Site Selectors' New Environmental Consciousness
As companies are now being assessed on their sustainability activities and successes, it's no wonder that the "environmental regulations" factor was among the top 10 in Area Development's 2007 Corporate Survey.
Linda G. Tresslar, Managing Director, Strategic Consulting Group, Grubb & Ellis Co. (Apr/May 08)

Not a day goes by in news and commercials that we do not hear something about going green, sustainability, or saving the environment. Since much of our collective community efforts are possible only through our use of real estate, this represents one of the biggest areas of opportunity to make significant gains. So, it is a natural progression for the real estate industry to move to the forefront in taking a proactive stance. It is also why there is increasing legislation - both on the punitive and incentive fronts - to ensure that owners and users of real estate act in concert with the collective desires of our communities to make positive impacts on the environment.

Governmental regulations and mandates regarding pollution, the use of chemicals, and disposal of waste byproducts, etc. are certainly not new, and restrictions on land usage have also been a common tool for controlling our collective impact on the environment. In recent years, however, new areas of regulation and use mandates and marketplace demands have emerged that are having a profound impact on the level of and the way we conduct environmental due diligence.
Corporate surveys - like Area Development's - have highlighted the importance of factoring environmental considerations into the site selection decision from both the user and the owner/investor side of the equation. The aggregation of these trends ensures that environmental considerations will continue to have an enhanced place in the overall evaluation of locations from a corporate operating perspective.

What Must A Location Deliver?
The old "first do no harm" and "mitigate your risks" mentality of environmental due diligence has given way to enhanced operating efficiency and better environmental stewardship as the hallmarks. Both owners and users or tenants of commercial real estate are becoming focused on minimizing their impact on the environment through goals such as carbon neutrality and enhanced energy efficiency. The marketplace can easily quantify the benefits of enhanced operating efficiency and lower operating costs. However, other goals, like a reduced carbon footprint, are being driven more by social corporate responsibility initiatives than by pure operational efficiency.

An even cursory search of today's news will confirm that we have crossed the Rubicon, so to speak, with respect to enhanced environmental consciousness and expectations. People want to live and work in places that have a positive impact on the environment and on their own health. The trend is prevalent in every sector - from office-using corporations to retailers to manufacturers. Moreover, employers are now realizing improved work force productivity as a result of the implementation of real-estate-driven operational initiatives in areas such as air quality, for example. With ever-increasing competition among corporations for talented employees, meeting their expectations as well as those of customers, is sine qua non to market competitiveness.

Companies are now even being assessed in the investment market with regard to their sustainability activities and successes. Consequently, it has now become important to both users and owners of real estate that its design, use, and impact meet these new levels of environmental expectations. Real estate that does not satisfy these marketplace expectations is destined to become economically and functionally obsolete. Good environmental due diligence during the site selection process should provide an accurate assessment of where an asset stands in regard to this new focus.

We see this shift manifesting itself in many new ways, especially in the expanded definition of what constitutes environmental due diligence. On the corporate social responsibility front, owners and real estate service providers must now demonstrate how the real estate itself and its operations will satisfy a tenant's corporate responsibility mission and operating protocols, which now often include reducing their carbon footprint, supporting broader community health goals, etc. While these have traditionally been viewed as a company's initiatives, the emergence of newer real estate products - such as LEED (Leadership in Energy & Environmental Design) certified properties - is providing market options for tenants to better achieve these goals. Market competition, not just expanded regulation, is giving rise to the adoption of these broader and newer areas of environmental due diligence.

Therefore, when a company is considering how to factor environmental considerations into a site selection decision, it is important to understand the changing landscape of sustainability initiatives - from building standards to trends in compliance to regulations and their likely impact on overall operating costs and the ability to attract and maintain a quality work force and to present a good image of corporate social responsibility. The following industry trends need to be considered:

Better building options are emerging. Driven by the desire for more efficient operations and enhanced sustainability practices, the U.S. Green Building Council (USGBC) was formed to promote the adoption of standards in design, materials use, and operations geared to promoting these goals. Active membership in the USGBC continues to expand and the rate of both newly credentialed LEED-certified professionals and properties is increasing rapidly.

The emergence of such a mechanism with which to measure positive environmental impacts was essential to cultivating a common measurement system and criteria to be used in the marketplace. And while the USGBC is the driving force at home, this is a global trend with similar initiatives ongoing worldwide. The adoption and use of LEED standards will continue to drive and standardize this area of environmental due diligence for all participants in the real estate industry from owners to users, from lenders to insurers.

The benefit to companies in the site selection process is the adoption of standards with which to compare markets and particular assets on a consistent basis. Industry education and information can be obtained for multiple markets, and one can gauge the speed with which certain markets are adopting best practices in the areas of sustainability and where investment dollars supporting such activities are being spent.

Government regulation is adopting emerging social environmental expectations. While most governmental regulations cover permitted uses and proper disposal and remediation protocols, and are enacted in punitive fashion, there is also emerging governmental use of economic incentives tied to energy efficiency; promotion of broader traffic and fuel emissions reduction through real-estate-related activities such as transit-friendly buildings; rebates for clean-energy use; and more. Many of these initiatives are provided at the state and local level and should be thoroughly explored when doing site selection due diligence.

Additionally, it is no longer safe to assume that older properties are to be grandfathered with respect to future operational and code standards. A thorough understanding of an area's long-term goals for carbon neutrality and sustainability are essential to gauging potential future costs that may be imposed to achieve or maintain environmental compliance with regulations. Use policies, such as water and energy consumption, and disposal requirements are known to be fluid, and only ongoing environmental due diligence and monitoring will capture these shifts in a proactive manner. This allows for better asset and capital planning and may impact an owner's or tenant's long-range plans.

