California Eminent Domain Report

It is increasingly important for buildings to be energy efficient.  So-called green buildings can not only lead to more efficient energy use, but can also result in significant cost savings over time.  Indeed, green buildings may be more valuable than comparable buildings that are not as energy efficient.  This is an important factor to consider in eminent domain proceedings.  This point was driven home in a recent presentation made by Michael Frost, LEED AP, First Vice President at CBRE in its Palo Alto, California office.  He made the presentation to a diverse group of right of way professionals at the International Right of Way Association (IRWA), Chapter 42, the Silicon Valley Chapter of the IRWA.  Michael has an extensive background in green building issues and was the first LEED accredited commercial broker in Silicon Valley.

Michael explained that there is a LEED green building rating system that is a voluntary, consensus based, market driven system based on existing proven technologies.  The system evaluates exterior building design and construction, interior design and construction, and building operation and maintenance.  There is a point system based on several factors including: location and transportation; sustainable site; water efficiency; energy and atmosphere; materials and resources; indoor environmental quality; and innovative and regional priority.  Buildings can achieve four levels: Certified, Silver, Gold, and Platinum, depending on how many points a building receives under the rating system.

Michael pointed out that green buildings provide many benefits to both landlords and tenants.  For landlords, having a green building and a high score on the rating system can improve the value of the building because it may result in lower operating costs and lower energy costs.  This will provide the landlord greater flexibility and competitiveness in a competitive leasing marketplace.  For instance, it may lead to shorter lease-up times and higher rental rates.  For tenants, green buildings may provide a public relations and marketing opportunity, showing that the tenant’s business values energy efficiency.  It also may help with recruitment among millennials who are very concerned about energy efficiency and the environment.  Some of the other employee friendly benefits of green buildings, such as using natural lighting, better indoor air quality, and more responsive and controllable smart building systems (e.g., digital HVAC controls and networked lighting), may lead to greater productivity from employees.  Michael noted that, while sustainability and energy efficiency may not be the chief criteria for a tenant making decisions on where to locate its business, the smart-building benefits of green buildings can be an important factor.

Finally, Michael noted that, with respect to new construction and remodels, landlords today have less choice because regulations may require energy conservation measures in new and rebuilt buildings.  Some cities and counties may also have building codes that require a building to meet certain energy efficient standards.  Michael expressed confidence that energy efficient and green buildings are the wave of the future.  He noted that some countries, such as Germany, have made a major concerted effort at all levels of government to promote energy efficient and environmentally sustainable growth.

For those valuing a green building in an eminent domain proceeding, serious consideration should be given to the benefits that a green building provides to owners and tenants as compared to a non-green building.  These benefits may result in a material increase in value of a green building as compared to a non-green building.  At the least, the energy efficiency of a building and whether it is a green building should be thoroughly investigated by anyone valuing a building, and consideration should be given to how its energy efficient status impacts its value.