Mr. Dahm

Insurance

Green Buildings & the Implications on Your Hotel Insurance

By Richard Dahm, Senior Risk Consultant, National Hospitality Division, Wells Fargo Insurance Services

As oil penetrates the $130-a-barrel mark and natural gas prices increase to rates four times what they were since the late 1990s, the use of green building (or building green) has taken seed to a new beginning to reform the cost of energy across all sections of industry. Green building is no longer just another popular cause or fad; it is here to stay as a vital and profitable part of the commercial real estate and construction industries. Anyone in the building trades or anyone involved with real estate investing or leasing needs to understand fully -- green building trends, opportunities, and consequences that can affect all areas including building codes, insurance rates, employee health, customer satisfaction, and more. This article will set out to serve as a survey of the important fundamentals and forecasts of what has happened and what will happen going forward in the efforts to build a green environment. In order to understand the green building movement, one must define what green means, its roots in government, its regulatory offspring, the LEED certification system, its growth forecast, profitability, banking, and insurance industry efforts, and its affect on states such as Florida and all those that are adversely effected. While southern states may have a stronger need for going green, all states and industries can benefit from the reduction of energy costs.

Green Building Benefits

The benefits are persuasive: energy savings, waste reduction, reduction in water use, enhanced indoor air quality, and inexpensive operating and maintenance costs. Not to mention, creating a better public image and increasing worker productivity, employee morale, retention, and overall better health.

Designed for cost effectiveness, green buildings reduce energy costs through the integration of site orientation, on-site renewable energy producing technologies (such as solar power and hydrogen fuel cells), natural daylight, and ventilation technologies, downsized HVAC, and many other energy-saving technologies. One can realize significant savings during the life of a green building with low-maintenance materials, smart building controls, salvaged construction debris, water-saving equipment, and natural landscaping.

In addition, employee productivity improves when increased daylight, fresh air, and access to pleasant views are incorporated into the workplace. It also improves employee health and well-being by improving air quality, reducing emissions, and providing natural light.

National estimates put the savings resulting from green building in the billions of dollars. These are healthy buildings and as such reduce exposure to legal claims and liabilities to the owner. On the other hand, sick buildings have seen rate hikes and mold exclusion clauses by the insurance companies soaring. As green buildings become more common, insurance companies are recognizing the benefits and are linking lower premiums to higher environmental performance.

Green buildings create value for tenants, increase property values, and may be eligible for incentive programs. Costs can be reduced significantly through flexible design features common to green buildings and substantial savings are realized on a per square foot basis when energy consumption is reduced. Green buildings offer easier maintenance and lower operating costs, which translate to a higher market valuation.

If commercial real estate can reduce energy consumption by 10% over the next 10 years, facility managers across the country should be able to reduce costs by $24 billion and cut greenhouse gas emissions equivalent to the emissions from 15 million cars. That is a significant and attainable goal achieved through a combination of strategies which include: green design, retrofits, green technologies, and no cost or low cost energy efficient operating strategies.

Defining Green Building

Today, building green means several things:

1. Recycle and refurbish the environment by living and building in environmentally friendly ways. Not only can green living minimize the harmful scars left on the environment, it can enable the energy clock to run backwards in time by contributing once again to the water, land, soil, and energy.
2. Construct with sustainable assets or use recycled materials that help to undo existing environmental damage. Huge improvements in sustainable building materials, derived from renewable and unlimited resources have been made using bamboo, hay, compacted earth, and cornstalks. These sustainable materials have the advantage of not polluting the environment in their manufacture and being energy efficient. Moreover, engineers have discovered ingenious ways to utilize this endless supply of excess products to develop environmentally friendly building materials.
3. Public awareness and creative design helps minimize energy consumption of other everyday resources. Energy efficiency has returned to the public consciousness and people are paying attention to the numbers when purchasing appliances and insulating the home including the continued use of solar power.
4. Make a minimum impact on the environment by building smart. Smart construction or intelligent retrofitting can save water, land, and fuel while at the same time easing your conscience; it is one of the most exciting areas according to some green building groups.

Forecasting Green Growth

The National Association of Home Builders (NAHB) says inquiries into green practices are up more than 250 % from last year. Commercial green building and development projects will increase 30 % over the next five years, according to estimates by the National Association of Industrial and Office Properties (NAIOP). The organization also reports that more than half of the world's 500 largest corporations issuing sustainability reports in 2005 say that they want to build and occupy real estate that reflects their values -- which includes green building practices.

