How Sustainability Advances Science Parks, Their Users, Communities, and Investors

Phil Wirdzek, International Institute for Sustainable Laboratories and Lisa Galley, Galley Eco Capital

Executive Summary

Laboratories for the 21st Century (Labs21®), a U.S. government program, is rooted in an awareness that, “as a building type, the laboratory demands our attention: what the cathedral was to the 14th century, the train station was to the 19th century, and the office building was to the 20th century, the laboratory is to the 21st century. That is, it is the building type that embodies, in both program and technology, the spirit and culture of our age and attracts some of the greatest intellectual and economic resources of our society.”1

Unfortunately, laboratories are also major consumers of resources. Among these necessary resources is the substantial financial investment to design and construct a laboratory, which exceeds that for commercial buildings in several ways.2, 3 The Labs21 energy benchmarking tool4 shows that the energy intensity of a lab can be three to eight times that of an office building and, depending on the science activities and the building’s age, can even exceed this range. In addition, lab management and operations require highly experienced and educated operators and building engineers. Water consumption and waste water discharges can also be substantial, due to round-the-clock mechanical operations, process equipment cooling, animal care, and more. Adding solid and hazardous waste management to operations expands the resource impact. Together, this list begins to convey a story of major lifetime costs resulting from an initial capital investment to build a laboratory.

Logically, it can be argued that science parks are defined by their laboratories. Clustering intellectual might into a physical locus increases scientific rigor, promotes direct and personal interactions, encourages multi-disciplinary research, expands individual expectations, and much more. However, this arrangement can place great demands on regional resources, impacting infrastructural systems such as utilities and community-based services. This impact can be further magnified as cleanrooms, data centers, healthcare, fabrication labs, and other high-technology facilities and industry partners are, by necessity, attracted to or brought into the science park.

Currently, although the weakened U.S. economy is forcing U.S. real estate owners to fight to keep their properties profitable, interest in sustainability generally—and green building in particular—continues to grow considerably, bolstered by public awareness, an emerging national energy agenda, published evidence of a positive business case, and qualitative benefits.

Science parks’ comparatively higher fixed costs present on its face a somewhat riskier business model than typical investment commercial real estate, but they have entered a time of unique opportunities. Their greater resource intensity and longer term focus of ownership, coupled with the recent passage of significant federal stimulus legislation—with its dominant focus on energy efficiency, renewable energy and technology—create an environment where sustainability initiatives can help grow the bottom line and increase science park competitiveness and contribution to community. Successfully achieving that “green” business case, however, requires that the operational, investment, and finance processes within science parks be adapted for sustainability as well.

This paper introduces the IASP community to the mission and applicability of the Labs21 program. It uses Labs21 as a foundation to promote sustainable master planning and the need to design and engineer science parks and their client facilities to meet a sustainable energy and environmental future. It also describes the economic realities to be considered by investors and developers for creating sustainable science parks.

Like any complex system, the survival and usefulness of a science park demands flexibility, adaptability, and efficiency in all aspects of its being. The world is facing a future of challenges that are dictated by population growth, economic re-positioning, resource consumption, and environmental instability. Unlike a single laboratory facility, science parks have the unique opportunity to embrace a very dramatic vision for the future—one that is dynamic, resourceful, and attractive, requiring a bold approach to place a value on these challenges in the world of financial investing.

The Labs21 movement in the United States has captured global interest and is the opportunity upon which to address sustainable science parks. With this paper, the authors wish to engage the IASP community in collaboration to support sustainable choices and generate the considerable influence sustainable science parks can offer one another and the built environment itself.

Part I: Sustainable Laboratories – Increasing Value, Decreasing Costs

Can laboratories be designed and operated to positively contribute to the goals of sustainability? Clearly, laboratories are not “spec” buildings, nor are they identical in design, engineering, or use. Whether for industry, government, or academia, they must not be viewed as financial investments for profit taking. They are each, by necessity and purpose, custom designed, engineered, built, and operated. They require a long-term financial commitment and are expected to have a useful life of several decades. As such, they will obligate owners and investors to considerable costs and risks throughout their life cycle and disposal. Their design and engineering also place a long-term demand on local and regional utilities, community services, natural resources, and infrastructural support.

Laboratory activities span a wide spectrum—anything imaginable is possible—and buildings are often altered throughout their lives to accommodate users’ new and changing requirements. These changes are both systemic (e.g., HVAC modifications, utility service enhancement, new laboratory equipment) and cosmetic (e.g., walls and partitions, re-surfacing, non-lab space reconfiguring), and they can occur often. Such changes must ensure continued health and safety for users and occupants, ensure functionality of facility systems, and support the work for which the changes were implemented.

Image of a laboratory workspace

Image of a laboratory workspace

 

As laboratories are created to support science and discovery, the level of increasing sophistication in scientific equipment, laboratory technologies, and machinery also advances and on a scale of acceleration that challenges a building’s designed and engineered capacities. Often, and as a result of scientific necessity, lab equipment and machinery that might not be available or affordable will be modified and re-constructed by the users themselves to achieve their objectives. This action might occur without consideration to the building’s service capabilities.

