The Economics of Change

THE ECONOMICS OF CHANGE

INTEGRATED VALUATION TOOL TM DEVELOPMENT

CONTENTS

Grant Proposal Executive Summary Economics of Change Project Team Economics of Change Advisory Council Technical Appendix The Economics of Change:

Integrated Valuation ToolTM Development

AUTHORS: Theddi Wright Chappell, CRE, MAI, FRICS, AAPI, Sustainable Values Inc. Stuart Cowan, Ph.D., Autopoiesis LLC Richard Graves, International Living Future Institute Jason Twill, Systems Economics LLC

October 31, 2013

1501 East Madison Street Suite 150 Seattle, WA 98122

2 The Economics of Change: Integrated Valuation Tool Development TABLE OF CONTENTS

GRANT PROPOSAL EXECUTIVE SUMMARY 4 Background 4 Approach 5 K ey Benefits Key 5 S cop e of Work Scopeof 6 Shifting Investment Towards Living Building Using Integrated Value 6 Sample Dashboard of “Full Spectrum” Integrated Value 8 B ud get and Timeline Budgetand 12 Proposed Funding Sources 13

ECONOMICS OF CHANGE PROJECT TEAM 14

ECONOMICS OF CHANGE ADVISORY COUNCIL 15

TECHNICALAPPENDIX 16 R eq uest for Proposal Requestfor 17

3 GRANT PROPOSAL EXECUTIVE SUMMARY

BACKGROUND The built environment accounts for roughly 50% of U.S carbon emissions and contributes to a web of significant, interconnected environmental and social problems. Over the past decade, the green building movement has incubated a critical mass of professionals capable of designing and delivering buildings that dramatically reduce or eliminate greenhouse gas emissions while also creating enduring ecological and social value. However, current lending approaches, appraisal protocols and valuation models largely fail to account for ecological and social value creation, distorting the market and slowing innovation and green building market growth.

In order to transcend these barriers, the Economics of Change project was established in 2011 as an interdisciplinary market transformation project under the leadership of the International Living Future Institute. By integrating practical knowledge of the real estate market with expertise in sustainable design, complex systems analysis, and ecological economics, a diverse team of experts has been pooled together with the ability to support a catalytic shift in both theory and practice within the real estate investment sector. Economics of Change has defined a theory of change for the real estate industry that includes three closely linked initiatives: • Local, state, and national policy innovation to provide incentives for high-performance green buildings.

• Integrated Valuation Tool™ development to inform a new generation of appraisal and valuation models that account for ecological and social value creation. • Industry transformation through new standards, protocols, and processes around appraisals, valuation, lending, and investment.

4 The Economics of Change: Integrated Valuation Tool Development GRANT PROPOSAL EXECUTIVE SUMMARY

APPROACH This proposal is focused on the creation of an Integrated Valuation International sustainable Tool™ . The key deliverable is an open-source real estate investment accounting and modeling software platform that is compatible with current measurement efforts industry standard platforms such as ARGUS® and EXCEL, yet will increasingly recognize five enable investors – for the first time – to tap into new value streams distinct forms of Capital. for the built environment beyond conventional methods. The Tool Human Capital: Education, will embed a wide range of identified avoided externality risks as Training, Health… well as make transparent new ecological and social value layers Social Capital: Governance, presently unrecognized using industry standard methods. Security, Civic Institutions, The core elements of this work will consider how the five forms of Community Facilities and Services… capital (human, social, built, natural, and financial)1 may be directly woven into an investment model to both expand and challenge our Built Capital: Buildings, Built current definition of value within the real estate industry. Infrastructure, Materials Economy… KEY BENEFITS Natural Capital: Biodiversity, The Integrated Valuation Tool™ will help shift the market towards Ecosystem Services, Ecological Infrastructure… restorative new construction and deep green retrofits in three distinct ways: Financial Capital: ROI, IRR, NPV, Market Cap… • In the hands of private investors, the Tool will demonstrate potential added income (from positive externalities) or losses (from negative externalities) that may occur in the medium to long-term through changes in policy, tenant preferences, etc., allowing owners to systematically evaluate risks, liabilities, and upside. This will influence and shift decision making towards outcomes that benefit both investors and the public.