A recent survey by McGraw-Hill Construction projected the near-term market growth in green construction for the following building sectors: Education, 65 %; Government, 62 %; Institutional, 54 %; Office, 58 %; Health care, 46 %; Residential, 32 %; Hospitality, 22 %; and Retail, 20 %.

Owners and developers of commercial and institutional properties are advancing green development through state-of-the-art tools, design techniques, advanced green products, and creative use of financial and regulatory incentives like Executive Order 13423, Strengthening Federal Environmental, Energy, and Transportation Management, signed by President Bush on January 24, 2007. It sets goals in the areas of energy efficiency, acquisition, renewable energy, toxics reductions, recycling, renewable energy, sustainable buildings, electronics stewardship, fleets, and water conservation. Furthermore, the order requires widespread use of environmental management systems as the framework to manage and continually improve these sustainable practices.

What Sparked the Green Trend?

A combination of factors have sparked the green building movement, including concern about the environment, the abundance of environmentally friendly building materials, economic incentives, and the financial savings that green building offers. A leader in promoting high performance green building has been the United States Green Building Council (USGBC).

Founded in 1993, the USGBC has rapidly grown into a coalition of over 4,800 companies and organizations within the building industry promoting the design and construction of buildings that improve environmental performance and economic return, while providing healthy places to live and work. Membership is comprised of manufacturers, property owners, contractors, developers, builders, architects, engineers, attorneys, nonprofit organizations, state and local governments, federal and state agencies, universities and research institutes, and professional societies.

The membership list is a distinguished one: Armstrong World Industries, Inc., Benjamin Moore, Centex Construction Company, Firestone Building Products, Hines, Honeywell International, Sherwin-Williams, Siemens Building Technologies, Target Stores, Whirlpool, Duke University, Harvard University, and the cities of Atlanta, Boston, Chicago, Los Angeles, New York, Orlando, Portland and Seattle.

In 2000, the USGBC published a voluntary, consensus-based rating system to define and measure the standard for a high performance green building: the Leadership in Energy and Environment Design Green Building Rating System or LEED(R) Rating System. Since then, LEED has become the widely accepted national standard for green building design, construction, and operations.

The LEED Rating System

The LEED Rating System is a point-based system that evaluates the sustainability of a building based on the integration of green concepts. Building projects earn one or more points by meeting or exceeding LEED criteria outlined as six major categories: sustainable sites, water efficiency, energy and atmosphere, materials and resources, indoor environmental quality, and innovation and design process. A project must achieve at least 26 points to receive LEED certification. There are four LEED certification levels: certified (26-32 points), silver (33-38 points), gold (39-51 points), and platinum (52 or more points).

LEED Certified Buildings in the United States:

Prior to the advent of LEED certification, there was little incentive and no uniform standard for recognizing green buildings. Today, there are approximately 1,500 projects seeking LEED certification and over 120 LEED certified buildings in the United States. These are just a few:

1. City of Seattle Justice Center (Seattle, WA)
2. Chicago Center for Green Technology (Chicago, IL)
3. Conservation Law Foundation Building Extension (Boston, MA)
4. Eugene M. and Christine Lynn Business Center at Stetson University (DeLand, FL)
5. National Association of Realtors Washington Headquarters Building (Washington, DC)
6. Premier Automotive Group North American Headquarters (Irvine, CA)
7. Rinker Hall at the University of Florida (Gainesville, FL)
8. Whitehead Biomedical Research Building at Emory University (Atlanta, GA)

Florida, A Leader in LEED Certified Buildings

In the last two years, the number of South Florida projects registered with the Washington, D.C.-based U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) program has jumped from four to 25. These green projects include offices, commercial centers, and government buildings like the Broward County South Regional Library in Pembroke Pines, which opened in December. Sarasota County commissioners turned to green building, beginning with a look at what they could do in their own facilities. In 2002, they passed a sustainability resolution that said all new county buildings would green buildings.

In Sarasota, the solar-powered Twin Lakes office complex and the non-irrigated North Sarasota Public Library are both 40% to 50% more efficient than conventional buildings. In 2005, the commission passed the first green-building incentives program in the state. Developers who pledge to build green get a fast-track permit, with approval in a week instead of upward of two months. As soon as the Florida Green Building Coalition certifies the building, the county refunds $1,000 in permitting fees.

Banking on Building Green

Wells Fargo & Company said it has provided $64 million in financing for the construction of two green buildings: a customer service center for Royal Caribbean Cruises in Springfield, Oregon and the Banner Bank Building, Boise, Idaho. "The green building movement is a national phenomenon that is good for all our stakeholders and is strongly supported by the public sector, and it is definitely gaining momentum in the private sector," says Bill McGee, Vice President of Commercial Mortgage, at Wells Fargo. "We're seeing building professionals who understand and appreciate the environmental benefits of green building technology, plus more and more developers are implementing energy saving and other green building strategies."

