What is the purpose of the CMP Green Value Score?

The CMP Green Value Score includes an aggregated score of a specific asset’s performance on the ENERGY STAR, LEED and Climate Neutral standards. 

The CMP Green Value Score is heavily weighted to an asset’s energy/water efficiency, indoor environmental quality, and location-based attributes that impact an asset’s current and future financial prospects on revenue and/or expenses.  The CMP Green Value Score addresses the presence or absence of financially valuable green features inherent to all real estate assets on a relative basis.

Calculating and reporting the CMP Green Value Score allows primary and secondary capital market participants the opportunity to make better informed risk-based financial decisions.  It also provides the opportunity for assets distinguishing themselves via superior management, energy/ water efficiency, and indoor environmental quality to gain appropriate financial recognition.

Implementing the CMP Green Value Score will lead to improved underwriting and investment decision making while allowing financial market mechanisms to distinguish risk and associated monetary value of real estate assets based on these characteristics.  

Why did the CMP Green Value Score weight the EPA ENERGY STAR score as the greatest factor of value?

The EPA ENERGY STAR program is a government-based program that is based on an asset’s energy performance using an asset’s actual trailing 12-month energy use profile which is benchmarked against a statistically relevant database.  Energy use and associated expenses are a significant component of financial value as is an asset’s exposure to future energy price increases and/or price volatility. 

ENERGY STAR is set up to quickly and easily score an asset on a 1-100 relative scale compared to this statistically relevant peer group.  This score is a valid measure of an asset’s energy performance which is one attribute that makes up an asset’s ‘green’ profile.  ENERGY STAR is electronic-based and immediately scalable to handle the high volume of inquiries the capital markets will require to implement this Standard.

Climate Neutral is of importance to reducing asset-specific grid demand, encouraging onsite renewable energy applications, promoting entry into long-term renewable energy contracts, addressing carbon-based energy price volatility, and insulating from carbon cap-and-trade or carbon tax effects on future energy prices (See Citigroup Equity Research – Carbon Limits Are Coming, September 2006).  The consensus standard is third-party certified, scalable in its certification methodology, transparent, and environmentally valuable with tangible benefits.

Combined together, LEED, ENERGY STAR and Climate Neutral provide a strong basis for analyzing and providing an asset’s ‘green’ rating.

How can these Standards help address “Mark to Market” issues in asset underwriting?

Projects with energy and water efficient features and proven financial metrics are penalized based on underwriters applying “greater-of-market-or-actual” to expense-based items and “lesser-of-market-or-actual” to revenue-based items.  Sometimes this market utility expense figure is based on appraisal comps, sometimes it’s based on a lenders experience, and sometimes it’s based on BOMA Experience and Exchange.  

We are attempting to make this point loud and clear and demonstrate manners within ARGUS / Excel-based modeling that these issues can come to light and be appropriately valued.  Either allowing for an adjustment based on identifying these transparent asset features, and/or better defining ones market set when applying comps is the direction the industry is headed and this Standard helps get there significantly faster.

Are there enough certified real estate assets in today’s marketplace?

All assets are eligible to receive an ENERGY STAR rating although only those assets scoring in the top 25% can receive ENERGY STAR certification.  By obtaining an ENERGY STAR score, assets can score positive points on the CMP Green Value Score. 

The LEED rating system is applicable for both new construction and existing buildings – any building can go through the LEED rating system as they seek to improve their design and construction practices or their operational profile.  Even without a LEED rating, an asset can obtain certain points on the CMP Green Value Score.  All assets are eligible for Climate Neutral certification.

There are over 110 municipalities with green-based legislation and/or incentives along with 20 states and 17 federal agencies including the Government Services Administration.  LEED registrations had the largest growth in 2007 with a nearly 150% increase over 2006 which equates to an absolute increase of 5,482 LEED registrations.  At the 2007 Greenbuild tradeshow, the USGBC stated their objective is to reach 100,000 total LEED certified projects by year-end 2010.

Is there the potential for green assets to receive reduced cost of funds in debt/equity markets?

The Standards make no assertion that there will be or should be a reduced cost of funds – this is for the market to ultimately determine. 

Given the Standards enable capital market investors to transparently identify numerous risk factors that tangibly impact finance-based decisions, it is apparent that added transparency will greatly aid the capital markets and allow market participants to more efficiently sort their preferences using the price mechanism with the result being a greater capital preference for those assets that transparently demonstrate a lower overall risk profile. 

Do these Standards address any negative risks regarding product-specific maintainability, durability and reliability as well as IAQ issues regarding building penetrations and other issues.

