Green Hotel Development Gaining in Popularity

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. 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.

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Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.