Cursed By Knowing The Numbers

Spent the summer growing our PV power development business, and so did not have much of a chance to add to this blog.

PV power is an exciting development, and one that I am doing on all my development projects.  It is an architecturally significant way to reduce your property's carbon footprint.

There are three tricks to successfully incorporating PV into your next project:

1. it looks like a prepaid power contract from a financial perspective, so the way you capitalize the project is critical.
2. the systems harvest sunlight--so design is critical.  Azimuth, elevation, matching of modules to inverters, backup power requirements need to be understood and planned.
3. these systems can boost the brand identity of the property, so developing the system in an architecturally significant way has benefits way beyond the avoided power cost.

Property markets are very different today from four months ago.  Cap stacks are different, cap rates are different.  What a world to come back to.

 are a bass-ackwards way of controlling time to complete on construction projects.  Was reminded of this pet peeve this morning when a past client emailed with news that only one bid was received on a project in San Francisco--his take was that it was due to an onerous liquidated damages ["LD"] provision in the bid documents.

I will be the first to admit that clients like LD's as a stick to get performance.  The problem is that this tool comes into play too late, and delays are often well documented from the contractor's side.  The truth of the matter is that LD provisions are largely ineffective, and if you are planning on using one, you need to double the amount of legal work you have budgeted for your project.

The solution?  Know the direction your team is moving in.  Manage your milestones. Do you know what your next three milestones are?  Know the numbers behind your schedules.  And work through changes very carefully.

Most contractors I have had the pleasure of working with think LD's are capriciously assessed, and more a way to run up attorney's fees than get quality construction.  I tend to leave LD provisions out of my contracts, but get very well written schedule reporting and recovery language into all my contracts--tied with progress payments.  Catch the team vectoring off course early, and correct the course at that time.  Recovery is the name of the game--get a good schedule and stay on top of it.

An ounce of prevention is worth way more than an onerous LD provision. 

Article in Sunday's NYT real estate magazine--Key--about aromatherapy in commercial real estate.  Inspired by retailers such as Pottery Barn and Starbucks at creating distinctive environments through meticulously chosen lighting, woods, background music, and fabrics, scent design is now the new frontier. 

Scent marketing is becoming increasingly pervasive--Advertising Age named it one of their top ten trends to watch in 2007.  Starting with a development's traditional architecture and interiors vocabulary--the identity is expanded to include aromas and auditory elements to tell a story, reinforce the project's position and seduce the target demographic.

Smell is the primary way most creatures identify mates, food and home--our most primal and deeply rooted sense.

"The ambiance that scent creates is critical"

"People will make quicker decisions, be willing to pay more for the property and most likely be so emotionally engaged that they are removed from the rational part of their behavior"

Now companies like ScentAir and AromaSys promise to help you and your project tap into the power of a memorable aroma.

Time for me to wake up and smell the coffee [ugh] on this tool--can't wait to put it to work on my next project.

I need to demystify pv.  Now a part of my plan on all my upcoming projects, I find that I need to convince my bankers and investors that it is more than window dressing--it is an essential part of branding my real estate.  The conventional wisdom is that it costs too much.

Moving from convention to the unconventional takes two things--

1. the system needs to be designed and sized right, and
2. it needs to be extremely buildable--unique designs are often priced to reflect unknowns.

It seems pv is now considered an exotic material by architects--more along the lines of tail fins rather than a true performance enhancement.  The answer lies somewhere in the middle--but I have not seen that answer produced yet. Aesthetics are the primary consideration, but aesthetics that do not respect the performance nature of pv will be remodeled out in ten years.

Look at it this way--stone or spandrel glass is about $75 to $100 PSF--about the same cost as PV.  And PV pays for itself in roughly 8 years, whereas the building skin material has no payback.  Starting to make sense?

Integrating solar power harvesting with the skin of a building is starting to become more widely understood.  The blue-toned cells of a polycrystalline module are now a part of the palette of materials available when I am struggling with what a site, and its structure, wants to be.  It enriches the story the asset tells.

The biggest hurdle is how I handle the costs.  BIPV, from a financial perspective, is simply front-loading energy costs into the building budget.  If I design the system right, my operating costs will be lower, demand for the space will be higher, and I can have certainty of supply when combined with a UPS system.  But it can easily double my electrical line item budget, causing a construction lender to grow faint.

BIPV is the visual evidence of green design.

For my financial partners--it requires a leap of faith as it is too new for many of them.  I split out the math--and look at bipv as a capitalized operating expense, and take the deduct on the construction cost side if there is one.  For my designers, it is easier to convince them that integration of the energy and environmental design features in a holistic way can be done--on time and on budget.

One of my main objectives over the next five years is to get the costs of this line item down.  And continually refine design.

