the Energy Star® label use about 40% less energy on average than conventional buildings, and that LEED buildings on average use 30% less energy than conventional buildings, although savings of 80% or more have been reported or projected in some cases.
Another variable in calculating operating costs is the human capital factor. Worker salaries are 72% higher than building energy costs and account for as much as 92% of the life cycle costs of a building. Studies show that people who live and work in green buildings are healthier and more productive. Reduced absenteeism, reduced health problems and insurance claims, reduced turnover, and increased productivity are all linked to a business' profitability.
Last, but not least, is the cash generated by the building in the form of occupancy levels, rental rates, and resale prices. A recent study by CoStar Group indicates that LEED buildings have 4.1% higher occupancy levels, rent at an average of $11.33 per square foot more than the non-LEED buildings, and sell for an average of $171 per square foot more than comparable conventional buildings in the same location, while Energy Star® buildings have 3.6% higher occupancy, a $2.40 per square foot rental premium, and sell for an average of $61 per square foot more than comparable conventional buildings, demonstrating that green buildings provide a much higher rate of return than conventional buildings. Few other investments offer this type of return, especially in today's economy.
CONCLUSION
Skepticism as to the costs and efficiencies of green buildings is still common. Detractors point out that some energy efficient systems or sustainable materials cost more than their conventional counterparts. In doing this, critics look at costs by line item rather than by total budget, which does not give an accurate project cost comparison. There is substantial evidence that the initial costs of green and sustainable buildings are not significantly higher than for comparable conventional buildings. Further, once all of the offsets, incentives, operating cost savings, and increased rental and resale values are considered, green buildings can generate a much higher return than other types of investments, including conventional buildings. Energy costs are widely expected to rise. Government regulation and mandates for higher building performance and energy efficiency will increase. Public awareness and concern for environmental and energy issues continue to grow and are reflected in the growing preference of building occupants for green buildings over conventional buildings. In this environment, failing to utilize energy savings strategies will ultimately result in higher operating costs, depressed values and lower occupancy rates for less efficient buildings. In other words, green buildings are a smart investment.
Footnotes:
1 The terms "green" and "sustainable" frequently are used interchangeably, but they do not necessarily have the same meaning. "Green" is the term typically used to indicate environmental friendliness, while "sustainable" generally has a broader meaning that includes environmental friendliness, social responsibility (in terms of human health and welfare and resource use and management), and energy efficiency. However, these terms are used interchangeably in this article.
2 Davis Langdon, "Cost of Green Revisited; Reexamining the Feasibility and Cost Impact of Sustainable Design in Light of Increased Market Adoption," July 2, 2007. The findings in this study include that many projects are achieving LEED certification within their budgets and in the same cost range as non-LEED projects.
3 In a June 29, 2009 announcement of new energy efficiency programs, President Obama stated that increased energy efficiency is one of the fastest, easiest and cheapest ways to make the U.S. economy stronger and cleaner.
4 The benefits of integrated design include 50% or greater reduction in energy use, reduced maintenance and capital costs, reduced environmental impact, increased occupant comfort and health, and increased occupant productivity. U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy.
5 Leadership in Energy and Environmental Design (LEED) is the green building rating and certification system created by the U.S. Green Building Council to measure and verify the level of sustainability of a building.
6 According to the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy website, the cost of commissioning a new building ranges from 0.5% to 1.5% of the total construction cost, while operating costs of a commissioned building range from 8% to 20% less than non-commissioned buildings.
7 U.S. Department of Energy, Energy Efficiency and Renewable Energy June 29, 2009, email alert.
8 Andrew C. Burr, "CoStar Study Finds Energy Star, LEED Buildings Outperform Peers," March 26, 2008.
9 The owners of the Sears Tower in Chicago announced on June 24, 2009, a retrofit of the building that is expected to reduce annual electricity use by 80% and water usage by 40%. Similarly, the Empire State Building in New York is scheduled to undergo a retrofit that the owners expect to reduce energy use by 38%, resulting in annual savings of $4.4 million. Closer to home, the new public library in Chrisney, Indiana, was completed within the original budget and uses solar panels to produce 100% of its energy needs onsite.
10 U.S. Green Building Council, LEED for Commercial Interiors V2.0 Reference Guide, pages 347-8, citing Rocky Mountain Institute, Inc.'s "Green Developments in Real Estate."
11 According to U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, a well-designed workplace can increase employee productivity by 20%.
12 Andrew C. Burr, "CoStar Study Finds Energy Star, LEED Buildings Outperform Peers," March 26, 2008.
