Reducing Risk and Increasing Transparency in the Pre-bid Process
Date Posted: August 13, 2024
Posted In: Discussion, Ideas,
From Urban Land: Real estate transactions move swiftly, and to date, have been a missed opportunity to collect critical sustainability-related information that could influence bid pricing and underwriting. Particularly with the rise in building performance standards regulation and market demand for low-carbon spaces, buyers recognize that building inefficiency and inability to meet such demands put assets at future risk of devaluation or worse – financial stranding.
Going in blind has a direct impact on the asset’s assumed cash flows, ROI, and overall performance. The industry is held back by insufficient information on sustainability performance and climate risk of potential acquisitions at the pre-bid stage.
For example:
- A real estate investment company acquired an asset in Denver a few months before the Energize Denver rules were published without researching pending regulations during the pre-bid and due diligence phases of the acquisition. When the regulation passed, the company realized it would owe more than $2 million in fines annually. The city granted the company a one-year reporting extension, and they are now working with an engineering firm, their property managers, and their tenants to make decarbonization investments they had not budgeted for to mitigate the fines for next year’s reporting period.
- A real estate owner acquired an asset in Washington, D.C., and, within a few weeks of managing the asset, the company received a notification from a local government agency about an upcoming deadline to comply with the local building performance standard. Given the company’s short timeframe and lack of familiarity with the asset, they hired a consultant to help them submit their data and carbon reduction plan, and they still missed the deadline. Had the company been aware of this requirement in the pre-bid phase, they could have spent less money on consultants and fines and instead trained their staff to handle it internally, supported by consultants as needed.
ULI Greenprint members came together to address the challenges of insufficient information on sustainability performance and climate risk of potential acquisitions at the pre-bid stage, creating a Sustainability Pre-bid Checklist to help the buyer, seller, and broker communities coalesce around consistent sustainability data sharing and improve communication in the pre-bid process. The checklist is relevant for all types of deal structures.