• In the hands of policy makers, the Tool will serve as a catalyst to support integrated policy measures that will shepherd an era of full spectrum, true-cost, lifecycle accounting for buildings, communities, cities and regions. This will give new opportunities for the world’s cities and towns to evolve in more socially and ecologically beneficial ways. • In the hands of public and private project developers, the Tool will provide a transparent and credible accounting of neighborhood, city, and regional-scale benefits that can be used as the basis for negotiating public-private partnerships (PPPs) and mission-related investments.

1 See http://www.forumforthefuture.org/project/five-capitals/overview.

5 SCOPE OF WORK

Task 1. Framework Development

The Economics of Change project has developed a comprehensive framework for understanding the combined economic (market), social, human, and ecological value creation in buildings, districts, and infrastructure.2 The project has introduced a critical new valuation concept:

Integrated Value = Market Value + Net Externalities

This concept serves as a bridge between existing valuation (and appraisal) models that by definition focus on current market value and more comprehensive, 21st century valuation models that explicitly account for the economic value of positive (and negative) ecological and social impacts resulting from buildings and infrastructure.

SHIFTING INVESTMENT TOWARDS LIVING BUILDINGS USING INTEGRATED VALUE As our built environment moves along the sustainable design spectrum from code minimum standards toward “less bad” outcomes more and more negative externalities are mitigated or avoided. By merging improved design processes with appropriate technologies we can even begin to transcend the “neutral impact” sustainable threshold, as demonstrated in the image above, to restorative standards by generating positive externalities. This is a point along the spectrum where the environmental and social impacts of our buildings and infrastructure shift from a net negative burden borne solely by the public to a net positive benefit that can be largely enjoyed by the public while also offering enhanced, multiple-bottom line returns for owners and investors.

Currently, within the United States, our research suggests an investment barrier exists around LEEDTM Gold/Platinum thresholds. We attribute this barrier to the “market value/cost horizon,” the point at which costs incurred to achieve more sustainable outcomes are no longer justified through increased market value recognition.

The framework developed by the Economics of Change project offers a pathway to transcend this investment barrier and support a wholesale investment shift towards more restorative outcomes in our built environments. However, the framework will only be effective when fully supported by rigorous underlying valuation algorithms and data sets.

2 See The Economics of Change: Catalyzing the Investment Shift Toward a Restorative Built Environment by Jason Twill, David Batker, Stuart Cowan, and Theddi Wright Chappell. Earth Economics: Tacoma, WA: 2011.

6 The Economics of Change: Integrated Valuation Tool Development LIVING BUILDING

CODE CHALLENGE LEED GOLD LEED SILVER SUSTAINABLE LEED PLATINUM LEED CERTIFIED INTEGRATED VALUE

INVESTMENT BARRIER COSTS MARKET (+) VALUE EXTERNALITIES

(-) EXTERNALITIES

As buildings move from "code" minimum standards toward built capital that is sustainable or even restorative, as with Living Buildings, their environmental and social impact begins to shift from burden borne solely by the public to that which benefits both private developers and the public as a whole. Currently, an investment barrier exist around LEED-Gold thresholds when the costs incurred to achieve more sustainable buildings begins to outweigh their market value. By updating economic models to include the negative externalities associated with the built environment, an "integrated value" emerges. A green building's integrated value includes its traditional market value in addition to the environmental and social value which it provides.

Task 2. Valuation Algorithms

Economics of Change has created a comprehensive taxonomy of ecological and social benefits (and costs) of the built environment. Some of these are shown schematically in the figure below as a sample “dashboard” of key project indicators that could be displayed by the software tool.

Standard templates will be used to describe, qualitatively and quantitatively, the attributes of green building features such as vegetative roofs, natural ventilation, enhanced air quality and human health through elimination of toxins, etc. in order to derive an assessment of ecological and social

7 benefits (and costs) for a given building or infrastructure project in a specified location. Appropriate methods from the field of ecological economics3 will then be used to determine a range of equivalent economic values, taking into account demographic, climatic, and other site-specific factors as well as inherent uncertainties in the modeling process. These valuation algorithms will include:

• Hedonic pricing (statistical modeling based on a sample set of existing buildings to determine the relative contribution to building market value of specific factors like proximity to open space or fresh food)

