Return on Investment

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Green buildings eventually will compete in the marketplace with standard buildings, so it's reasonable to ask that they be evaluated financially and economically on the same basis. Return on investment (also expressed as internal rate of return or net present value) is fundamental to evaluating economic decisions. Simply put, return on investment is how much I plan to make, either annually or totally, from an investment, with all numbers expressed in today's dollars. If I'm going to take the risk of making an investment, then my goal should be to equal the return from similar investments.

Saving energy is like buying a long-term bond. If I invest $100,000 today in a ten-year treasury bond, I expect to make about 5% each year, before taxes and inflation, a return dictated by the bond market. This is a completely risk-free investment, but my net gain is small (imagine 20% combined state and federal taxes and 3% inflation, leaving me with a net real return of 1%).

If I invest $100,000 in energy-savings improvements that yield $20,000 per year in savings (a five-year payback on the incremental invest-

ment), my return is 20% per year, almost risk-free (as long as the building continues to be occupied and energy costs don't fall), and my return goes up typically at the rate of inflation or better, so I get to keep more of my gain than with a bond.

Green buildings offer other returns than just energy savings. If they have a lower vacancy rate, command higher rents or sales prices, higher renewal rate at the end of the lease, water savings, lower insurance costs, etc., then these virtues have an economic value to an owner or developer. Considering also the tax credits and deductions for investing in energy-saving and renewable energy technologies — which may exceed $1 to $2 per square foot on a new building — there is an excellent economic case for private owners to invest in green buildings, based strictly on return-on-in-vestment criteria.

In my book, Developing Green: Strategies for Success, I calculate the benefits of such green building benefits.133 For example, a lower vacancy rate of just 2% translates into a building value increase of 3%. In the world of commercial real estate, this is not a trivial gain.134

David Gottfried, one of the co-founders of the US Green Building Council and a former Washington, DC, real estate developer, gives an inspiring talk about return on investment for green real estate projects. He talks not about the bottom line but about the top line, the positive effect on project revenues of having a more desirable project in the marketplace that enhances the ability of a project to attract high-quality tenants, get better rents and keep the tenants for longer periods of time. Also, there is a strong return on investment for an organization committed to sustainabil-ity as a basic value proposition, in terms of recruiting and retaining high-quality employees and business associates. What makes you get out of bed in the morning is typically not your salary, but the purpose of the organization and the value or importance of your work, isn't it?

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