Moreover, Tony Sciortino, Vice Vresident of Commercial Mortgage Services for Wells Fargo's Commercial Mortgage Group points out that "over time, appraisers and investors will highly value buildings that have a longer life, better performing systems and lower operating costs" while those "lower costs will boost net operating income, a key factor when using the income approach to appraising property."

Energy Efficiency Equals Reduced Losses

Evan Mills, Ph.D., of the Lawrence Berkley National Laboratory in Berkley, Calif., has written extensively about the insurance benefits of energy-efficiency and renewable energy options and their potential for risk management and loss reduction.

He says energy efficient systems can reduce insurance losses in commercial property, as well as boiler and machinery, builder's risk, business interruption, completed operations liability, comprehensive general liability, contractor's liability, environmental liability, product liability, professional liability, service interruption, workers' compensation, health and life, and homeowners insurance.

"It should also be noted, that the addition of new products/technologies will increase the insured value of green buildings, which, of course can mean more premium volume for insurers," Mills said.

Green Building Coverage

Fireman's Fund Insurance Co. recently announced new coverage aimed at promoting green building with the introduction of Certified Green Building Replacement and Green Upgrade products. While conventional policies cover building restoration to its original condition, Fireman's Fund is now providing three new products that will enable commercial property owners and managers to rebuild and replace using green alternatives.

First, owners of a certified green commercial building can purchase the Certified Green Coverage Form from Firemen's Fund. The form is similar to traditional property loss coverage, but with expanded definitions that include coverage of structures like vegetated roofs, solar panels, and bio-gas electricity generation plants. This is similar in price to existing property loss coverage.

In addition, the Real and Personal Property Update Form is for commercial property owners who wish to cover a not-yet-green building that they want to make into a green building in the event of damages or a total loss. This form allows for, in the case of such an event, the installation of replacement materials like non-toxic paints, Energy-Star-rated equipment, low-energy interior lighting, and water-efficient indoor plumbing. Fireman's Fund encourages owners to increase the limit they select by 1.5 % over the actual cost of the building to reflect the cost of building as certified.

The third product, Building Commissioning Expense, provides coverage for the cost of commissioning: the costly inspections by certified engineers necessary to certify a re-built building as green in the wake of a total loss. Such commissioning, which is required by both the U.S. Green Building Council and the Green Building Initiative can run in excess of $25,000. The insured pays 50 cents in annual premiums for every $100 they get in coverage.

For buildings that are green certified by the USGBC or the GBI, Fireman's Fund will cover sustainable building elements such as vegetated roofs and alternative energy and water systems. In the case of a total loss, they will cover the rebuilding to be green certified as well. For buildings that are not quite there yet, but are looking to go green, they provide an upgrade package as part of its green product. For example, if there is a fire in the building, they will pay the upgrade to replace the carpet with green certified carpet and Energy Star office equipment. Here again, if there is a total loss, they will cover the entire rebuild to be green certified.

A Green Bottom Line

As mentioned early on, anyone in the building trades or anyone involved with real estate investing, leasing, banking, or insurance needs to understand fully green building trends, opportunities, and pitfalls. It can affect building codes, insurance rates, employee health, customer satisfaction, loans, premiums, etc.

We should address green building throughout the entire lifecycle of a project: from concept to planning, to programming, design, construction, and ownership. It demands systematic considerations of environmental impact, energy use, natural resources, economy, quality of life, and building and refurbishing costs.

Some green building efforts may turn a profit early on while others may kick-in down the road, but nonetheless, investigating all options for a healthier environment and investing in them wherever and whenever possible will have a positive affect on everyone's future and everyone's environment.

Richard Dahm, Jr. is senior risk consultant for the National Hospitality Division of Wells Fargo Insurance Services, Clearwater, Florida. His expertise includes property, restaurant/hotel facilities, and risk management. He holds a BA in management from Eckerd College and an MBA from DeVry University. Richard is a member of the Florida Restaurant and Lodging Association. Mr. Dahm's knowledge, coupled with his professional staff of claims, safety, and marketing professionals enables him to provide hospitality executives with consultation that reduces insurance risks and premiums. Mr. Dahm can be contacted at 800-282-3343 Ext: 5436 or Richard.Dahm@wellsfargo.com Extended Bio...

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