With few exceptions, laboratory safety, efficiency, and operational effectiveness are readily affected by laboratory users. Simply opening or closing a fume cupboard or a lab door affects the laboratory’s performance on a minute-to-minute basis and over many years. Laboratory owners and owner representatives often have little, if any, knowledge or control of the user activities. Communication among facility engineers, owner representatives, and users might occur only on a “need-to-know” basis, often determined only by the user. Taken together, these elements magnify the risks of losing control and operational integrity of a laboratory, which affects operational costs, safety, resource consumption, and the need for costly capital repairs and improvements.

Those working to build or alter an existing laboratory to achieve specific sustainable goals must fully appreciate these significant forces within the context of the laboratory’s lifetime purpose and yet accommodate the unexpected shift in future missions. Often, a natural tendency is to over-design, over-engineer, or over-size laboratories to allow for the unknown and address users’ flexibility demands. Though this is a reasonable approach, it can increase the capital cost, lifetime operational, and maintenance expenditures and place a greater demand on resources. Solutions to these and many other challenges are being pursued and, through the coordinating efforts of the Laboratories for the 21st Century (Labs21®) program, are shared and evaluated by this industry.

Laboratories for the 21st Century (Labs21®) – A Backbone of Sustainable Science Park Planning

Labs21 was launched in response to U.S. legislation to improve energy efficiency within the federal government. It is a voluntary partnership program co-sponsored by the U.S. Environmental Protection Agency (EPA) and the Department of Energy (DOE), conceived as an open forum for the exchange of energy efficient laboratory strategies and sustainable environmental solutions that were not readily shared within or implemented by the U.S. laboratory community.

By working with the U.S. laboratory industry, Labs21 became the leading forum for the exchange of strategies, solutions, experiences, and know-how throughout the U.S. industry. Using Labs21 to encourage this exchange, EPA and DOE recorded the information and documented examples where such solutions were applied. The agencies have continued this effort and, in collaboration with others, are adding new studies, tools, training materials, and analyses to encourage increasing energy efficient and environmentally sustainable laboratories.

Labs21 provides three areas of participation for the laboratory community. These include 1) a voluntary partnership opportunity, 2) technical tools and resources, and 3) training and education. The voluntary partnership component is a relationship with the federal co-sponsors in which lab facility owners gain access to technical support provided by the co-sponsoring agencies. In this relationship, partners agree to set energy and environmental goals for new or existing laboratory projects and to document progress toward meeting those goals. Partners are expected to present progress on projects at annual Labs21 conferences and, when completed, work with the agencies to develop case studies.

For their part, EPA and DOE use the partner projects as one of many sources of information for technical tools and resources, such as case studies and best practices, which capture the experiences of the partners. Through these agencies, Labs21 has accumulated a considerable base of information, which is offered through a Labs21 toolkit5 and other online resources. The toolkit and resources include not only the partner case studies and best practices but also design assistance tools, literature reviews, an energy benchmarking system for labs, and much more.

As for training and education, Labs21 uses these materials to create the Labs21 training workshops, of which four are currently available and several others are in development. These workshops include an introductory design and engineering course, an advanced lab HVAC workshop, an operation and maintenance course, and a workshop offering a guide for sustainability. Furthermore, through a new agreement with the International Institute for Sustainable Laboratories (I2SL), the Labs21 workshops and annual conference are being expanded to reach an international audience and expanded facility types, including healthcare, data centers, and cleanrooms.

Through I2SL and its new partnership with the American Institute of Architects (AIA)6, comprehensive and “living” laboratory design and planning guidelines are being developed to integrate the building strategies that will offer a sustainable approach for laboratories to meet global building challenges.

The annual conference, which attracts experts from the national and international laboratory building community and is co-sponsored by I2SL and the federal agencies, promotes Labs21 and the program’s energy efficiency and sustainable environmental practices. From architects to users, from laboratories to data centers, the conference enables networking and the exchange of information. The conference provides interactive meetings on special topics such as onsite renewable power systems, water management, ventilation strategies for hospitals, high-containment labs, K-12 learning labs, and much more. Many sessions feature presentations from around the world and have included Singapore, Europe, Australia, and the Middle East. The annual event is held in different U.S. locations to promote the greatest level of information exchange.

The Labs 21 program emulates and builds on the U.S. Green Building Council’s very successful Leadership in Energy and Environmental Design (LEED®). The LEED system provides a guide for the building industry for setting energy and environmental goals. LEED establishes a variety of building attributes for specific categories that address sustainable sites, water efficiency, energy and atmosphere, materials and resources, and indoor environmental quality. A point-based system within each category provides designers with guidance for pursuing energy efficiency and environmental sustainability with many building types. LEED therefore provides an early “road-map” for owners and designers to set goals and measure their progress through construction. As such, the LEED system has become the benchmark for buildings within the United States.

