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Green building stuck in a gray area

Len Blundon, an employee of Brad’s Custom Carpentry LLC, Hartford, frames an entry arch March 7 at a home under construction at Concord Creek Reserve in Mequon. Pewaukee-based Tim O’Brien Homes Inc. is building the home, which will include green elements. (Staff photos by Kevin Harnack)

Brad’s Custom Carpentry LLC’s Len Blundon frames an entry arch March 7 at a home under construction at Concord Creek Reserve in Mequon. Pewaukee-based Tim O’Brien Homes Inc. is building the home, which will include green elements. (Staff photos by Kevin Harnack)

Predictions that the nation’s residential market will take on a more verdant shade in the next three years have forced appraisers and real estate agents to confront confusion over just what those green homes are worth.

About 23 percent of homes built in 2013 were green, which accounted for $36 billion in construction spending, according to a summary of a soon-to-be-released study by McGraw Hill Construction and the National Association of Home Builders. By 2016, according to the NAHB and McGraw Hill, that market share could grow to one-third, which would equal spending between $83 billion and $105 billion.

The predicted growth in green building is tied to, among other things, increasing energy costs, which is one reason why Donald Esposito, Madison market president for Pewaukee-based Tim O’Brien Homes Inc., said he expects Wisconsin to follow national projections. The state’s interest in green building is robust, he said, because the winters are notoriously harsh.

“It’s just not logical,” Esposito said, “that Wisconsin people would lose interest in saving energy.”

Appraisal problems

But even if interest remains high, so too will the hurdles to paying for green features in residential construction, said Jonathon Synovic, owner of Brookfield-based homebuilder Source 1 Project Solutions Inc. Appraisers often grapple with justifying loan adjustments for green elements, and that makes it difficult for homebuyers to prove to lenders what green features are worth.

‘Green home’ defined

The National Association of Home Builders defines a green home as one built to meet the requirements of the International Code Council 700 National Green Building Standard, the U.S. Green Building Council’s Leadership in Energy and Environmental Design program or a similar system.

A green home, if uncertified by those systems, is one that includes “responsible site planning” and elements designed to improve indoor air quality and efficiency for water, energy and resource use, according to the NAHB.

The struggle to find a value that lenders will accept is highlighted in the clash between green elements and the traditional appraisal systems that focus on sales comparisons, cost or income.

That struggle stems primarily from a dearth of sales comparisons, which often are the standard in determining value in the residential market, said Sandy Adomatis, an appraiser with Punta Gorda, Fla.-based Adomatis Appraisal Service and an instructor for the Chicago-based Appraisal Institute.

“The No. 1 challenge, I would say, is a lack of data,” she said.

Third-party certification would allow for those sales comparisons, but most green homes are not certified, Adomatis said. And even if one is, or if homeowners chronicle green additions through installation records and product descriptions, convincing lenders of the value still can be difficult, she said.

One certified home might be of little use to appraisers or lenders, said Bill Garber, director of government and external relations for the Appraisal Institute. Several certified homes, on the other hand, would give appraisers the points of comparison they need to include green in the value of a home.

“The appraiser’s hands are somewhat tied in doing that analysis,” he said, “because the data doesn’t exist.”

Certification costs money, and it is at a price few homeowners or homebuyers are willing to pay, said Tim O’Brien, president of Tim O’Brien Homes. He said his company builds only green homes, and his customers usually do not need to be convinced of green’s merits. But even they rarely pay for, for instance, a LEED certification, which usually costs between $1.50 and $2 per square foot, he said.

But even if appraisers could draw from a pool of certified homes for comparable sales, Garber said, resales still would be a problem because brokers often are wary of touting a home’s green features.

Builder doubts predicted
surge in green building

David Belman, vice president of Waukesha-based Belman Homes Inc., says he does not believe green homebuilding will increase as quickly as predicted in a study by McGraw Hill Construction and the National Association of Home Builders.

According to that study, green homebuilding accounted for 23 percent of the residential construction market in 2013. By 2016, that market share is expected to increase to between 26 and 33 percent. But Belman said the residential construction market still is fragile in the wake of the recession. Until homebuilding in general gains a firmer footing, he said, specialized building is not likely to grow. Adding to his skepticism, he said, are rising costs for building materials.

Overall, building material prices rose 0.6 percent in January, a trend that is expected to continue and to squeeze builders’ profit margins, according to the Associated General Contractors of America. Gypsum products’ prices increased the most, rising by 7.4 percent from December to January. Costs for lumber, plywood, cement, insulation, copper and steel all went up as well.

“I think that’s why you won’t see huge, huge spikes,” Belman said, “in the green building.” If homes in general will cost more to build, he said, homebuyers will be less likely to pay extra for green features.

“The green things are usually the extras,” he said, “and the goodies.”

— Beth Kevit

“It’s because the existing housing stock is largely not retrofit,” he said. “I think there is some fear on their part that promoting it could penalize properties that are not retrofit.”

Few options

Lacking the relatively easy comparisons of multiple homes that are certified, appraisers find little help in using the income or cost systems to identify value, Garber said. Cost, which is based on how much green features increase construction prices, applies best to new construction, he said.

The income approach, which is most widely accepted in the commercial market, finds value based on how much money green features save a building owner, Garber said. The value of energy-efficient features, for example, can be proven through savings on utility bills.

