Reducing investment risk in sustainable building development

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This article presents a tool that tests, at project inception, the financial feasibility of a development that aims for best-practice sustainability.

Summary

When designing for sustainability, financial constraints and risk tend to undermine otherwise good intentions. By minimising the risks and identifying the financial feasibility at the outset of a project, some of the uncertainty associated with sustainable development can be minimised.

This article presents a tool that Williams Boag Architects (WBa) has developed to test, at project inception, the financial feasibility of a development that aims for best-practice sustainability. By this means it is expected that potential financiers are reassured about investing in innovation that may otherwise be perceived as risky. The information can then be interpreted by the design team to prioritise sustainability opportunities for both environmental and financial success.

This tool has been applied to a case study building, demonstrating the ability to identify and prioritise opportunities for sustainable development. Further detailed feasibility analysis is then conducted to assess specific systems that may be used to capture these opportunities.

It is anticipated that this tool will assist clients, design teams and financiers to better identify, assess and minimise the perceived financial risks associated with sustainable building development. In reducing these risks, it is hoped that investment in sustainable building development will be further encouraged.

Introduction

Clients and design teams are often faced with significant challenges and impediments when implementing the numerous strategies and techniques necessary for sustainable building development. Whilst we believe the goal of all projects should be to maximise sustainability, financial constraints and risk tend to undermine otherwise good intentions. By minimising the risks and identifying the financial feasibility at the outset of a project, some of the uncertainty associated with sustainable development can be minimised.

This article presents a model and tool that Williams Boag Architects (WBa) is starting to use with clients and investors to test the financial feasibility of a development that aims for best practice sustainability. The test is applied at the inception of a project using limited information. By this means it is expected that potential financiers are reassured about investing in innovation that may otherwise be perceived as risky. The information can then be interpreted by the design team to prioritise sustainability opportunities for both environmental and financial success.

Through identification of the critical financial success factors for a range of sustainability parameters (e.g. conserving energy and minimising waste) it is possible to assess a particular project to determine the financial feasibility of implementing strategies that will reduce the environmental impact of the project.

In this article, the tool has been applied to a case study building, which demonstrates the ability to identify and prioritise opportunities for sustainable development. Further detailed feasibility analysis can then be conducted to assess specific systems that may be used to capture these opportunities. The recommendations provided by the tool have been compared to the approaches taken in the final built project, showing that a number of the opportunities identified were successfully implemented.

With the assistance of this tool, clients, design teams and financiers will be better able to identify, assess and minimise the perceived financial risks associated with sustainable building development. If these risks can be reduced, it is expected that this will lead to improved confidence when investing in these projects. It is also hoped that this will encourage a greater number of building developers to take an uncompromising best-practice sustainable approach to their projects.

Background

Sustainable building design

Generally, sustainable buildings are considered to cost more to design and construct than conventional buildings (Williams, 2004). However, many studies have shown that not only is it possible to design a sustainable building that costs no more to develop than a conventional building (Davis Langdon, 2007), but the additional financial savings and benefits over the life-cycle of these buildings can be significant (Kats, 2003; GBCA, 2006).

Traditionally, most emphasis has been placed on the upfront or capital costs associated with building development. The design of buildings to take a more sustainable approach to the way in which the resources required for their construction and operation are consumed requires that clients and design teams take a more holistic approach. A sustainable building will by its nature, have consideration for the life-cycle impacts associated with its construction and operation. Increases in capital costs are often a result of the specification of more durable, longer-lasting materials that may be offset by reduced maintenance and replacement costs over the life of the building (McCartney, 2007). Increased capital costs may also be attributable to double servicing, adding mechanisms and systems to a conventionally serviced building due to lack of confidence in the alternatives, instead of substituting them.

Financial constraints and risks

There are many perceived barriers to the integration of sustainable design solutions into conventional building developments. These often pose a significant barrier to the adoption of innovative design solutions. They include the potential cost premiums, the risk of reduced long-term investment returns and building performance, lack of available information, hidden costs and split incentives (Sorrell et al., 2004). These perceived barriers are predominately financially driven, and as such any attempt to promote sustainable building design must address the sometimes conflicting financially based considerations associated with building development. One of the most significant barriers is the conflict between those providing the capital outlay and those paying for ongoing operational costs.