Not directly.  These issues either primarily pertain to the construction process or to items that are addressed in the Property Condition Assessment (“PCA”) report. 

The Standards and the CMP Green Value Score are intended to compliment existing components of the real estate investment due diligence process including:

• -  Phase 1 ESA
• -  Property Condition Assessment Report (PCA)
• -  Asset appraisals
• -  Physical needs assessment
• -  Planning cost review

What LEED credits are not considered for this Standard?

Any LEED credit not specifically denoted within the Standard is determined to have “intangible” value which cannot be directly ascribed to the asset.  This value is captured within the CMP Green Value Score through the asset’s overall LEED rating.

What is the expected median CMP Green Value Score?

The initial expected median CMP Green Value Score of a specific asset will fall in the 25-30 range.  There are several aspects of the Standard that may be deemed forward looking such as climate neutral certification, LEED certification at higher levels, etc. which makes achieving high scores somewhat of a stretch at this point in time. 

For example, a building with the median ENERGY STAR score of 50 will score 20 points on the CMP Green Value Score (the ENERGY STAR score is weighted at 40% resulting in 0.4 * 50 ENERGY STAR score = 20 points as seen in the formula on the cover page). 

One result is that an asset with a superior CMP Green Value Score (50 or higher) should send a strong market signal there are a number of risk reduction aspects associated with that particular asset.

What is "Building Commissioning" and why is commissioning so important to an asset’s value?

Building commissioning is an independent systematic process of ensuring that a building’s complex array of systems is designed, installed, and tested to perform according to the design intent and the building owner’s operational needs.  This quality assurance process increases the likelihood that a newly constructed or renovated building will meet design expectations. 

The benefits of commissioning can include reduced operating and maintenance costs, improved energy efficiency, better indoor air quality, complete operating documents, and warrantee information.  Commissioning is important to an asset’s value due to:

Improved Energy Efficiency – A commissioned building operates optimally thereby consuming less energy than a non-commissioned building.

Improved Indoor Air Quality – Through testing and documentation, commissioning verifies that the systems are providing the proper air quality requirements.

Reduced Operation Costs – Equipment and systems training results in better trained and informed building operators; properly trained operators are less likely to make blind changes or system adjustments which can impair building efficiency.

Informed Ownership – A building owner or subsequent acquirer has a better understanding of the intricate building systems and how they integrate with other systems resulting in better future decisions when building systems are modified.

Given the strong market value of a LEED rating, does the CMP Green Value Score treat this value appropriately?

The Standard provides credit for a LEED rating up to 15% of the total possible points under the 100 point CMP Green Value Score.  These 15 possible points reflect the intangible benefits attributed to a LEED-certified asset for marketing/PR benefits, market positioning, and also address the positive intangible environmental benefits embedded within LEED points that are not called out specifically within the Standard.  

The Standard is predominantly focused on identifying and attributing tangible financial attributes that impact value pertinent to the financial community – energy / water efficiency differentials along with indoor environmental quality.  As such, the Standard places 85% weight on tangible value factors.   

Because specific tangible LEED points play a large component of the Standard scoring matrix, the asset market value from attaining a LEED certification is higher than these 15 points due to these tangible attributes being “baked into” the scoring system.  

Why is third-party verification important?

The capital markets require third-party verification to determine documented proof of key risk-reducing tangible attributes.  Not going through a third-party rating system is the same as asset owners doing self-appraisals to an asset’s value, or the current owner providing a PCA to a lender.  These situations are obvious conflicts of interest.  Given the need to positively impact financial quality, third parties are vital to the underwriting process. 

How does this Standard apply to new construction equity investments?

Equity investors and construction lenders can judge where the asset might end up on the CMP Green Value Score, then use this process as an additional data point when judging the asset’s competitive posture in the tenant and financial markets.  Equity investors may also choose to use this Score as a negotiating point with their construction and/or permanent lender.  

The overriding purpose of this Standard is to stimulate the private market to ask for key pieces of information – ENERGY STAR score, LEED scorecard, Climate Neutral certification, commissioning report – then determine the CMP Green Value Score and report it in all relevant areas of asset and corporate reporting. 

What areas of financial reporting apply to the CMP Green Value Score?

CMP Green Value Score reporting examples, either asset-specific or in an aggregated portfolio fashion, include but are not limited to: 

• -  Third-party institutional private equity investment portfolios (commingled or separate account structures)
• -  Publicly-traded lender’s annual 10-K discussing their real estate lending practices
• -  Publicly-traded REIT’s annual 10-K
• -  CMBS portfolios at time of secondary offering or secondary-market trades
• -  Private market syndicate reporting to LLC partners
• -  Press releases by all of the above denoting year-over-year improvement