The LEED criteria do not completely address the unique characteristics of laboratories, however. Recognizing this opportunity, Labs21 created a system to integrate with the LEED structure, adding a new set of criteria that addresses the unique characteristics present in laboratory buildings. The Labs21 Environmental Performance Criteria (EPC) is a consensus-based set of criteria developed by members of the Labs21 community that expands on LEED and now provides guidance for goal setting by laboratory owners and designers. In combination with LEED, the EPC offers decision-makers a clear pathway to energy efficiency and increased environmental performance goals for laboratories.

Sustainability Investments and the Rate of Return

Do sustainability investments provide a return? Yes. The Labs21 case studies and best practices guides, as well as the increasing numbers of accounts in trade literature such as R&D Magazine, Engineered Systems, Sustainable Facilities, and others, describe such results. For example, Figure 1 shows the added costs for the National Renewable Energy Laboratory’s (NREL’s) Science and Technology Facility (S&TF) in Golden, Colorado, which lists all the energy improvements and their incremental capital costs. Most of these energy savings measures had fairly a quick payback, especially given that this facility is expected to be owned by NREL for several decades.

 

Figure 1. Payback Versus Cost for Additional Energy Conservation Measure for NREL S&TF

Figure 1. Payback Versus Cost for Additional Energy Conservation Measure for NREL S&TF

 

The “payback” can be recognized through other measures, however—not just financial. As a long-term asset, a sustainable laboratory is flexible and its limits uncompromised, attracting and retaining the best talents, providing user convenience and comforts safely, and ensuing an informed and intelligent interaction among the building, the user, and the operator throughout its useful life.

 

Figure 2. Lab Building O&M Costs

Figure 2. Lab Building O&M Costs

 

The Labs21 case studies (representing the labs that have taken measures to save energy) show that the energy cost for operating an energy efficient lab building are in the range of $3 to $4 per square foot annually. This cost becomes especially noteworthy where energy costs are high, such as those reported by Cornell University where energy costs can be nearly 10 times the custodial and maintenance costs combined (see Figures 2 and 3). Compare this to the energy costs of a new office building designed to meet the latest ASHRAE standards, which is approximately $0.77 per square foot annually.7

 

Figure 3. O&M Costs From a Sample of Cornell Laboratory Buildings

Description

Maintenance $

Custodial $

Utility $

Total O&M

Year Built

Gross SF

Geology T&R

$1.55

$1.04

$4.12

$6.71

1984

75,000

Physics research

$1.24

$1.26

$6.99

$9.49

1965

250,000

Engineering T&R

$0.60

$1.83

$4.44

$6.87

1955

100,000

Biotech research

$1.82

$0.60

$5.08

$7.50

1987

175,000

Chemistry T&R

$1.38

$1.09

$6.92

$9.39

1921

233,000

Chemistry T&R

$1.99

$1.37

$5.28

$8.64

1942

130,000

Materials research

$2.30

$1.23

$6.54

$10.07

1963

50,000

Chemistry research

$1.78

$1.39

$11.71

$14.88

1967

106,000

Nano research

$2.42

$0.94

$16.38

$19.74

2004

150,000

Averages

$1.97

$1.20

$9.37

$12.54

(These data are for fiscal year 2007)

 

The Outlook for Sustainable Science Parks

Given that laboratories can be sustainable, what about other extreme building types such as data centers and cleanrooms, for example? Organizations like Green Grid and Critical Facilities Roundtable are pursuing sustainable outcomes in these facilities and are considering similar criteria as the Labs21 EPC to set goals and record success. But, when aggregated into a single campus setting, such as a science park, what sustainable expectations can be met and what are the possibilities?

Simply put, if labs, data centers and other high-technology facilities can find their way to sustainability, then the science park can embrace these objectives as well. Investors and developers can provide considerable reinforcement to the sustainability goals of their individual clients. They can establish a campus sustainability code of ethics for clients. By coordinating goal setting, planning alternative utility systems and services, providing the vision for the campus, and marketing the values of each client as a strong union for a common goal, the investors and developers elevate the value of the campus above those that have not.

 

Photograph of the National Institute of Health campus in Bethesda, Maryland

photograph of the National Institute of Health campus in Bethesda, Maryland

 

Consider this photograph of the National Institute of Health campus in Bethesda, Maryland, available through Google Earth. The juxtaposition of this campus beside the residential neighborhood can provide an appreciation for the potential impacts and competition for resources between the campus and its neighbors. For example, the energy required to operate a laboratory fume cupboard (hoods) is equivalent to the energy consumed by three standard U.S. homes over the same period of time. A laboratory facility with 100 fume cupboards is not uncommon. Simple multiplication means this facility’s fume cupboard alone would equal the power demand of a 300-home community, all drawing the energy from the serving utility. The utility must therefore increase its energy output to satisfy this demand while maintaining its competitive edge in its business.