But that method makes lenders squeamish because it focuses on how much is saved, he said. A commercial property, for instance, can show how green elements led to collecting premium rents.

It’s difficult, Garber said, to apply the same formula to the way a home operates. And, as a result, lenders view the approach as a risk in residential.

Adding to the dilemma for appraisers is the form they use to record the information about a home. Adomatis said those forms are, for the most part, not designed to document green features. She said she helped the Appraisal Institute develop an addendum that would account for green features, but adoption has been low.

Only 185 of the 850 multiple-listing services in the nation have fields for green information, Adomatis said.

The Milwaukee-area multiple-listing service lets brokers indicate that a home has green features, but details must be submitted separately, said Betsy Head, a broker for the Whitefish Bay office of Realty Executives Integrity and a National Association of Realtors-designated green home specialist.

“You can disclose it,” she said, “but you can’t search for it.”

Those difficulties translating green in a home to something that is quantifiable have stoked lenders’ resistance, Garber said.

“There’s a real caution, I think,” he said, “that we make safe and sound loans.”

Loan underwriters, Garber said, want to be sure that green features will be worth the money spent to install them.

“It doesn’t do the developer any good,” he said, “to pump $10 million into a property that’s worth seven.”

Sharing the pain

Synovic said builders share appraisers’ frustration. When the housing bubble burst, he said, banks tightened lending requirements.

“The parameters set up for evaluation,” he said, “don’t allow for any interpretation anymore.”

He said appraisers stumble most over evaluating complicated improvements, such as solar panels and geothermal heating systems, but have an easier time understanding such simple features as tight building envelopes.

Adam Sankeu, an employee of Perrin Carpentry Contractor Inc., Waukesha, uses a nail gun to secure decking March 7 while building in the Quail Haven subdivision in Menomonee Falls. Waukesha-based Belman Homes Inc. is building the home with green features.

Perrin Carpentry Contractor Inc.’s Adam Sankeu uses a nail gun to secure decking March 7 while building in the Quail Haven subdivision in Menomonee Falls. Waukesha-based Belman Homes Inc. is building the home with green features.

“We’ll see a building trend,” Synovic said, “that will focus less on these systems that appraisers are having trouble with.”

And there will be a tendency to focus on the elements that age better than others, said Andy Pace, owner of Waukesha-based Green Design Center Inc., which supplies and installs green features in homes and consults with homebuilders. What ages best, he said, is a quality building envelope: insulation, windows and wall construction that reduce a home’s air infiltration.

“There’s no moving parts,” he said, “It’ll never break. It’ll never stop working.”

The features that do not age well, Pace said, either because they break or depreciate quickly, are the more complicated ones, the ones Synovic said stymy appraisers: solar panels and geothermal heating systems.

And if those elements are difficult for appraisers to value, there will be fewer points of sales comparisons and fewer builders putting those types of systems into homes, O’Brien said.

“I can’t build a home, a dark-green home, so to speak,” he said, “if the appraisers coming out don’t understand green.”

A dark-green home is the most advanced option, he said, and would include complicated features, such as a geothermal heating system.

O’Brien described a home his company was building in 2008 and 2009. The buyers, he said, wanted a geothermal system, but the appraiser could not persuade the lender to increase the loan.

“He said, ‘There are no comps out there. There are no homes that sold in the last six months with a geothermal unit,’” O’Brien said before pausing to laugh. “I believe you. But that doesn’t make it right that it’s zero value.”

Those buyers decided against including the geothermal system because they could not pay for it out-of-pocket.

Finding the value of green

Sean McKeown, an employee of Perrin Carpentry Contractor Inc., Waukesha, spreads adhesive March 7 before plywood decking is laid down at a home in the Quail Haven subdivision in Menomonee Falls. Waukesha-based Belman Homes Inc. is building the home with green features.

Perrin Carpentry Contractor’s Sean McKeown spreads adhesive March 7 before plywood decking is laid down at a home in the Quail Haven subdivision in Menomonee Falls.

Determining how much value a green element adds to a home is “the million-dollar question,” Head said.

“You might know it’s making a difference,” she said. “It’s just hard to evaluate.”

Adding to the difficulty, Adomatis said, is the likelihood that a homeowner has lost or thrown away paperwork describing green features. That can make it impossible for an appraiser to determine how much a feature was worth when it was installed and its residual value.

That, O’Brien said, underscores the importance of third-party certification despite the reluctance of consumers.

His company faced two major problems when it opened seven years ago, he said. First, he had to convince buyers that spending more up front would save money later on, and second, he had to back up the assertion.

The company solved the second problem by having a third party verify a home’s expected energy consumption through the state’s Focus on Energy program, and by having homes Green Built Home-certified by the Madison Area Builders Association. Some homes are built according to National Association of Home Builders’ green criteria.

Certification costs are built into the price of each home, Esposito said, making it easier for buyers to stomach the added expense.

But the larger problem of identifying value still exists, Garber said. The only solution, he said, is for the NAHB and McGraw Hill’s predictions to be true.

Homebuyers must build more green homes, and then they must, eventually, put them up for sale.

“Velocity,” Garber said, “is important.”

About Beth Kevit

Beth Kevit is the Milwaukee city beat reporter and also covers real estate. She can be reached at beth.kevit@dailyreporter.com or 414-225-1820.

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