As  adoption rates for LEED and other sustainable building certification systems continue to grow, a looming challenge for the appraisal industry, and in turn the development world,  is the proper and uniform valuation of green buildings.

There are essentially three methods of valuing property: the income approach, the replacement approach and the comparison approach.  Each presents it’s challenges when considering LEED and most appraisals combine, to some extent, all three of the approaches to derive a final value.

The income approach values a property based on the gross or, more typically, net income of a property. A multiple is then applied to determine the market value of a property.  Assuming the operating expenses of a more efficient building are lower, it would stand to reason that the end value would be higher.  However, in a a tenant-metered and billed building, the full impact of the energy savings doesn’t hit the bottom line in operating expenses and may not be fully realized in the form a higher rent, especially in a down market.  And, in the instance of a fully or partially vacant building, some credence must be given the value of unoccupied space.

The replacement approach is just what it sounds like - it’s based on the cost to re-create a building.  If we assume that a sustainable building is marginally more expensive to construct than a traditional building, it should be valued higher than the latter.   Again, there’s a missing component.  The value of a property includes not only the improvements, but the land on which it is erected.

The comparison approach looks at the sale prices of other, similar properties.  Basically, this is the market demand check in the process.  What occurs following data collection is a reconciliation, where the value of the subject property is adjusted based on  it’s strengths and weaknesses versus the other, comparable properties.   The glaring issue here is that there are a limited number of LEED certified and other sustainable buildings that have traded hands.

In a perfect world, there would be a uniform standard for crediting values for more efficient, better built buildings against their peers.  But, there isn’t one - it’s a subjective process and appraisers have no uniform standard to follow.

If you are an appraiser or building owner that has recently addressed sustainable construction issues in property valuation, we would greatly appreciate your feedback.