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Green Hotel Development
Gaining In Popularity


 
 
October 2007 - As a sign of its sweeping popularity, one of the best attended sessions at the recent Lodging Conference in Phoenix was:
“Going Green: Environmentally Profitable Hotels.” Some of the pioneers of the green hotel movement, including panel moderator, Howard Wolff, Senior Vice President of the architectural firm Wimberly Allison Tong & Goo, and Wen-I Chang, President of Atman Hospitality Group of South San Francisco, were there to share their challenges and triumphs in working toward a carbon constrained future.

What Is The Cost Premium For LEED-Certified?

Naturally, the biggest question on everyone’s mind was: How much more does it cost to develop a new hotel that meets the silver, gold or platinum standards of LEED (Leadership in Energy and Environmental Design) green building rating system?

According to Chang, developer of the only LEED gold-certified hotel in the world (the Gaia Napa Valley Hotel & Spa), his first LEED gold hotel cost about 15% more than a hotel built using conventional standards — but that was largely because of a late decision to go green, and starting off with advisors who had never built a LEED project. His next hotels built to the same standard were close to a cost premium of only 5%.

It is interesting to note that the green premium for Chang’s projects is significantly higher than the 1 to 2% premium that recent U.S.  Green Building Council (USGBC) studies have shown. Perhaps these studies involved projects with greater size and scale. Perhaps the developers of the projects studied made the decision to go LEED-certified earlier in the process, or were able to tap the right team of LEED experts or employ alternate designs and building systems. But, the fact is that the cost to go green is going down, and that is what is important.

What Incentives And Savings Offset The Costs?

Up front incentives. According to panel member Gary Golla, an associate with the architectural firm SERA of Portland, Oregon, there are many incentives currently offered to help offset the higher front-end costs of LEED-certified hotel development. These range from fast-track approvals for entitlements to actual incentive payments and from tax credits to replates. For example, a hotel developer in the audience reported that the city paid him a $250,000 incentive payment as well as an additional $250,000 in sewer hook up fees, because of the project’s reduced water usage.

Energy, water and waste disposal savings. On top of initial development incentives, high performance LEED-certified buildings have been proven to use 30-to-50% less energy than conventional buildings, 40% less water and up to 70% less solid waste disposal.  These efficiencies translate into reduced operating costs for the lifetime of the building. At today’s energy costs, with a 30-50% energy savings, a limited service hotel would achieve hard economic savings which would be the equivalent of increasing ADR by $1.80-3.00, and a full service hotel would have the equivalent benefit of increasing ADR by $4.00-6.75. You can do the math yourself for what happens as energy, water and waste disposal costs skyrocket with coming shortages, and regulatory implications. [See article by Ian Forrest, page 1.]

People will pay more for a green building. Panel moderator Wolff said that hotel owners who promote their environmentally friendly development and operations can also command higher room rates from guests who want to support these principles. Anecdotally, a member of the panel’s audience confirmed this, stating that he was able to charge 5% more for the rooms he retrofitted to green standards than those he billed as “regular rooms.” He added that he was in the process of gradually converting all of his rooms to green standards.

Wolff also noted that the new 7 World Trade Center in New York City, which was built in accordance with LEED standards, is now renting space at a premium rate. People want to work in the healthier environment of a more efficient high-performance green building.

More valuable buildings. Panel member Greg Hartmann, Managing Director, HVS International in Boulder, Colorado, an internationally recognized consulting and valuation firm, said that in addition to all of these benefits, the owners of green hotels will see higher resale values when they are ready to sell.

Lessons Learned: How To Build Green

With the economic “why” for green development established, the panel also gave the audience some good “how to” advice for developing green. First, is making the decision to go green before you start anything, and then getting a green building team on board at the earliest time possible. Your team should be experienced in everything from site layout and design to building certification requirements, city and other incentive programs and green certified building materials and systems. They need a clear understanding of the LEED certification process, which can be lengthy and complicated. Second, it is important to find out all you can about green hotel development. There are lots of available resources to learn more about the process, including several publications and Web sites, and a good foundation of knowledge makes for a sounder development overall.
 