Client needs

The current challenge in implementing sustainable design is typically not convincing stakeholders of the benefits of sustainable buildings, but in providing evidence of its financial feasibility, especially considering the emphasis given to financial aspects of projects (Higgins et al., 2004). Often the difficultly in convincing clients of the financial benefits, is the life-cycle thinking needed to convey the significance of these benefits. Clients are often unwilling to allocate funds to unproven or seemingly unnecessary technologies or design solutions (RICS, 2005, p.13). It is not until a client is aware of the life-cycle implications of design decisions that the benefits of a more sustainable approach become clear.

According to Williams (2004), the dilemma faced by clients is finding the right group of sustainable design strategies that are financially attractive, provide operating costs advantages and deliver benefits to occupants. A method is needed to demonstrate to clients, the potential benefits and financial viability of taking an environmentally responsive approach to design. If the potential can be assessed at the pre-design stage (when minimum costs have been expended and at the lowest risk level) then development proponents are in a better position to evaluate the viability of the project.

Life-cycle approach and benefits

By taking a life-cycle approach to building design and development, a client or financier is able to capture the many benefits that are associated with a sustainable building. While developers may be reluctant to invest additional capital into a project if they have no interest in the building once it is complete, they may find that potential purchasers and tenants will pay more for buildings that will save them on operating costs throughout the life of the building (McCartney, 2007).

There is an opportunity to significantly increase the return on investment by capitalising on the building life-cycle operating cost savings, however, design teams need to ensure that any extra capital investment will be recouped within a reasonable investment cycle. By identifying the environmental strategies that have an acceptable level of return, clients and investors can be more confident about taking a sustainable approach to projects, at little to no increased risk. It has also been suggested that the risks associated with not taking a sustainable approach to building development may be even greater than the risks of doing so (Wasiluk, 2007).

Assessing the financial feasibility of sustainable buildings

In order for project proponents to invest their money and time into taking a sustainable approach, they need to have a thorough understanding of the risks and benefits involved. The lack of built examples has provided great uncertainty and resulted in reluctance to be involved. Also, the risks associated with these types of projects are often perceived to be significant (Bartlett and Howard, 2000). WBa identified that a way of reducing some of these perceived risks was necessary in order for clients and financiers to be more comfortable with backing more sustainable buildings.

WBa has developed a tool that can be used, prior to any design work being undertaken, to assess the financial feasibility of a sustainable outcome for a particular building proposition, which also indicates the extent of risks associated with the approach. In addition, it is possible to identify where the greatest potential exists within the project, allowing design teams and clients to prioritise and target these opportunities.

Traditionally, the judgement of the feasibility of a sustainable building approach has been on an intuitive basis, using the knowledge held by a limited number of senior consultants, gained through past experiences. WBa has formalised this knowledge and decision-making process into a tool that, wherever possible, is based on objective data.

Assessment model

WBa has established a model with the objective of unlocking the financial potential of the recurrent costs of a building (e.g. energy and maintenance savings, rebates, income opportunities etc.) so that it can be used to benefit its initial capitalisation. This model seeks to identify financially beneficial design opportunities. By doing so, significant monetary returns can be shown to be linked to an environmentally responsible design response, making the proposal attractive to financial institutions.

The model (see figure below) provides an objective assessment of a project to determine its potential for creating a best-practice sustainable building, measured on a scale from zero to ten.

The opportunities across various sustainability parameters (see figure below) are identified.

The numerical outputs of this assessment are then converted into an overall project score which indicates the likelihood of a return on investment if a best-practice sustainable development is undertaken. This score is presented to clients and financiers together with a report describing the areas where greatest opportunities exist within the project and also where greatest risks are likely. Clients and design teams can then use this information to prioritise particular opportunities and strategies for integrating sustainability into their projects.

Sustainable innovation feasibility tool

The model has been realised in a web-based tool named the Sustainable Innovation Feasibility Tool or SIFT. SIFT is simple to use, requiring easily obtained inputs and enables building design teams to assess the financial feasibility of achieving a best-practice sustainable outcome for any project at its outset, and well before any design work is commenced. SIFT does not assess designs or design options for the level of sustainability attained. There is an underlying assumption that the design team has the expertise and drive to implement best-practice. The test is for financial feasibility only.