This demand might require an infrastructure upgrade for possible new line services, transformers, and added generation capacity. It also might mean that the community might absorb the cost of that investment. Other campus demands will also reverberate throughout the region. What is not apparent in the photograph is the demand for other services, such as the community’s water and wastewater system, storm water run-off capacities, solid waste disposal, transportation, and other more diverse services such as fire and emergency response, schools, and hospital capacity.

The sheer scale of a campus within this community implies a substantial demand for services of all types. This example provides an opportunity to appreciate the sustainability challenges and choices that must be considered initially and throughout the life of the park, such as the surrounding area’s economic growth, changes in single and multi-family residences, impact on the environment, or societal benefits.

Essentially, the new thinking for campus planning should be maximizing self-sufficiency.

Conclusion

Regardless of the politics, a national mood for sustainability has been and continues to be a strong sentiment throughout the United States and has been globally. More recently, political sentiments are matching the heightened national awareness. And as discussed already, many individuals, organizations, industries, and government entities have begun to respond.

Labs21 is one of these responses. Specific to laboratories, the program is based on the belief that the laboratory defines a nation’s educational intent, its technological capabilities, its economic prospects, and its commitment to social stability. The lab, as the kernel for growth and a hub of knowledge, discovery, and realization, can be a foundation upon which science parks pattern their sustainability objectives. This foundation then links with other unique science park facilities such as test buildings, pilot plants, cleanrooms, data centers, and others to contribute to the park’s sustainable goals. The science park is a natural symbiosis, aggregating these facilities into a central plan.

Like cities throughout the world, however, laboratories offer employment opportunities and provide a convergence for economic activity, giving hope for an increased standard of living to its population. Science parks bring these same opportunities, whether they are urban, suburban or rural. To these locations will come the people who will build, operate, study, research, develop, and produce, imposing increased demands for services and resources.

Part 2: How Green Finance Helps the Sustainability of Science Parks

Science park owners indicate a high level of interest in adopting sustainability on their properties, despite the many funding challenges. A survey of recent research and direct work with investors in sustainable real estate shows that the economic benefits of sustainability can even extend to the science park’s finance and capital investment system, if it is set up in a way that can access liquidity from socially responsible capital sources and monetize environmental benefits. Overcoming such challenges have become even more urgent for science parks in light of funding opportunities such as those provided through the recent passage of the American Recovery and Reinvestment Act—which has allocated billions of taxpayer dollars toward the energy efficient, “green” upgrading of many federal facilities and other related types of property, including science parks.

This section discusses the emergence of “green finance,” which describes capital sources and funding processes that help investors and owners of science parks to truly connect their sustainability initiatives to their bottom line. Science park owners and investors who successfully implement a green finance approach alongside their sustainability initiatives will enjoy more competitive properties due to their ability to access additional sources of liquidity as well as better identify and monetize the financial benefits that sustainability programs may offer.

U.S. Real Estate Deals With Financial Un-Sustainability

The current credit crisis represents one of the most intractable problems that real estate and facility management professionals have experienced in their lifetime. Banking executives8 recently estimated that nearly $4 trillion to $9 trillion has been removed from the U.S. economy over the past 18 months. Those figures should be compared with the estimate that consumers and businesses usually contribute approximately $1 trillion to the national economy in a good year. It is projected that businesses will not be healthy enough to produce $1 trillion for the national economy for the next several years to come. Most in the economy clearly recognize that credit and investment capital is highly constrained and an easy credit environment will not be back for a long time. Thus, real estate owners must become experts at economic sustainability; conserving and organically growing precious cash flow and becoming more efficient users of capital the next several years to come.

The current credit crisis also exacerbates other long hidden problems within commercial real estate that have only recently come to light. Rising energy costs over the past decade, particularly within the past 24 months, have been increasing consumer cost of living and weakening the business sector through higher costs of living and operations—both of which hurt landlords and destabilized communities.

During the real estate boom years of 2004 to 2007, low interest rates and increased debt leverage combined to help inflate real estate prices—and few landlords or financiers paid attention to the real rise in energy and water costs on their properties. Unbeknownst to them, utility, operational, and maintenance costs were increasing beyond the rate of inflation and eroded net operating income at the property level, to the extent that they could not be passed on to tenants through typical inflationary increases. Even when they were passed on to tenants via triple net lease arrangements, those increases were also constraining their tenants’ future ability to pay rent and absorb further rental rate increases. Higher fuel costs were embedded within a host of cost increases beyond rent and common area maintenance charges that were paid by commercial business owners. In effect, property base rental rate increases were actually competing with above-inflation expense adjustments, squeezing the total “share of wallet” that a landlord could expect to receive from the tenant.