• Market price-based approaches when there are existing markets for benefits • Cost-based approaches that estimate the cost to provide a benefit stream (e.g. occupant health and well-being) using other methods

• Production function-based approaches, contingent valuation, choice modeling, group valuation, and other widely accepted methods

• Benefit transfer techniques to extrapolate values from one geography to another

SAMPLE DASHBOARD OF “FULL SPECTRUM” INTEGRATED VALUE

Task 3. Data Sets

Economics of Change will utilize a wide range of data sets to support and validate every aspect of the modeling process. These will include building databases; ecological and social benefits derived from green features, systems, and whole buildings; bioclimatic data; demographic data; and a range of other integrated value-modeling data.

Economics of Change has prepared a detailed Request for Proposal document (see Technical Appendix) to engage an internationally recognized vendor to support Tasks 2 and 3 of this proposal. It is anticipated that vendors submitting qualifications may include: • Gist Advisory under the leadership of Pavan Sukhdev (study lead for The Economics of Ecosystems and Biodiversity, a project of the United Nations Environment Programme) • Trucost, a leader in estimating environmental and social externalities • Deloitte’s Sustainability Services Group (UK) under the leadership of Guy Battle • Earth Economics, a non-profit that provides science-based ecologically sound economic analysis and policy recommendations. • Other qualified firms

3 Ecological economics, with modern roots in the 1990s, extends the methods of neoclassical economics to provide a comprehensive approach to understanding tradeoffs and opportunities among Human, Social, Natural, Built, and Financial Capital within the fundamental biophysi- cal constraints of the planet.

8 The Economics of Change: Integrated Valuation Tool Development Task 4. Case Studies of Existing Buildings The framework, valuation algorithms, and data sets will be tested on a group of 3-4 existing high performance buildings, including one Platinum LEEDTM and at least two Living Buildings in order to validate the overall approach, assumptions, and usability. An additional case study on an infrastructure project may be undertaken, perhaps in partnership with NRDC through its initiative

9 on green infrastructure financing.4 These case studies will be carried through as conceptual testing opportunities for the Beta Version software. Detailed results from the case studies will made available as part of the overall project’s deliverables.

Task 5. Beta Version Software Platform

The Integrated Valuation Tool™ will initially be released in a beta test version for a range of corporate, governmental, and non-profit organizations active in transforming real estate investment models, including: • The Urban Land Institute • The United Nations Environment Programme (Responsible Property Investment Initiative) • The Center for Responsible Development • The Prince’s Accounting for Sustainability Project • The Sustainable Accounting Standards Board • The Tellus Institute • The Natural Resources Defense Council (Center for Market Innovation) • The New Economy Institute • Leading academic institutions (Harvard, Tulane University, New York University, and the University of Arizona) The software will use off-the-shelf components to provide the following key features: • Unified interface that allows simple entry of standard real estate project information, green building features and specifications, and relevant project-specific incentives; • Applicable to a basic version of all standard real estate investment types: multi-family housing, office, retail, industrial/storage, hospitality, and health care; • Analysis of existing buildings and infrastructure, green retrofits, or new development and infrastructure projects; • High-level “dashboard” showing order of magnitude levels of a wide range of ecological and social benefits along with financial returns; • Ability to export modeling results to either ARGUS® software or a standardized EXCEL format; • Open source, offering visibility to underlying valuation algorithms, data sets (when possible), and model calculations along with the ability to make annotations and adapt software platform for new applications

4 See http://www.nrdc.org/greenbusiness/cmi/green-infrastructure.asp.

10 The Economics of Change: Integrated Valuation Tool Development After initial work on Tasks 2 and 3, Economics of Change will prepare a detailed Request for Proposals (RFP) to engage a software development vendor to support Tasks 5 and 6.

Task 6. Final Release After a period of peer-review and beta testing, the final 1.0 software release will be made under a suitable Creative Commons open source license, allowing free use for all users, but not commercial sale of any modified version of the software. It is anticipated that consulting fees related to the software and underlying framework, algorithms, and data will support continuous upgrading of all aspects of the software. This may include inclusion of additional externalities, algorithms and methodologies, and data sets. The Integrated Valuation Tool™ is intended to become a new real estate standard, interoperable with existing investment modeling software and accepted as technical support for appraisals and underwriting under well-defined and industry accepted protocols.

