ROI For a LEED-Certified Building in the SF Bay Area: Do the Costs Pencil Out?

If you’re considering pursuing a LEED certification for your new building project in the San Francisco Bay Area, keep reading. In this post we’re going to examine a simple fictitious building scenario and see if the ROI in pursuing LEED certification makes business sense.

We will assume that this is a new construction of a 100,000 square foot, multi-story office building pursuing the Gold level certification.

 

Let’s Start With the Costs of Green Building

You will have to hire specialists

No doubt about it: to have your building be LEED certified, there must be strict adherence to the rules that you will need to meet.

Which means that you will have to hire experts who are familiar with these rules. As of this writing, the document that describes the LEED point system for Building Construction + Design is 161 pages long.

Architects:

Your architect should understand these requirements inside and out. An example of the requirements that will be incorporated into the design:

  • The maximum distance of a functional entrance to be located from public transportation
  • Incorporating a bicycle network into the design
  • How much of the natural surrounding area that need to be conserved or restored
  • Lighting design to reduce light pollution for wildlife and people
  • Water efficiency thresholds
  • Waste management and reducing impact to the environment

And many more.

Contractors:

The contractor that constructs your building will also need to be knowledgeable of the LEED requirements, as they will be sourcing the materials that will meet energy thresholds, managing distribution of waste generated during the construction period and performing construction work to minimize the impact to surrounding habitats.

Also, throughout the construction process, they should be aware of what is and is not acceptable as far as impact to the surrounding areas.

Sustainability Managers:

In many cases, contractors hire Sustainability Managers — experts in LEED certification — just to make sure that everything on the list is being checked off.

Sustainability Managers will also advise the estimators when costing out materials and help train the field crews in green building practices.

All of this expert knowledge and experience comes at a higher cost.

Documentation

Each level of LEED certification requires a range of documentation specific to the desired rating. Whether it’s your Architect or General Contractor who manages the documentation process, both  will need a team well-versed in gathering information and data relevant to the project.

The higher costs of material

Now in the case of materials, the total cost of materials may or may not be higher for LEED buildings.

While you may need to install costlier high-performance windows, you may be able to recover that by replacing hard surface areas with a lower-cost option.

Also, building materials are becoming more advanced and cheaper to manufacture.

So it’s possible to select materials that meet LEED requirements and cut back on non-essential materials to balance the total costs.

So, are construction costs higher for LEED certification?

In this report, the World Building Council found that green buildings cost from 0% to 12.5% higher. However, the 12.5% building belonged to an ambitious zero-carbon project.

So for our fictitious building, let’s assume that construction costs are 5% higher in pursuit of LEED certification.

Energy modeling services and other fees

Depending on your situation, you might also need to factor in the cost of energy modeling. Energy modeling could cost up to $20,000 for a 150,000 sq ft building.

Fees to the U.S. Green Building Council could also be up to $10,000 for the same size building.

 

Let’s assume for our fictitious building, all construction costs (including designer, contractor, materials, fees)

Non-LEED = $330 per square foot

LEED = $346.50 per square foot (5% increase)

 

Now Let’s Consider the Savings

Government incentives

With LEED certification, your building permits are approved faster, possibly a full 12-18 months faster. The fees could also be waived.

This could lead to significant savings with loan payments.

Or you could be allowed to build more square footage or more stories, allowing for more tenant space to rent out.

For actual tax credits, you could receive a deduction of up to $1.80 per square foot, according to IRS Section 179D.

Department of Energy also has this tax credit schedule. (This applies to New Mexico but I’ll assume CA is the same for our fictitious building example.)

And there are many other grants and incentives available at the national, state, and local level.

 

So for our building example:

Department of Energy Tax Credit

Non-LEED = $0

LEED Gold = $177,500

Loan payment savings with faster permitting

(assuming $25M loan at 4.5% interest rate over 30 years, interest-only payment)

Non-LEED = $0

LEED = $1,125,000

 

Decrease in utility and maintenance costs

LEED design takes advantage of natural light and warmth. Building materials and airtight construction keeps extreme weather out. This reduces the need to artificially heat and cool the building, saving in energy usage.

Large and expensive ventilation equipment are also not needed when smaller ones will get the job done.

And if you select more durable and sustainable building materials, they will last longer and require less repair and replacement over time.

For a new green building, you would save on average 15% on operating costs over 5 years. And your building value would be up 7% over a non-green building.

 

Our building utility and maintenance costs:

Non-LEED = $8 per occupied square foot

LEED = $6.80 per occupied square foot (15% decrease)

 

Higher-than-average rent

With lower utility costs, cleaner indoor air, and more productive employees, companies are choosing to lease LEED-certified buildings because this also reduces operating costs for them.

Your LEED certified building would command an average of 3.7% more in rent and have 4% higher occupancy rates.

In fact, 5.6% of tenants are more likely to renew because of its LEED status.

 

For our building:

Rent:

Non-LEED = $70/square foot

LEED = $72.59/square foot (3.7% increase)

Occupancy:

Non-LEED = 75%

LEED = 78% (4% increase)

 

Does the Math Work? The Verdict

Years to break even:

Non-LEED = 7.5 years

LEED = 6.9 years

ROI after 10 years:

Non-LEED = $11.5M

LEED = $16M

In our simplified scenario, LEED certification does, in fact, make good business sense. You will, of course, need to evaluate your own situation. But feel free to download our calculator and plug in your own numbers.

 

Let us know in the comments below what you come up with! Does LEED certification give you a bigger ROI?

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