The Public Embraces Sustainable Buildings

The very widespread problem of energy, water, and fuel supply and price risk helped to propel environmental concerns to the national agenda and even shaped the outcome of the 2008 American presidential election. The public has become much more sensitized about the negative impact of buildings on the use of natural resources.9 The fact is, buildings are responsible for 40 percent of primary energy use, 72 percent of U.S. electricity consumption, 29 percent of carbon dioxide emissions, and 13.6 percent of potable water consumption. Against this backdrop, buildings constructed using green building principles are presenting compelling answers to these problems:

  • Energy use in green buildings is 29 to 50 percent less than non-green counterparts.
  • Green buildings use an estimated 40 percent less water.
  • Carbon dioxide emissions in green buildings are reduced by 33 to 39 percent.
  • Solid waste attributable to green buildings is reduced by 70 percent.

Increasing public concerns about the environmental and social impacts of buildings has spurred the business community’s adoption of sustainable development principles, creating an increase in the preference for green buildings.

The market shift to green real estate in the United States is still in its infancy, with LEED-certified buildings in total representing barely 2 percent of the total of the U.S. real estate market. But the rapid growth of green real estate is affecting the real estate sector in a way that can be compared to the effect of the internet on information.

RREEF Alternative Investments confirms in its latest study10 that the amount of square footage attributable to LEED-certified buildings in the United States is growing exponentially, from nearly 40 million square feet in 2005 to an estimated 180 million square feet as of the first half of 2008. According to McGraw-Hill Construction’s 2009 Construction Outlook, the value of the green building market is expected to grow along the following trajectory11:

  • 2005: $10 billion
  • 2008: $50 billion
  • 2013: $150 billion

A review of the most current research and latest national events reveals the following early outcomes for owners and investors in green buildings:

  • Perception of Green Building Value:
    Eighty-three percent of commercial real estate investors indicated that they will most definitely build green in the immediate term.12 Furthermore, the recent passage of the $787 billion American Recovery and Reinvestment Act (ARRA)13 can be understood as a positive validation of the green building business case by the federal government itself. While much of the ARRA funds focus on energy efficiency upgrades and “green” improvements to federal property, significant sums within ARRA have been allocated to “extramural” partners of federal agencies, such as science park owners and tenants – an example discussed later in this paper.
  • Very Low Added Construction Cost:
    Surveys of real estate executives experienced in constructing and investing in green buildings at conferences14, 15, indicated that green buildings at “certified” and “silver” LEED-certification levels can be built cost-neutral or for up to 1 percent added cost. The participants indicated that achieving “gold” or “platinum” certification would cost them about 2 to 3 percent more up front than conventionally built projects. All of the participants indicated, however, that economic and qualitative benefits achieved from green buildings outweigh the added costs.
  • Higher Rents and Values:
    A study by the Berkeley Program on Housing and Urban Policy16 indicated via regression analysis that green buildings command 2 percent higher rents.
  • Lower Operating Costs:
    Green buildings show an 8 to 9 percent decrease in operating costs.17 Newest data from Good Energies18 show that green schools enjoy a net present value of $7 in water and energy benefits for every $3 additional cost invested. Green office space garners approximately $9.50 for every $4 additional cost invested.
  • Higher Occupancy:
    Green buildings show a 3.5% higher occupancy ratio.19
  • Positive Investment Case:
    Green buildings show a 6.6-percent increase on return on investment20 and $5 million higher value.21

Additional benefits of green buildings include:

  • Productivity and student performance impacts
  • Indirect positive impacts on water systems
  • Positive brand impacts for property owner
  • Operations and maintenance savings
  • Embodied energy savings

The Special Advantages and Issues of Sustainable Science Parks

The Association of University Research Parks notes the following characteristics of university research parks in its 2007 study22:

  • Size of Market:
    In 2007, university research parks in the United States and Canada encompassed more than 47,000 acres and included 124 million square feet of space in 1,833 buildings. At full buildout, these parks can include 275 million square feet; less than half of the estimated total square feet are currently “open.” Parks report that 86 percent of available space is currently occupied, but 94 percent of the parks have room for expansion.
  • Sustainability:
    Sixty-six of the respondents indicated that there has been an increase in the emphasis on sustainability in the past 5 to 10 years, and this trend is likely to continue. In the future, it is likely that research parks will be developed to minimize impact on the environment and to use renewable energy sources and “green” building practices.
  • Capital Structure:
    Developing a research park is a significant, long-term investment that can require millions of dollars over several years. This funding is likely to come from multiple public and private sources, including bond issuances (both general obligation and revenue bonds); state appropriations; land contributions; rental of space by sponsoring institutions; and state investments in research, commercialization, and other technology-based economic development programs.

Research park managers indicated the following funding challenges:

  • Eighty-six percent of research park managers indicated that obtaining capital for park development and renovation was of high or very high significance.
  • About 66 percent of park managers indicated that obtaining financing for wet-lab space was a significant or highly significant challenge.
  • The park managers reported finding few sources of operating funds with the exception of some government programs.
  • Sixty-one percent indicated that obtaining financing for multi-tenant facilities would also be a challenge. Respondents reported tapping private developers, government grants, and bonds to fund construction of buildings.

