‘Green’ building can mean any number of things for a developer. It can be taking simple energy efficiency measures and capitalizing on federal rebates: or building a mixed-use community certified as LEED ND (Neighborhood Development), with LEED certified office, retail, and residential inside.

From a planning perspective, ‘green’ development has been more or less known as New Urbanism for decades and has proven to be very successful in the marketplace. Transit-orientated high-density mixed-use developments are in high demand from consumers and regulators, who are growing more and more resistant to sprawl and the infrastructure demands that come with it. Turning the different stakeholders into partners working together, instead of adversaries competing over every detail, will ultimately lead to a more effective and efficient give and take and a better final product in a shorter time. Consider the legal, engineering, and finance costs that could be saved by speeding up the plan approval and permitting process. It is also worth noting that one of the key concepts of ‘green’ building is density in the right locations. By working with the regulating bodies to do ‘green’ development, a developer could add significant density, dramatically increasing revenues.

On the building side, ‘green’ building strategies like passive solar and thermal mass go back millennia. Recently, the US Green Building Council (USGBC) has come up with the Leadership in Energy and Environmental Design (LEED) rating systems.

These rating systems have become the de facto standard of ‘green’ building and have had such success that they are used as a reference point for various regulations and incentives across America and Canada. For example, Chicago now mandates that all buildings built by the city be LEED certified. In DC, all new large commercial projects will be required to build to LEED certification by 2012. Click here for information on legislation in your area.

The standardization provided by LEED has allowed for effective market studies of the costs and benefits of LEED building. The results are incredible. They show that building ‘green’ adds 1-7% in building costs depending on the level of certification sought, and averages 2%, or $4/sq ft. The energy savings alone average a total of $5.80/sq ft for the first 20 years. The total benefits averaged between $10 and $15/sq ft, a 150-275% return on investment. That does not even take into account the benefits of using leverage. If you are not going to own the building and be there to earn the full lifetime return, the current market provides a sales premium for LEED certified buildings for example, of 10% to 35%, a 400-16,500% dollar for dollar ROI. This is the kind of return you can only get in the early stages of a growth market. To find a growth market niche within the otherwise stagnant and highly competitive real estate market would be a great opportunity for any builder/developer to gain a competitive advantage and position themselves for the future.

The economics of going ‘green’ are impacted more powerfully by the sentiment of people than any valuation tool. As people begin to desire to live in ‘green’ homes and ‘green’ communities more and more the economic power of that emotional desire will force builders and developers to either adapt or die. It is possible to place some relative economic value on human health, but when it comes to the health of their families and themselves, people are prone to be very price inelastic.