Shades Of Green
A revolution is under way! Soon we will all be thinking “GREEN” in nearly every material decision we make, hotel development included. If you don’t think your hotel guests are starting to evaluate your “shade of green” in making hotel selections, think again. The number of hospitality projects we are asked to review with an eye toward making them greener is growing daily, and more and more we are asked to analyze the rules and regulations of going green. With new laws and regulatory approaches cropping up everywhere as politicians worldwide jump on this politically correct bandwagon, navigating some of the more stringent requirements is becoming increasingly complex. Even “hiccups” in the financial markets won’t be able to slow this inevitable sea change, and lawyers as well as their clients had better learn to see the benefits of compliance rather than the headaches.

Soon every lender and capital provider will have a checklist item for a hotel’s “green” quotient; that is, the specific costs of complying with climate change regulations and requirements.  Hard evidence of this can be found in the petition filed on September 18, 2007 by an impressive list of governmental and institutional investors with the Securities & Exchange Commission. That petition called for a more full disclosure of all material information on the costs of compliance with environmental legislation. To be sure, no capital source wants to get stuck with a portfolio that has a non-green asset, one which will bring with it the future obligation to make the asset “green” in order to comply with laws or to make the asset marketable in the future.

Yes, just as it has become socially unacceptable to litter, it will soon be socially unacceptable to have a non-green hotel. This paradigm shift in green thinking will impact every aspect of our lives, where we will consciously or unconsciously consider the environment in every act we take. Hotel patrons will consider turning their lights off when they leave their rooms, stop demanding fresh towels when they return, want natural fiber bedding, non-toxic soaps, and so on. In essence, consumers may very well decide to stay at a particular hotel simply by the “color” of it, and the deeper shade of green an establishment is, the greener that hotel developer’s bank account will become.

So, is it worth the economic burden to go green? Yes. Is it challenging? Yes. Are there resources out there to help developers ride the green wave without drowning in it? Yes. Still, there is no doubt the process will be complicated, especially in light of the difficult economic cycle our country is in. Nevertheless, this is also a time in which only the most creative, savvy and practical hospitality professionals will win. It does not appear, at least in the short to mid term, that any rise in the real estate tide will save the inexperienced investor or developer who isn’t wise enough to capitalize on the importance of branding themselves “GREEN” — now!

And our special thanks to Howard Wolff for recommending the UNLV-JMBM Hotel Developers Conference being held March 11-13, 2008 at the Green Valley Ranch Resort & Spa in Las Vegas, Nevada. This is not just an introduction to green development, this is a comprehensive, 2-day program entirely devoted to green hotel development. For more information, to register or to participate in sponsoring the conference or being an exhibitor, go to: www.jmbm.com/thdc.



Catherine DeBono Holmes is a senior member of JMBM’s Global Hospitality Group® and a partner in the firm’s Corporate Department, specializing in financial and investment services. Because of her background in representing investment advisers, securities brokers and real estate brokers, she brings an additional expertise to hotel owners seeking financing through securities and/or sales of condo hotels. Working with several developers of luxury mixed use resorts throughout the United States and in Mexico, Costa Rica and the Caribbean, she includes Gencom, Grand Sierra, Remington Hotels and The Trump Organization, as her clients. In addition, she advises condo hotel developers on working with local government authorities to obtain approval for their projects, and discusses ways condo hotel units can be sold legally here and abroad. Catherine can be reached at 310.201.3553 or cholmes@jmbm.com.

Copyright © 2007 Jeffer, Mangels, Butler & Marmaro LLP (JMBM). All rights reserved. Global Hospitality Advisor® and Ask the Hotel Lawyer™ are trademarks/service marks of JMBM. The Global Hospitality Advisor® is published four times a year for the clients and friends of JMBM.

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Contact:

Jim Butler
Chairman, Global Hospitality Group
Jeffer, Mangels, Butler & Marmaro LLP
1900 Avenue of the Stars, 7th Floor
Los Angeles, CA 90067-4308
(310) 201-3526 direct
jbutler@jmbm.com
www.HotelLawBlog.com

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Also See: How Global Warming Laws Will Affect Hotels; Will California’s New Legislation Set The “Standard” For The Country? / Global Hospitality Advisor / October 2007
Building a Green Hotel - The Challenges of Certification / Jim Butler / June 2007
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