Synthesizing the main observations from the preceding section of this paper with the foregoing information in this one reveals several critical issues that connect the vitality of science parks as a business to the success of their sustainability programs:

  • Higher Operational Risk and Constrained Funding Sources:
    The fact that science parks studied have an 86-percent average occupancy and can expand an additional 151 million square feet suggests that these properties are already burdened with high carrying costs, in the form of vacant available space and “land banking” for future expansions. Much like hotels, nursing homes, and other highly real estate dependent operating businesses, science parks must manage a very high degree operating leverage.
  • Sustainability Decisions Should Fit Ownership Objectives:
    The ownership structure of science park properties is more often that of a long-term hold as compared with typical commercial property owners. This means that sustainability investment decisions need to emphasize the cost/benefits over the lifetime of the assets being evaluated.
  • Greater Resource Intensity Means a Greater Green Business Case:
    As detailed in Section 1, science park properties typically contain many more resource intense elements than those found in conventionally built commercial properties. Reducing resource intensity therefore, becomes a great business opportunity, since properties can yield even larger (or quicker) investment results than similar measures at conventional properties. Considering the previous point about their comparatively high fixed costs, every dollar saved or avoided through greater resource, operational and maintenance efficiencies is disproportionately rewarded in the project’s net cash flow.
  • Unique, Large Funding Opportunities Tied to Energy Efficiency & Sustainability:
    While much of the research indicates that science park managers are experiencing funding challenges, the recent passage of ARRA contains hundreds of billions of dollars which should fund infrastructure, energy, and science. Science parks are partners with many of the federal agencies, state and local governments as well as landlords to tenants who will all be direct recipients of federal stimulus dollars. The federal government has made repeated announcements that much of the funding will focus on increasing energy efficiency and promoting renewable energy. Science park owners and managers will undoubtedly be working to understand the various sustainability-related requirements with the many sources of federal stimulus funding, in order to make sure their parks obtain any funds they may qualify for.

Connecting “Doing Well” with “Doing Good” in Science Parks: The Finance Hurdle

The previous section summarizes the particular business issues and advantages that science parks might encounter when pursuing a sustainability program; however, the success of any capital initiative depends as much on its process as its outcome. For science parks, like many other property types pursuing sustainability, their finance and investment processes may need “greening” to make sure the good decisions are as sustainable as the properties themselves.

The typical capital raise and investment process within many campus communities reveals “industry standard” processes that inadvertently hinder sustainability and, ironically, derail realizing the very financial efficiencies and opportunities that the science park owner may seek.

In Galley Eco Capital’s work with real estate investors and their partners, it has been observed that these problems typically stem from 1) not knowing enough about sustainability, 2) not understanding how to value the opportunity and/or 3) insufficient accountability for and measurement of environmental performance within the project portfolio. Below is a breakdown of the many ways in which these “symptoms” can manifest:

Area of Need

Symptoms

Need for Education

Investment decision-makers are not knowledgeable about sustainability in a campus setting.

Investment team is not integrated into the sustainability planning process early enough to obtain and provide input on financial matters.

The outside financial partners of the science park (key donors, local/state agencies, tenants, equity investors, contractors) have not expressed interest in sustainability, which silently “pressures” the investment team to avoid inclusion of sustainability choices within finance.

Need for Accountability

No explicit policy requirement exists that ties financial decisions to positive environmental outcomes.

Need for Better Opportunity and Risk Evaluation

Capital planning does not include comprehensive sourcing of monetary and non-monetary incentives, which may subsidize a portion of the costs of greening buildings.

Capital decisions do not assess environmental regulatory risk (e.g., potential carbon emissions costs, mandated energy reporting).

Capital decisions are based on short, undifferentiated payback periods.

Capital decisions are too narrowly focused on first cost considerations, without the balance of benefits being obtained in exchange for costs.

Valuation of buildings typically excludes consideration of many green features (renewable energy, advanced water and building controls).

Underwriting of building projects (particularly multi-tenant buildings) does not include an assessment of the impact of the third-party rating system criteria across the pro forma income and expense projections.

Financial decisions narrowly focus on impacts of sustainability on owner finances, not the business case of other stakeholders tenants and community (e.g., site selection that increases commutes).

Need for Feedback Loop to Assess Effectiveness

There is no benchmarking, measurement and verification of the existing portfolio of campus buildings. The investment team has no data history that supports sustainability choices.

Ongoing management reporting does not detail environmental and social outcomes alongside financial results.

 

Addressing these types of challenges constructively requires science park owners and managers to adapt their current finance and investment processes to include “green finance” features, which help them to better identify and capture the economic benefits associated with a sustainability program. This paper discusses some of the more critical of these issues in the following sections.