If you are interested in joining the parade, download this BIPV design guide [.pdf 9MB].

Great article in the Economist [subscription reqd] about how biologically inspired design can help reduce the environmental impact of development.

This concept resonates with me.  Growing up on a farm in southeastern Pennsylvania, I came to greatly respect two things:

1. Nature designs for performance.  There is very little about natural design that does not serve a purpose or essential function.
2. Nature always gets last bat.  As little as 20 years after man has left an area, nature reclaims the site and continues to do what it has always done--grow, reproduce, transform, and return to the soil--a closed loop.

Biomimetic principles can be taken to a point where they add measurable value to a building through increased tenant demand for the building's brand identity, reduced operating costs,  and increased investor demand.  At a minimum, a building should be able to generate it's own energy.

"Nature has had the benefit of a pretty long R&D period."

It is going to take a while to get this right--so start with simpler techniques, like incorporating smog eating concrete into the facade, employing photo-voltaics to harvest the available solar resource, understanding a site's environmental attributes, and maximizing daylighting/solar orientation.

"Part of the challenge, I believe, is to reconnect people with resources."

Precisely.

Closed a 1031 tax deferred exchange yesterday for a client now living in Europe.  A 1031 exchange is basically getting an interest free loan from the US government for the amount of capital gains tax [15%] you would normally pay on sale of commercial property.  You don't escape the taxes [unless you die], but you can defer them by rolling over your old basis into a new property.  The taxes are due when you sell your replacement property, unless you do another tax free exchange.

Qualifying for this "loan" isn't easy.  There are strict limitations to the amount of time you have, identifying your targeted properties, and on taking any cash out.  An entire industry has grown to service this market--as baby boomers age, they like the certainty of a steady rent check, and parking the cash in property.  Leases are being tailored to this market--long term, flat rents, with tenants bearing nearly all of the day-to-day maintenance costs.  More like a bond, less like a real estate deal.

The good news is that you can get deals done in this space.  Deal flow is good, and there are a ton of brokers working the market. 

The less than good news is that there is a tremendous amount of mis--information out in the marketplace.  Owners are still on the hook for structural, painting, roofing and environmental repairs, and I didn't see adequate reserves provided for in any of the deals.  Cap rates are low...<100bps over T notes, and you really need to get your head around the risk.

The value I added was evaluating the risks and the residual real estate value, resulting in a decision to either go after the asset, or pass.  The objective was tying everything together, from sourcing deals on Loopnet and Propertyline, to multiple road trips to see the assets, to looking at the entitlements and how the property was built, to understanding the lease, to getting a feel what the site would be worth if the tenant left.  Pushing the candidates to a close.  A veritable cattle drive.  I probably looked at over 100 deals to close one.

What is important is the happy ending--cash flow increased by 20%, capital gains taxes have been deferred, the property has a new fifteen year lease, and this client has a new building in the path of development leased to a tenant that tells a great story.

Amazing how important a good story is.

...had to be Michelle Kaufmann's mkLotus house--a 640SF prefab erected in Civic Center Plaza.

It seemed wider than the 14'-6" wide chassis would indicate, and fit and finish was above expectation. 

The indoor/outdoor feel was a big deal.  This is probably the hardest element to duplicate when your land costs require you to achieve higher densities.

Transportation of the cube turns out to be less of an issue than I thought--range is 400 miles @ $5/mi, a nice improvement over my previous150 mile heuristic.

It fomented all sorts of ideas--prefabbing kitchen/bath cores on higher density product >>

Resort development becoming more feasible because site construction unknowns are reduced.

Quicker mixed use>>Santana Row'ing retail because your time on site is now within the retail downtime [Jan to May] window.

Looks like the house is a zero energy house--we need to get all our projects to achieve this.  The house is Green Point Rated by Build It Green.

Interested?  Here is her book. 

And the numbers?  Per Justin Brown, bizdev guy for the firm, $110 PSF, not including foundation, decks, or hookups.  TDC is probably ~$400PSF, about 10% less than site built right now.

Green building is demand led--consumers want it, and are getting smart about spending their construction budgets in a green way.  The range of materials--countertops, paints, flooring, carpets--mean that a lot of options are available that say "green"--giving the people what they want.

Materiality was the major advance in this show--that and the understanding that green building is an easy choice.  Suppliers are scrambling to fill the gap.  It used to cost more to build green, prices now seem at par with custom home prices.

Standards are in flux--degrees of greenness abound--LEED for Homes and Build It Green are the two big ones. 

Momentum is impressive, and understanding of what it means to be green--without materially compromising what is important--is occurring.

Press coverage has been ample--increasing both understanding and demand.

Next steps?  Getting banks on board with green mortgages, and jurisdictions requiring energy upgrades at time of sale.

My action item?  Getting much better at practicing  sustainable real estate development.