Green Ratings explained – why are they so important?

For a famously outdoor nation, Australians generally spend a lot of time inside buildings. We take for granted the shelter, protection, warmth, coolness, air and light that buildings provide. However we rarely give a thought to the systems that deliver these services.

Few of us understand the environmental consequences of buildings, particularly from a commercial point of view. With the ever increasing global impact on our environment, there has never been a greater need for sustainable new and existing buildings.

So, what is involved in making our buildings more ‘green’?

Firstly, let us examine the facts around buildings within an environmental context. Buildings consume 32% of the world’s resources including 12% of its water. They produce 40% of landfill waste & 40% of air emissions. In essence, buildings are responsible for consuming 40% of the world’s energy. In Australia alone, buildings produce almost 9% of the national Greenhouse gas emissions. Clearly, buildings have a significant impact on the environment.

The problem seems obvious enough. How do you reduce the amount of energy buildings consume? Is it possible to measure buildings in this regard? The answer is yes. As to how this is done, the answer is Green ratings.

Green ratings rate how well a building design will perform environmentally. For example: by using less resources over their lifespan and reducing the environmental impacts that arise from constructing, operating and demolishing buildings, the total consumption of energy by buildings can be reduced.

A number of types of “green” rating tools exist for various applications. In particular, the Green Building Council of Australia’s (GBCA) suite of tools currently address commercial offices at all phases of development.

There are, or will be, rating tools for not only different building classes, (for example, office, retail, health, etc), there will also be rating tools for the different phases of the building life cycle, including stages such as design, fit-out and operation.

Various other rating tools have evolved to assess or predict building performance against certain criteria. These range from water & energy use to waste management and occupant satisfaction.

The basic aims of the rating tools are:

·          to minimise the environmental impact of development,

·          promote resource conservation,

·          reduce energy use,

·          establish a common language and standard of measurement for green buildings.

Apart from the obvious sustainability positives, another benefit of adopting rating systems is that they promote integrated whole building design. Whole building design considers all building components during the design phase. This integrates all the subsystems and parts of the building to work together. This approach brings together building design, energy efficiency, and solar technology to boost energy savings. It also makes the most of all building elements. It reduces the amount of energy required to operate a building compared to conventional building design.

Other benefits include: identifying life cycle impacts from a building’s planning and construction phase through to its use and eventual demolition; and improving built environments, often by reducing pollutants and ensuring the quality of air and water.

While “green” design may have an initial minor cost impost (up to 3%), their implementation generates many benefits and opportunities. These might come in the form of increased available floor area, lowered life cycle costs, the provision of healthier buildings that are more enjoyable to work or live in. They can also use pleasing architectural designs to brighten up work areas, using sunlight rather than electricity, without causing glare. The overall achievement reduces the amount of energy required to operate a building compared to conventional buildings

The benefits of ‘”green” buildings are significant in terms of increased sustainability. With the ever increasing global impacts on our environment, there has never been a greater need for sustainable new and existing buildings. Green ratings and green buildings are no longer just the future of the industry - they are today’s reality.

Alternative and renewable energy sources continue to be hot dicussion topics throughout the world. Both solar and wind power are renewable energy sources that continue to attract considerable attention.

Solar Power

Located in Nevada, USA, construction of the largest solar thermal power plant to be built in the last 15 years, is nearly complete.

The 64 Megawatt Nevada Solar One power plant will generate enough power to meet the electricity needs of about 40,000 households and follows in the steps of the 354 Megawatt solar thermal power plants located in California’s Mojave Desert.

While California’s solar plants have generated billions of kilowatt hours of electricity during the past two decades, the Nevada Solar One plant will use new technologies to capture even more energy from the sun.

Wind Power

At the end of 2006, the total installed wind power capacity throughout the world was 74,223 megawatts which accounts for less than 1% of world-wide electricity use. This generation figure is up from 59,091 MW in 2005.

The countries with the highest total installed capacity are Germany , Spain, USA, India and Denmark. These installations account for approximately 20% of electricity use in Denmark, 9% in Spain, and 7% in Germany.

Generally it can be difficult to site wind turbines in many areas for aesthetic or environmental reasons, and it is also often difficult to integrate wind power into existing electricity grids in some cases.

Notwithstanding these issues, the wind energy sector has become an important player in the energy market, with the total value of new generating equipment installed in 2006 reaching approximately US$23 billion.

It is expected that the 2007 analysis will show a continuing and substantial increase over previous years.

Climate change continues to be one of the most talked about issues across the property and development industry.

