Green office construction: a discounted after-tax cash flow analysis

Publication Date29 July 2014
Date29 July 2014
AuthorBillie Ann Brotman
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Green office construction:
a discounted after-tax cash
flow analysis
Billie Ann Brotman
Department of Economics and Finance, Michael Coles College of Business,
Kennesaw State University, Kennesaw, Georgia, USA
Purpose – The purpose of this paper is to address the apparent slow acceptance on the part of
developerslocated in the USA to seek green certifications. If green-certifiedconstruction costs more than
non-green construction, then is there a financial reason for not seeking a green rating. Do green
buildings perform better than non-green buildings financially? The paper develops and presents
a discountedpresent value model for doinga cost-benefit analysis for buildinggreen. This model enables
an investor to determine the feasibility of constructing a new green-certified building instead of
a conventional non-green building. Non-green buildings are not certified by a rating agency such as
Leadership in Energy and Environmental Design (LEED), Energy Star or Building Research
EstablishmentEnvironmental AssessmentMethod (BREEAM). Real estate permits aregranted by local
municipalities in the USA. This means that local government mandates requiring green construction
that significantlyadds to the initialcost of a project could have theunintended result of encouragingnew
non-green construction just outside their municipal boundaries.
Design/methodology/approach – The paper collects publically available research data for office
buildings located in the USA, and inputs this information into an income statement. It tests the
hypothesis: is green-certified construction a financially feasible choice for an investor? An incremental
approach using a 15-year holding period is presented. This time period takes into account equipment
wear and tear. Heating/cooling systems and othergreen-technologically based operating systems have
a limited life and do not last for 30 or 40 years. They are likely to need replacement after 15 years
have lapsed.
Findings – The negative net present value (NPV) results and high payback periods indicate that
increased rents for green construction, a tax credit for the present value loss and/or property-tax
reduction covering the shortfall is neededas an incentive to commercially buildg reen.The implication
of a negative NPV is that green office buildings will be built bygovernment agencies where green is
mandated, corporations that want a green image and benefit from this image, where local ordinances
mandate green constructionfeatures and where local and federaltax incentives are available increasing
a construction project’s feasibility.
Research limitations/implications – The limitation of any cost-benefit study is that analytical
models and/or data used to forecast energy and water consumption savings in green-certified
buildings compared to conventional buildings can be inaccurate. Forecasting models can understate or
overstate the actual savings realized from green construction especially in the long-term given the
difficulty of predicting equipment wear and tear, net rents and energycosts. The modeled percentage
cost associated with green new construction features could remain constant or grow through time.
Tables I and II results assume energy and water expenses remain a constant percentage over the
15-year period. The agency costs associated with obtaining a LEED or BREEAM certification was not
calculated as an upfront cost. Certification by LEED or BREEAM increases the upfront cost associated
with building a green building.
Practical implications – The length of the payback period estimates coupled with negative NPV for
green certified compared to non-green construction suggests that developers do not have an incentive
to build green. Higher WACCrates would result in green-cer tified projects being less feasible to build.
Social implications – The LEED certification point system may need to be reviewed. Points
are assigned for features that improve occupant satisfaction, but may have little impact on reducing
energy usage.
The current issue and full text archive of this journal is available at
Received January 2014
Accepted May 2014
Journal of Property Investment &
Vol. 32 No. 5, 2014
pp. 474-484
rEmeraldGroup PublishingLimited
DOI 10.1108/JPIF-01-2014-0007

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