For example, if it is determined that future compliance costs will erode returns to an unacceptable level, an owner may reconsider his holdings or decide to reposition the asset, or a tenant may seek a new location upon lease expiration or limit its future exposure to cost increases through lease negotiations. While many of these considerations appear to be focused on asset ownership, the same level of review can yield beneficial information regarding the viability of maintaining current operating cost structures and will allow an accurate evaluation of one asset versus another in the context of likely environmental costs differentials.

Additional costs are proving less than perception. An argument commonly proffered in the investment and development community had been that initiatives such as building to LEED certification added additional costs that would not be recognized in economic returns. Current investment industry information now supports the conclusion that building to LEED specifications only adds 3-5 percent to a project's total costs. Even more compelling is the news that LEED certification is now adding significantly to the market value of the completed project, i.e., buyers are paying premiums for LEED-certified products.

LEED projects also are demonstrating lower ongoing costs of operations, which will have significant cumulative impact on asset value over its hold period. In addition, funds are specifically being raised in the investment community to buy "green" real estate. The product currently isn't being built fast enough to meet demand in certain asset sectors, further boosting asset values. This has increased the flow of capital investment into LEED-certified assets, which will also expand the supply of efficient assets from which site selectors can choose.

The Expanding Universe of Environmental Due Diligence
With both governmental regulation and market-driven reasons behind the expanding breadth and depth of environmental due diligence, there is an increasing need for awareness of the multiple areas one needs to consider, regardless of what role one plays within the environmental continuum.

For instance, the types of potential liability associated with ownership of real estate or land continue to increase. Close monitoring of governmental regulations regarding use of real estate, materials use and disposal, emissions and byproducts is necessary on an ongoing basis, at both national and local levels, and may change during ownership tenure. Knowing historical uses prior to chain of title is important, but is not what is most likely to have a negative impact upon liabilities associated with ownership.

Close monitoring of tenant activities is also required to actively monitor and mitigate chain of title risks, and the ability to do so should be addressed in any leases an owner enters into with a tenant. It is important for owners to have thorough environmental protocols from an operational standpoint. This is essential to effective risk mitigation and proof of environmental regulatory compliance, and is, in essence, a form of continuous environmental due diligence.

Emerging environmental compliance and reporting regulations, combined with stricter reporting of contingent liabilities for corporations under pension laws and Sarbanes-Oxley, should also cause corporate owners of real estate to thoroughly assess the merits of direct real estate ownership and to make sure that they are accurately reporting on their real estate holdings under these various newer legal requirements.

Corporations can no longer assume that cessation of use will cause liability to diminish; they are still required to report liabilities for these assets and to hold reserves against them. Costs of ongoing compliance must also be factored in when conducting regular hold/sell and valuation analyses. From an owner/investor perspective, if applicable, there needs to be a component of ongoing monitoring of emerging regulations, mandates, timing and assessment of resulting capital obligations, increased liabilities, and impact on operating costs.

Active environmental due diligence requires that owners maintain operating protocols designed to ensure compliance with regulations, but they should also be designed to drive enhanced efficiency of operations in areas such as energy management, air quality, recycling and adaptive reuse of materials, use of more efficient and environmentally safe materials and products, etc. Site selection criteria for tenants should be consistent with these desires and provide a means for evaluating the owner/operator's success.

Environmental checklists are being developed by both companies and site selection specialists to help companies thoroughly evaluate their options. These are areas that can help improve the bottom line for the property as well as for its tenants, representing a win-win situation and demonstrating the ability to achieve greater value over the long run. Standard operating procedures should be reviewed when considering ownership and/or tenancy at a property. If the property is not operating in a manner that allows the tenant to comply with its own environmental operating goals, it is important that the environmental due diligence process be designed to vet this issue. For example, it could be disastrous from a company's perspective to wind up occupying buildings that are found to be poor environmental stewards if its stated policy is to be carbon neutral.

From an ownership perspective, adoption of a continuous improvement approach to environmental review will lead to better risk mitigation, enhanced operating performance through adoption of best practices, and better information to use in positioning the asset in the marketplace and for consideration of the merits of future capital investment. Good environmental review of operations can achieve cost savings of 50 to 90 percent on water costs, and 30 to 35 percent on carbon and other energy-related costs. This obviously helps tenants achieve the same operational and environmental impact goals.

A Holistic Approach and the Impact on Site Selection
Given the expanding and dynamic nature of environmental impact considerations relative to real estate, effective environmental due diligence must be a continuous improvement proposition. It is being conducted by multiple parties including owners, tenants/users, governmental bodies, and consumers. The standards and hallmarks have clearly shifted to include broader social expectations regarding sustainability and collective community impact on the environment. These shifts have manifested themselves in not only expanded environmental due diligence regarding chain of title (historical and prospective) but also of ongoing operations. Thus, regardless of the industry vantage point from which you consider environmental due diligence, now is the time to review the adequacy of your process in relation to understanding the issues being assessed by the other industry participants.

Adoption of a holistic, continuous improvement approach will provide multiple benefits including better compliance and risk management, improved operations, better value creation, and enhanced participation in newly emerging community expectations regarding environmental responsibility. When considering environmental factors in the site selection process, the weighting of specific attributes must reinforce a company's broader corporate social responsibility goals and mission.

Site selectors should also consider the market-based attributes like a community's own policies and mandates regarding environmental considerations (i.e., green building practices; air quality; recycling programs; use of incentives, mandates, or fees; transit patterns; etc.). After market comparisons, attention will naturally turn to a favorable market representing the asset-based operational attributes that are sought, e.g., adoption of green cleaning products, energy efficiency measures, recycling programs, the use of clean energy, etc. These factors must be determined and weighted against all of the other location selection factors during the normal site selection process and compared in relation to their overall ability to meet a company's own environmental goals and objectives.

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