Investors are increasingly reaping the rewards of building and rehabbing properties with energy-efficient features in higher cash flow and ROI.
By Susan Thomas Springer
Do green building practices make economic sense for investors? Two successful real estate developers, one in California and one in Colorado, have proven the answer is yes. Here they explain why their properties, both single- and multifamily, sell for a premium. And if you plan to follow in their green footsteps, two experts explain the keys to being successful: educating your market players and earning and marketing third-party certification.
Make a Profit & Improve the World
One Southern California real estate developer calls himself both an environmentalist and a capitalist.
“Green should be a way that assists you in hitting your profit numbers. It shouldn’t be something that prohibits you,” says Jim Simcoe, owner and CEO of Simcoe Green Homes.
Simcoe seeks “impact investors” for his projects, or people who share his mission to make a positive social impact in addition to earning profits. His goal is at least an 8 percent to 12 percent return on investment.
In 2006, Simcoe became convinced there was a better way to build and remodel when he saw huge debris piles where San Diego property owners knocked down 10,000-square-foot homes to build 50,000-square-foot houses. Also, his first daughter was born, inspiring him to put his “do good, make money” business philosophy into action. Since then, his experience developing green single-family homes, and now multifamily, has proven profitable. Simcoe Green Homes offers good capital growth partly because his homes are in high demand, sell faster and for a higher price.
Simcoe Green Homes is developing its first big multifamily project, a 10-unit Oceanside Ecovillage condo, scheduled to be completed later this summer. The homes will be net-zero energy and feature solar power, water conservation features, improved indoor air quality and even electric car-charging stations. The design has generated more interest than anticipated.
“Because of the green design that we’re doing, I’ve already had people come to us wanting to buy the property even though we don’t have finalized unit plans and can’t legally sell them yet,” says Simcoe.
Simcoe says investors need to effectively market green features. He adds it’s a mistake to try to sell on guilt. Instead, he emphasizes how green saves money and is healthier for families. For example, if an investor improves energy efficiency and earns a good HERS (Home Energy Rating System) score, that’s an important selling point.
“That may not seem like a really sexy thing, but if you do that and find you can reduce someone’s utility bills by 30 or 40 percent by fixing the duct work, that’s a pretty big savings,” says Simcoe.
In April 2015, California Gov. Jerry Brown imposed mandatory water restrictions for the first time in the state, ordering cities and towns to reduce usage by 25 percent. Simcoe doesn’t see drought conditions dramatically changing the way real estate investors do business. He expects it will have a lot bigger impact on existing homeowners than on people doing fix-and-flips. However, he’s found that water conservation features are especially attractive to buyers.
“Water is a finite resource, so it’s one of the biggest things that we focus on now,” says Simcoe, who adds the company often includes rainwater harvesting systems in its homes.
One way Simcoe Green Homes markets the advantages of its homes is by placing placards on appliances and features explaining their benefits. The tankless water heater cards point out the money savings that accumulate since there’s no wasted energy keeping water hot in a storage tank. The low VOC (volatile organic compound) paint cards explain how much safer the air is to breathe, especially for children. And the grey water system and low-flow plumbing fixture cards tout saving money. Simcoe finds that after a little education, most buyers are very interested in green.
“Green should either save you money or make you money, and if it doesn’t, you’re doing it wrong,” he says.
Multi-family = Multi-good
Zocalo Community Development in Denver, Colo., developed the first LEED (Leadership in Energy and Environmental Design) multifamily project in the Rocky Mountain Region. Zocalo, a Spanish word for a town’s central gathering place, was also the first developer in Denver to offer a fully equipped bicycle maintenance facility as an amenity for residents. Designing, constructing and managing multifamily and mixed-use buildings that meet LEED green building standards—plus offer appealing designs—has proved a winning combination, tower after tower.
“We have sold two of our multifamily projects in the downtown, at the time, both trading for the highest rent per square foot in the history of the state. So we certainly do see the value of developing LEED-certified buildings,” says Susan Maxwell, principal at Zocalo Community Development.
In addition to the bottom line, Zocalo believes green is “the right thing to do” and considers its legacy and impact on the next generation.
“We are not a merchant developer—we are a very local, thoughtful, developer that very much considers the value to the community,” says Maxwell.
Zocalo’s marketing message has evolved over time.
“When we first opened Solara, our green message was ‘in your face,’” says Maxwell of the 120-unit high-rise that was LEED-Gold certified in 2010. “One of the tag lines was ‘Saving the planet one rent check at a time.’ Today it’s much more expected and subtle, but we do have messaging throughout the building.”
Zocalo’s research has found its buildings appeal to people for a variety of reasons: environmental values, ability to reduce utility bills for the budget-conscious and healthy living, among them.
“Some form of LEED and sustainability was in the top three reasons for leasing, where price was fifth,” says Maxwell. “So we also think that the consumer is willing to pay up. They may not understand the benefits of LEED when they walk in, but they certainly will when they walk out.”
Residents value sustainable urban living features such as furniture in common areas that is locally made, a rooftop solar array that powers a high-efficiency heating system and innovative, non-potable landscape irrigation systems. Also, they can track how much recycling and compost was hauled off the property. Zocalo’s energy-efficient and water-saving technologies reduce costs while increasing asset value. Zocalo-designed communities use up to 50 percent less energy and 35 percent less water than a typical code-compliant building.
“From a buyer’s perspective, the return is the long-term hold, higher rents, nicer design, more efficient design, which means lower expenses and higher return on investment,” says Maxwell.
Maxwell adds that, in the end, all the green features have to “feel good and look good to the end user.”