Green Finance

Based on work to date, Galley Eco Capital has defined green finance as a system of public and private market mechanisms that promote the finance of sustainable real estate. Green finance has three core qualities:

  • Rewards Resource Value:
    Green property construction and operations attempt, as much as possible, to direct the wise use of natural resources, since the failure to do so results in a high permanent costs to the property owner, tenants, and surrounding community. This means that green financing sources, whether internal and external, take into account the responsible use of resources within their decision making criteria.
  • Intentional:
    The green capital provider seeks sustainable outcomes, in addition to economic ones. One example might be an equity source that has earmarked funds at market returns for a LEED-Gold asset, a state bond initiative that funds school energy efficiency retrofits, or the campus adherence to triple bottom line criteria, such as fair wage and healthcare policies for all workers.
  • Integrative:
    “Doing” green finance successfully involves combining applicable regulations, incentives from multiple jurisdictions, ratings standards of third-party organizations, and even triple bottom line investment criteria.

At its heart, a green finance program advances the science park’s sustainability by directly tying capital raising and funding decisions to environmental and social value created (or negative outcomes avoided). The resulting benefits for the investment team might be accessing new funding contingent upon meeting sustainable investing requirements, a higher return on investment from lower operating costs, regulatory risk reduction or greater financial efficiency—getting more done with the same revenue base.

Green finance can take several forms; for example:

  • The pooling of avoided costs (such as avoided energy and water rate hikes) and savings from capital programs in order to pay for newer projects, conserving the deployment of fresh capital.
  • Winning outside capital, from a source with allocated funds earmarked for property built using a third-party green building rating criteria.
  • The sourcing of funding from incentives and grants structured to help pay for green features.
  • A series of analytical protocols that aid the assessment of environmental outcomes alongside financial ones.

A system of measuring and quantifying the economics associated with resource savings can also provide a basis for structuring deals popular with university and corporate owners, such as sale leasebacks or build to suit real estate.

Applying Green Finance Strategies to Sustainable Science Parks

 

Figure 4. Applying Green Finance to Sustainable Science Parks

 

Figure 4 shows how applying green finance assessments and tools can assist the investment team in isolating efficiency and cash flow opportunities within a science park’s sustainability strategy. Essentially, the model details several ways in which positive environmental outcomes can be monetized to the park’s benefit.

Note that it does not expressly mention any costs or savings associated with carbon emissions. It is assumed that, if carbon regulations were introduced, then conventional building owners would see carbon tax costs flow through operating expenses, in addition to having their building assessed with additional investment risk in any future appraisal—lowering its value. In that scenario, the sustainable science park owner would realize the avoided cost of carbon emissions via lower operating costs and an avoidance of a discount to value tied to no carbon risk.

Tips for Getting Started with Green Finance

Following is a list of “low-level” easy as well as larger organizational initiatives that can help science park owners and managers to more effectively connect their finance and investment processes with their sustainability initiatives:

  • Include life cycle cost analysis within investment decision-making:
    Life cycle cost analysis compares the total costs of a project over its lifetime with the benefits it creates. It is the most widely accepted industry protocol for assessing environmental outcomes alongside financial ones.
  • Do not use a one size fits all payback periods:
    Using a single payback metric of 2 to 3 years is flawed because it assumes that the risks of all projects are equal (they are not), and it also forgoes assessing the likelihood of achieving the desired budget and environmental outcomes. Sustainability projects displaying a high probability of achieving the desired outcomes within budget but having a longer payback may be better than shorter paybacks with a lower probability of realizing desired outcomes. Multiple payback periods are also appropriate, which will result in the benefits from projects with shorter paybacks “financing” others with longer paybacks.
  • Underwrite energy and water efficiency to the green rating standard being achieved:
    This is the low-hanging fruit of the green project’s investment pro forma. For example, if the science park is building to LEED-NC v2.2 standards, then achieving the credits associated with Energy and Atmosphere and Water Efficiency credits will almost certainly require a review of the anticipated energy and water use and a recalculation of same within the project investment pro forma.
  • Understand Revenue/Expense Synergies when Underwriting:
    Similar to integrated design, sustainable projects generate benefits that come from a whole system of interactions—which often reflect in the cash flow. For example, water savings typically help reduce other energy costs. Commissioning not only results in lower repair and maintenance costs over the project’s life, but also a lower capital repair budget, due to longer equipment life. In multi-tenant rental settings, green buildings may not always generate rental premiums above their peers, but tenants clearly prefer them, which reduces vacancy costs due to faster leaseup and higher retention rates.
  • Understand how incentives affect science park owners and its partners:
    The work of many science park owners and managers will increasingly focus on the combination of incentives with other forms of financing that are expressly target the greening of properties. For example, the National Institutes of Health announced that the American Recovery and Reinvestment Act contains $10.4 billion allocated to the NIH for the next two years, within which is $1 billion for “extramural repairs, construction and alteration, $500 million for the renovation and new construction of NIH facilities and $300 million in shared instrumentation and capital equipment.23 Many nonprofit science park owners assume that their lack of tax liability precludes their projects from taking advantage of incentives. Many others are aware of a few, but do not have time to search comprehensively. They may also overlook that fact that many incentives (such as the federal Energy Policy Act of 2005) are structured so that a key partner, such as a general contractor may be able to claim the incentive instead – creating a valuable contract bargaining point.
  • Create an internal investment fund around operational, energy and water savings and avoided costs:
    The best way to make sure that your investment process is identifying and benefiting from most green efficiencies possible is to explicitly measure and pool these financial opportunities together and have a sub-process for discretely allocating those funds. Make them a reporting requirement on par with all other income and expenses. This will require a little extra effort at first, but it will get everyone’s attention. Of course, this requires implementation of the next suggestion, benchmarking.
  • Establish a portfolio wide benchmarking, measurement and verification of building performance:
    Start a benchmarking process along with continuous monitoring and verification of building performance within your existing building portfolio. This will help you to make future green finance decisions based upon knowledge of areas of financial success within your existing portfolio.

