1. 1SDN · GREEN BUILDING
Return on Investment
for Green / LEED
Projects
By Ed LeBard on June 28, 20106 Comments
PNC Bank Headquarters in Washington, D.C.is currently aiming for LEED-NC Platinum rating.
Copyright: Gensler and PNC Bank
Green buildings provide long-term savings and solid returns on investments. They also
command much more than similar non-LEED buildings due to the economic benefits they offer.
Soon Class A office buildings that do not attain LEED certification will see their property value
decline as LEED becomes the de facto benchmark in measuring quality in construction.
by Ed LeBard, Associate AIA | LEED AP+, Principal 3 Design Consulting
Green development is becoming more business-savvy. Many developers and building owners
consider it a smart business decision to invest a down payment of 1 to 2 percent of project cost to lock
2. down long-term savings. It is based on a framework of several rewards and benefits but the two most
obvious benefits are long-term financial savings and returns on investments (ROI). Keep in mind that
benefits and rewards for constructing green/LEED buildings vary by type of ownership, type of use,
owner’s and project team’s level of investment and the team’s drive to build a sustainable building.
Regardless of variations, according to the U.S. Green Building Council (USGBC), projects that
achieved LEED and Energy Star status normally garner an internal rate of return of 20% or more. This
is achieved by increased annual energy savings (think of rising oil and natural gas prices for the
foreseeable future). Many more LEED buildings are specified to use 30 to 50 percent less water and
energy use than current codes.
For instance, compare a 100,000 square foot LEED building that saves $1.50 per square foot in energy
costs to a similar building built to code – resulting in savings of $150,000 per year. In order to get $1.50
in energy savings, the building owner had to invest $400,000 on green / LEED related items; in other
words, put down a $4.00 per square foot premium. As a result, it would take a little over 2.5 years to
receive your investment back and then some.
In the world of commercial real estate, commercial properties are normally valued as a multiple of “net
operating income”, which is determined by dividing the income by the capitalization rate of roughly 6
percent. Capitalization rate is expressed as a percentage – similar to corporate bonds. If the building
reduced annual energy and water costs by $150,000, the capitalized rate of 6 percent would result in
an incremental increase of property value by $150,000 divided by 6% = $2.5 million.
The result of investing $400,000 in annual savings of $150,000 would be to yield a return on investment
of 625% – more than a “six-bagger” in the investing world!
Another way of looking at it, would be to give the 100,000 square foot building costs of $275 per square
foot (industry average is between $150 to $300 per square foot). Multiply $275 per square foot by
100,000 square feet and you end up with $27.5 million in overall construction costs. The savings of
$150,000 may appear diminutive compared to the cost of $27.5 million to build the project – but it’s a
savings nevertheless.
As previously stated, with the going rate of roughly 6 percent annual capitalization rate, the green /
LEED investments made by the owner and project team would add $2.5 million to the value of the
building ($150,000 savings divided by 6% rate) – an increase of $25.00 per square foot compared to
a investment of $4.00 per square foot. That’s a net increase value of $21.00 per square foot. The value
of the LEED project when completed would increase from $27.5 million to $30 million.
In the end, when the building owner or developer arrive at the decision to sell their LEED building on
the market, it is the norm for green buildings to command 30% premium price over similar non-LEED
buildings due to the economic benefits they offer. It’s a matter of time before Class A office buildings
that do not attain LEED certification see their property value decline as LEED is becoming the de facto
benchmark in measuring quality in construction. This is an example of true value of green/LEED
buildings by long-term savings and solid returns on investments. Indeed, less is more.