The assessment is performed at the earliest possible stage of a project. This may be at an initial client meeting or based on an advertised tender. Limited information is required to perform an assessment, such as: the project budget, floor area, building function and location details (as shown in the figure titled 'A number of the SIFT model parameters of assessment' above). Using this basic information, additional information can be gleaned, for example the climate is known based on the site address, usage patterns can be assumed from the building's function. A range of 18 assessment parameters form the basis of the SIFT evaluation process. They were identified as key factors influencing sustainability and also as having a financial impact, either a cost or an income potential. They are rated on a scale from zero to ten with a score of ten representing an area where maximum long-term financial benefit is to be gained from implementing a high aspiration sustainable solution. These individual parameter scores are weighted and combined into an overall score for the project. The financial risks associated with a project with a higher score are thus considered to be lower.

The tool contains benchmark data specific to particular building types and locations, obtained from various industry and government sources. This data is used to make the connections between each of the key inputs and the subsequent relationships with each of the assessment parameters.

For example, energy consumption data per square metre of gross floor area is used to determine the potential for integrating innovative energy saving solutions into the design. The quantity of energy consumed within a building is typically dependant on the purpose for which the building is used, the size of the space being heated/cooled/lit, climate in which it is located and hours of operation. These inputs for a specific project (building type, GFA, location and occupancy hours) are used to determine the likely energy consumption for the proposal, based on the benchmark data within the tool, for a conventional building. If this energy use is considered to be high then the potential for cost savings from reducing energy consumption would be correspondingly high and so the higher the likelihood of achieving a financial return from implementing particular strategies, such as active or passive systems, to reduce this energy consumption.

The outputs of the tool include a detailed report that is used to inform the client of the possible environmental outcomes that can be achieved at minimal risk and maximum return, whilst also identifying those areas where potential for a financial return is unlikely or risky. Key opportunities or constraints specific to the project are also identified by the tool at this stage. This may include information relating to problems with availability of infrastructure to the specific site for the project that may influence the ability to provide innovative, feasible design solutions. It may also include the identification of funding availability for implementing otherwise cost prohibitive technological solutions. By having identified the areas with greatest sustainability potential, time and effort is saved by design teams, who can focus on those areas where greatest financial return can be achieved.

The tool is simple to use and some of the reporting is automated, but its benefit cannot be optimised without an understanding and committed design team to interpret the results and follow its guidance.

Case Study

As a demonstration of the application and benefits of SIFT, the tool has been applied to a building case study (see figure below).

The project was selected because it has been substantially built and has been recognised by national and international awards for its sustainability initiatives. It was tested by SIFT as if it were a new unknown proposal, using the key project details available at its outset. These details are listed above.

The figure below shows the SIFT assessment result for the case study project.

With a SIFT score of 6 out of a possible 10, this project is considered to have medium potential to be developed as a financially feasible best-practice sustainable building. There was found to be potential for incorporating financially feasible sustainability strategies into this project across the majority of assessed parameters. One reason why the potential may have been slightly reduced across some of the areas of assessment was due to the building not being owner-occupied. Clients are typically more willing to invest in innovative sustainability strategies if they are also likely to benefit from the ongoing operational cost savings that these strategies provide, and occupant behaviours are more reliably predictable when the occupants can be identified and included early in a development's genesis.

Whilst certain factors may have reduced the overall financial feasibility of creating a best-practice sustainable outcome for this project, potential for the overall project still remained relatively high. The areas that were identified as having the greatest potential to contribute towards achieving a best-practice sustainable outcome, whilst maximising the financial feasibility of the project, included:

• conservation, re-use and collection of water;
• reducing construction and operational waste;
• reducing replacement costs of services, central plant and services reticulation;
• reducing recurrent costs;
• incorporation of natural ventilation; and
• maximising the use of public transport.

The SIFT tool allows a range of different building types to be assessed, from residential to educational and commercial. Particular building types may have greater or lower potential than other building types due to numerous factors, such as level of servicing required for the function, hours of operation, scale or adaptive use possibilities. SIFT considers this possible variability and thus the score for particular building types will fall within a set range. For example, multi-unit residential projects are only capable of achieving a total score between two and eight within SIFT (as shown the figure below). A score of six therefore is considered to be quite high for this type of building.

Recommendations and built outcome validation

The SIFT assessment of the Oasis Project identified that this project had reasonable potential and numerous opportunities for creating a financially feasible sustainable outcome. This assessment also identified the areas in which the greatest strengths of the project were, in order to capture these opportunities (as listed above). The opportunities for integrating water conservation and re-use strategies into the project and potential for achieving a significant return on investment for implementing these strategies was assessed as being maximum by the tool (ten points out of ten). It is interesting to note that the project includes an extensive grey-water treatment and recycling system, for which it has won numerous awards, including the United Nations World Environment Day Award 2000 and the Stockholm Partnership for Sustainable Cities Award 2002.