One of the most important elements in the climate change debate is water. Throughout Australia, different locations experience different rates of rain fall. This can translate into considerations for building design, particularly in regards to potential ways to store water.

If you could store water, a building with a roof area of 1,000 square metres in Sydney or Brisbane could collect 1,200,000 litres of water on average per year, which is equivalent to the volumetric space of approximately 46 basement car spaces.

However, same building in Melbourne would only capture 600,000 litres, while the same building in Tully, Far North Queensland would collect 4,500,000 litres of water per annum.

Also, a 600 square metre house block in Sydney or Brisbane could collect 720,000 litres of water per annum. This is interesting as a very high average house usage of 900 litres per day would only use 328,500 per annum.

With water restrictions tightening across the eastern coast of Australia, the issue of sustainability remains at the industry forefront. Napier & Blakeley is fully qualified and experienced in the areas of green accreditation and sustainability, and can provide assistance, oversight and coordination of the asset greening process.

With a staff of over 140 across the Eastern States of Australia, Napier & Blakeley currently has in excess of $20 billion either under management or analysis.

With the recent downturn in commercial property activity now is not a time to lose sight of good property management, especially in relation to the Schedule of Condition in the terms of your lease.

A crucial component of a good leasing strategy understands the importance and purpose of a Schedule of Condition.  All too often Make Good negotiations are made more complicated and protracted, not to mention more expensive, because there is no record of the condition of the premises at lease commencement.

Whilst the general purpose of a Schedule of Condition is acknowledged in the market place, their value as an effective tool in preventing disputes and removing ambiguity during the negotiation process is less understood and appreciated.

The level of protection a Schedule of Condition provides depends on a number of factors, namely the accuracy and detail of the schedule, the length of the lease and the lease obligations.  At worst a poorly prepared Schedule will offer little or no protection to the tenant if it fails to properly record the property’s condition in the context of the lease obligations,  is too ambiguous or, simply, is improperly or poorly referenced to the lease.   

Recently N&B were instructed by a tenant of a large dilapidated warehouse after they were served with a Final Schedule of Make Good totalling more than $1,000,000.

The lease term was for 5 years and did not have the protection of a Schedule of Condition.  Constructed in the early 1970’s, poorly maintained for longer than the preceding 5 years, the yield up clause in the lease required the tenant to deliver the property to the landlord in the condition which the lease stated as being “Good”, which would certainly have not been the case.

Fortunately for our client, we were able to reduce the claim to circa $200,000.  If a Schedule of Condition was prepared at lease commencement, however, the agreed settlement would have been negligible.

Whether you are a landlord or tenant, prior to signing a lease, during a lease or at lease end, accurate and timely Make Good advice can potentially save you a considerable amount of money and anxiety.

Steve Di Leo, Principal of WHK Horwath, one of the largest accounting groups in Australia, agrees and says of their clients “Corporates with the best Leasing Strategy make sure they understand how their Make Good component affects their bottom line” and sound Make Good agreements can significantly affect not only the Tax, but also the financial health of the signatories. 

Now, more than ever, landlords and tenants need to make sure that they fully understand the commitments in their Make Good agreements to ensure “that they don’t find themselves in a situation where they have spent a million dollars on a fit out only to find that they’re not eligible to receive the best tax outcomes they may have hoped for.” Di Leo advises.   While many larger corporates may have the Tax component under control, they may not have made provision for the new International Financial Reporting Standards (IFRS) accounting standards nor understand that a Future Make Good Obligation is an actual liability and not a contingent liability.

For example, if the estimated cost of your Future Make Good Liability at the end of your lease is $60,000 and the lease term is 5 years, then this appears as a $1,000 expense item on your monthly Profit & Loss and a $12,000 expense item on your annual P&L.

IFRS dictates that each year this estimated liability must be reviewed and updated to ensure continuing accuracy.  This review should take into account market price fluctuations and any additions or reductions to your liability due to any works that may have taken place during the preceding year.

Further, a well managed Make Good that accounts for tenant departure and temporary vacancies can benefit landlords with Reversionary Depreciation rights that may accrue to them when a tenant departs.  An example of this would be if a tenant incurred $20,000 on a fit out in 2000 and left the premises in 2005, they would have claimed a total of $2,500 in 5 years.  After the lease terminates, the construction expenditure pool of $17,500 would revert to the landlord affording them a additional $500pa claim on building allowance, assuming there is new tenancy.

So the advice from Di Leo and WHK Horwath is “to make sure that, when you enter into lease arrangements, you are clear of the Tax and Accounting implications of the agreement because it’s not something you need to think about at the end of your lease, it’s got ongoing implications now for both landlords and tenants.”