Conclusion

The first part of this paper laid out the potential cost reductions and financial opportunities for laboratories built using Labs21 EPC criteria. This portion of the paper explored the latest evidence that green buildings offer a strong financial case alongside many positive environmental and social outcomes—even against a backdrop of the U.S. real estate industry experiencing a severe downturn. Ironically, science parks, with their higher degree of operational leverage and resource intensity are in a unique position to benefit from the Labs21 program and its resources, which should be applied when considering recent federal stimulus legislation and which leans heavily in favor of sustainability-related initiatives. This new environment supports a strong business case for sustainable science park properties.

The paper further explored the need for finance and investment professionals dealing with science parks to adopt green finance tools and techniques provided by Labs21 in conjunction with other guidance such as LEED® within their overall sustainability planning, in order to maximize the potential benefits that any sustainability program could bring to the science park. The paper provided recommended actions for those professionals who would like to get started with green finance, noting, however, that there are many more techniques and potential capital sources which would need to be examined and included within any final fully operational green finance program. The authors would be pleased to engage the IASP community in partnership with Labs21 in support of these objectives.

References

    1. U.S. Environmental Protection Agency and Department of Energy. August 2000. Laboratories for the 21st Century: An Introduction to Low Energy Design.
    2. Alex Carrick. March 19, 2008. “Construction Cost Increases for Four Office Building Categories.” Reed Construction Data. http://www.reedconstructiondata.com/news/2008/03/construction-cost-increases-for-four-office-building-categories/.
    3. Davis Langdon. July 2007. Cost of Green Revisited: Reexamining the Feasibility and Cost Impact of Sustainable Design in the Light of Increased Market Adoption.
    4. U.S. Environmental Protection Agency and Department of Energy. “Energy Benchmarking.” http://www.labs21century.gov/toolkit/benchmarking.htm.
    5. U.S. Environmental Protection Agency and Department of Energy. Toolkit. http://www.labs21century.gov/toolkit/index.htm.
    6. International Institute for Sustainable Laboratories. http://www.i2sl.org/partnerships/index.html.
    7. Enermodal Engineering. 2004. NREL Office Building Energy Analysis. Golden, CO.
    8. Dave Williams, CEO of ShoreBank Pacific. March 4, 2009. “The Financial Perspective.” Presented at the Green Building Finance & Investment Forum.
    9. U.S. Green Building Council. “Building Impacts” (presentation). http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1720.
    10. RREEF Alternative Investments, “How to Green a Recession?—Sustainability Prospects in the US Real Estate Industry.” https://www.rreef.com/cps/rde/xchg/ai_en/hs.xsl/3157.html.
    11. McGraw-Hill SmartMarket Report.
    12. Turner Construction 2008 Market Barometer.
    13. Details of the full American Recovery & Reinvestment Act can be found at www.recovery.gov.
    14. Discussion with 120 real estate executives at the Green Building Finance & Investment Forum West, on March 3, 2009, during opening session titled, “Pension Fund Perspectives.”
    15. Galley Eco Capital is the organizing chair of the Green Building Finance & Investment Forum West, held March 2-4, 2009.
    16. Berkeley Program on Housing and Urban Policy. 2008. “Doing Well by Doing Good.”
    17. U.S. Green Building Council. http://www.usgbc.org.
    18. Greg Katz, principle of Good Energies. Presentation at GreenBuild, the U.S. Green Building Council’s national conference.
    19. U.S. Green Building Council. “Building Impacts” (presentation) http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1720.
    20. U.S. Green Building Council. “Building Impacts” (presentation) http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1720.
    21. Berkeley Program on Housing and Urban Policy. 2008. “Doing Well by Doing Good.”
    22. Association of University Research Parks. 2007. 21st Century Directions: Characteristics and Trends in North American Research Parks.
    23. National Institutes of Health. www.nih.gov/about/director/02252009statement_arra.htm.