Potential for incorporating strategies for natural ventilation was also found to be high and financially beneficial. In the actual buildings, the use of natural ventilation has been maximised through a system of vertical shafts and open areas throughout the building. This system allows every apartment to be naturally ventilated with hot air exhausted at the highest point of the building (see left figure).

The potential for a significant reduction in recurrent and replacement costs for the project was considered to be high. One of the strategies used in the project to capture this opportunity was a centralised hydronic heating system. The advantage of this type of system is that it reduces operating, or recurrent costs and also the costs associated with replacement of parts (see left figure).

These examples illustrate a good level of correlation between what SIFT predicts is feasible and what was realised in a commercial development.

Assessment reporting

The tool provides an assessment of a project based on a total project score between zero and ten, and a similar assessment of the potential across a number of sustainability parameters. Whilst this output is useful in the first instance for identifying overall project potential, it doesn't provide the level of information and detail required to address project opportunities or constraints and set realistic project goals. For this reason, it is necessary to expand these numerical values into a more descriptive explanation of the likely opportunities inherent in the project. This detailed explanation is presented to clients and used by design teams to set project goals and identify particular design solutions. An excerpt of this report is shown below in the figure below.

The final stage of the SIFT process involves the consultancy team conducting a detailed feasibility assessment of the possible solutions for capturing the project potential. This would involve quantifying the extent of life-cycle financial, social and environmental benefits associated with particular strategies in order to prioritise these for consideration in the building design.

Discussion

By identifying where significant sustainability potential may or may not exist, it is possible to alleviate some of the uncertainty and provide clients with a clearer indication of the extent of risks involved in taking a sustainable approach to their projects.

SIFT can be used to help reduce some of the risks that are typically associated with sustainable building development by providing clients, design teams and investors with an understanding of the likely success factors for a particular project. By identifying these factors and areas of greatest and least potential at the earliest stage of a project, time and costs can also be saved through the adoption of realistic and achievable project goals. This would help to avoid the common practice of overstating project goals only to be dropped later in favour of capital cost savings.

SIFT provides numerous benefits towards the decision making processes associated with the development of sustainable development projects. These benefits include:

• establishing the potential for capitalising on life-cycle cost savings resulting from the implementation of sustainable building solutions;
• informing clients and design teams at project inception stage to aid decision making;
• enabling clients to integrate sustainable solutions into building designs at the earliest possible stage;
• reducing the investment and design risk typically associated with sustainable building development;
• assessing and comparing alternative building investment choices;
• comparing financial opportunities for different building types, uses and locations.

The SIFT database captures the information and knowledge that is held by all members of the design team so that this information can be accessible to a much wider audience and applied to any project. The expertise and knowledge gained from previous projects is used to inform and improve future projects.

Initial validation of the tool has been performed by comparing the tool's outputs to the intuitive-based opinions of design teams for over ten projects. This process showed a close correlation between the opinions provided by the expert design team members of the likelihood for creating a best-practice, financially feasible sustainable outcome, and the outputs of the tool. Still in its late testing stages, the tool needs to be validated against built outcomes, however due to the long nature of building projects this process is likely to occur over an extended period of time.

Conclusion

Through considering of the whole-of-life consequences of design decisions, the SIFT tool, developed by WBa will enable clients, financiers and designers to identify early on the financial feasibility of achieving a best-practice sustainable building project. The tool makes it possible to identify the potential for creating a sustainable building, whilst prioritising the particular areas in which greatest potential exists for taking a sustainable approach to the design of buildings and systems that are also financially feasible. By identifying possible financial barriers and opportunities within a project, the risks associated with developing a sustainable building can be somewhat minimised.

SIFT is currently only able to assess offices, multi-unit residential developments and primary, secondary and tertiary educational buildings across Victoria, Australia. Its coverage, of building functions and geographically, will be extended as data becomes more readily available and as the early stages are proven. A more streamlined tool is currently being developed that will enable the assessment of buildings worldwide.

Acknowledgments

This work has been supported by an Australian Government AusIndustry Start Graduate grant and an Australian Research Council Linkage grant (LP 0667653) and we would like to thank both of these bodies for their support of this project. A number of individuals also contributed to this project and we would like to acknowledge their input, including: Prof. Craig Langston (Deakin University), A/Prof. Graham Treloar (The University of Melbourne), and Caimin McCabe (Cundall Australia).

References

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