“I think more investors are becoming educated and aware of the responsibility of developing sustainably and thoughtfully as it relates to the environment, and it is also recognized as adding value to an investment,” says Maxwell.
It Pay$ to Get Certified
Earth Advantage, based in Portland, Ore., has one of the oldest green building programs in the country. The company is a pioneer in guiding homebuilders, remodeling contractors and multifamily-property developers toward green and cost-effective choices. The company’s experience shows a property with a green seal of approval is enticing to both renters and buyers.
“Study after study has shown that certified third-party green homes sell for more than a comparable home,” says Peter Brown, LEED AP, BPI, Director of Residential Services, Earth Advantage.
“It helps sell homes faster and for a premium. And we’re starting to see in the multifamily world that it helps them to lease out faster,” says Brown.
Brown says the biggest early adopters were flippers. They are devoted to Earth Advantage’s remodel certification because there is good payback on the bottom line. In addition to the certification adding to the sales price, studies also show fewer days on market—money in the flippers’ pocket.
It’s important to have an independent third-party endorsement to ensure the claim is real rather than “green washing.” For example, it pays to have homes certified by recognized leaders such as LEED or Energy Star.
While investors can take advantage of various incentives for energy-efficient building across the country, Brown says the biggest benefit is not a one-time rebate from a utility.
“The biggest incentive is to improve the value of your asset and reduce your maintenance costs going forward,” says Brown. “Green building is a framework and standard of performance to ensure that the building is a better value and is more durable.”
If it’s built to last, a structure is better for investors who don’t have to tear out and replace failing materials—plus, it means fewer old materials are added to landfills.
Brown says for the vast majority of properties the most cost-effective improvement is insulation. Specifically, he recommends going into an accessible attic, pulling back the existing insulation, thoroughly air sealing the attic and then replacing the insulation. Second on his list is to continue with air sealing by checking out the basement, looking for other leakage points that are inexpensive to fix. Third is to replace incandescent bulbs with CFLs or LEDs.
“That’s especially true in warmer climates, because an incandescent bulb is essentially a little heater that just happens to give off light,” says Brown, who adds bulbs with the old technology force air conditioners to work harder.
Investors need to assess the demographics and political climate in their market, as receptivity to green homes varies across the country. Brown says in Oregon, price premiums could be 3 percent to 5 percent. However, in California, green features may add more value. He’s found that green-certified properties are appealing for two reasons: buyers appreciate lower monthly energy bills, and they like knowing their residence won’t be cold and drafty.
“There is no price that most of us won’t put on the health of ourselves, our families and our pets,” says Brown.
With the energy labels on appliances and other features becoming more commonplace, buyers and renters can get an accurate estimate of what their monthly utility bills will be.
“If you’re spending as much as you think you can afford on your mortgage, you don’t want to buy a 1930s bungalow with no insulation and spend $250 a month on utilities,” says Brown. “Here in Portland, your water and sewer bill is increasing faster than electric or gas. That utility is often overlooked.”
The real estate market still needs to gain knowledge of green building benefits. Earth Advantage actively educates market players so builders get maximum value.
“We want to train you to communicate to the consumer what a better value these homes are and hopefully get a premium for them,” says Brown.
One contractor and investor is taking on this key element for green remodeling and building to pencil—educating both the industry and consumers.
James Lebair runs JRL Design Inc., which specializes in high performance remodeling—that refers to incorporating energy-efficient and sustainable practices. Lebair has several certifications, including being a Green Certified Professional (GCP). Also, he serves as the NARI (National Association of the Remodeling Industry) Locals Chapter Education Chair in Pennsylvania’s affluent Bucks and Montgomery counties.
Lebair devotes plenty of time to educating his industry to adopt more sustainable practices and be able to communicate and market the advantages. The industry includes consumers, Realtors, home appraisers and inspectors.
Even though his clients’ remodeling project may be simply upgrading a kitchen, he looks at the whole house with the goal of improving insulation and reducing air leakage. Many of his projects include spraying foam polyurethane into the walls because he finds it’s effective at air-sealing.
“The first thing I recommend to my clients is that they have an energy audit performed, and that will bring to light the opportunities to improve the energy efficiency of the home, the indoor air quality and the comfort and safety,” says Lebair, founder and CEO of JRL Design.
That is a less expensive energy-efficient method, compared with other options such as installing a new HVAC system or windows. Also, it results in the tangible benefit of enjoying a more comfortable temperature.
“The areas that you usually have access to that don’t require removal of walls or ceilings are your attic and your basement. The cost to air-seal those areas and insulate them is not tremendous,” says Lebair.
He thinks one way consumers will become more aware and interested in energy efficiency is by being able to automate their homes on smart phones and tablets.
“We have a generation, that in years to come, really are technology-oriented. A home-energy management system is a major plus for the younger group. They can tie their phone into a system and control their HVAC, their lighting, their theater systems,” says Lebair.
Lebair has seen the financial benefits both for his clients and in his own investing. When he purchased a neighbor’s 1948 house, he gutted and remodeled it from roof ridge to basement, including re-wiring and re-plumbing. He removed the siding, insulated and put in a new HVAC system. Some people thought he was overdoing it from an investor standpoint.
However, he rented the house for three years during the downturn then sold it at the top end of the market due in part to its energy-efficient features, a lesson he’s working to teach other investors.
“I reaped the benefits at the end—I was able to sell it for a greater amount and sell it faster,” says Lebair.
About the Author:
Susan Thomas Springer is a freelance writer based in Oregon. Contact her at email@example.com.