LEED ROI and Payback

Here we are again, speaking on the cost of going green. I find it remarkable that there are those that still question the value and benefits of going green even when faced with strong Return-on-Investment numbers that confirm that high-performance building is the right way to go. Is it so difficult to believe there's some good deals out there?

I'm currently attending the FEFPA (Florida Education Facilities Planners Association) in Fernandina Beach and this morning's speaker, Alan Whitson, spoke about money and green building: It's the Money: Separating Green Fact from Fiction. (For more information on Alan Whitson, visit www.squarefootage.net) He provides some excellent numbers to share with clients when discussing green building options.

As mentioned before, the first question asked when discussing a LEED project is "How much more is it going to cost?" Or, "What is the payback on this?" If you had to convince an owner that the payback period was 5 years, would you receive a favorable response?

How about if you said the return on investment was 20%?

20% sounds mighty good.

In his example, the 5 year payback earned a 20% return on investment. I think we should start talking in terms of ROI instead of payback. Whitson does, too. He shared some excellent suggestions on why to use ROI instead of simple payback:

Simple payback focuses on how fast capital is returned, not on maximizing the return on capital. Simple payback doesn't consider post payback period cash flows, the time value of money and the risks to the cash flow.
Acceptable time periods are arbitrary and do not reflect market rates of return.

He also suggests that we include ALL financial benefits that can be generated including increases in building value and shareholder value. Your assumptions should include a realistic time horizon, inflation, and reinvestment of savings. Also, consider the financial impact of depreciation and income taxes.

Here's a great example Whitson provided:

Let's look at the impact of a $0.40sf. annual energy savings on a 130000sf school.
With no inflation and no reinvestment: $2,600,000 savings
With 2.5% inflation rate and 5% reinvestment: $22,260,535 savings
With 2.5% inflation rate and 8% reinvestment: $41, 093,713 savings

If you could incorporate energy saving measures that would equal $0.40sf on a 130k sf. project, you could reasonably earn back $41M dollars?

Let me guess... "That couldn't POSSIBLY be correct. There must be faulty numbers or everyone would be doing this."

Mmm hmm. Exactly.

As the green building champions that we are, we should be providing our clients the tools they need to make the right decisions. It's up to us to get this information into their hands so that they can move forward with sustainable projects. This is what they need to present their shareholders, or their boards, or their owners, so that they can feel strongly about making the right decision.

Most owners already have the desire to build an environmentally responsible, healthy place to work and live. Let's show them that it can be profitable, too.