11 BUDGET AND TIMELINE

TASK SCHEDULE ECONOMICS VALUATION SOFTWARE TOTAL OF CHANGE / DATA SET VENDOR TEAM VENDOR

Task 1. January – $20,000 - - $20,000* Framework October 2013 Development

Tasks 2,3. January – $175,000 $250,000 - $425,000 Valuation December Algorithms 2014 and Data Sets

Task 4. July 2014 – $100,000 $25,000 - $125,000 March 2015 Case Studies

Task 5. October 2014 – $50,000 - $100,000 $150,000 March 2015 Beta Version

Task 6. April – June $10,000 - $40,000 $50,000 2015 Final Release

Total $355,000 $275,000 $140,000 $770,000

*This funding was previously received as a portion of a $100,000 seed grant received from The MacArthur Foundation during the period October 2012 to October 2013. Funding for other components of the project has been received from the Bullitt Foundation, Northwest Energy Efficiency Alliance, and Russell Family Foundation.

12 The Economics of Change: Integrated Valuation Tool Development PROPOSED FUNDING SOURCES

SOURCE 2013 2014 2015 TOTAL CORPORATE SPONSORS Sponsor 1 $100,000 - $100,000 Sponsor 2 $50,000 $50,000 $100,000 Sponsor 3 $50,000 $50,000 $100,000 Sponsor 4 $50,000 - $50,000 Sponsor 5 $50,000 - $50,000 Subtotal - $300,000 $100,000 $400,000 FOUNDATION SUPPORT MacArthur Foundation $20,000 $20,000 Foundation 1 $100,000 $100,000 $200,000 Foundation 2 $100,000 - $100,000 Foundation 3 $50,000 - $50,000 Subtotal $20,000 $250,000 $100,000 $370,000 Total $20,000 $550,000 $200,000 $770,000

Economics of Change proposes a streamlined fundraising strategy that would allow a group of 4-6 corporate sponsors and 2-4 foundation supporters to jointly fund a combined $750,000 project budget over the 18 month period January 2014 – June 2015. Commitments would all be in place by Q1 2014 ensuring continuity and timely completion of the project. Corporate and foundation sponsors would be given the opportunity to test drive the Beta Version before other users, along with implementation support from Economics of Change. They would also be highlighted in all project materials. Potential corporate sponsors include: Lend Lease, Vulcan Inc., CB Richard Ellis, Wells Fargo, Bank of America, PNC Bank, Deutsche Bank, GE Capital, Skanska, One Pacific Coast Bank, and Autodesk Corporation. Potential foundation supporters include MacArthur Foundation, JPB Foundation, Kresge Foundation, Rockefeller Foundation, and several others identified by the project team to date. Potential governmental supporters include numerous municipalities, state and federal agencies, and development agencies.

13 ECONOMICS OF CHANGE PROJECT TEAM

The International Living Future Institute serves as the lead agency on this project. A non- governmental organization (NGO) committed to catalyzing a global transformation toward true sustainability, the Institute created and oversees the Living Building Challenge—a certification program and advocacy tool for buildings and developments at all scales. www.living-future.org

Theddi Wright Chappell, CRE, MAI, FRICS, AAPI heads Sustainable Values, Inc. a woman-owned consulting firm specializing in market, feasibility and investment analysis, particularly related to the business case for, and valuation implications of, energy efficiency and other sustainable strategies in the built environment. The practice also offers strategic analyses for the valuation and financing of new, existing, and/or redevelopment projects.

Stuart Cowan, Ph.D. is the co-founder of Autopoiesis LLC and has 15 years of experience in designing, planning, and financing sustainability projects in ecological design, renewable energy, and biocultural restoration. Stuart was a founding member of Portland Family Funds, a sustainable community fund, and is co-author of Ecological Design, an overview of the integration of ecology, architecture, land use planning, and product design. www.apoiesis.com

Jason Twill is the originator of the Economics of Change project and Founder/President of Systems Economics LLC. With over 15 years of experience in planning and developing high performance assets, Jason works with clients to enhance their bottom line through identification, measurement and valuation of natural and social capital intrinsic in green buildings and infrastructure. He Chairs the board of the International Living Future Institute and serves on the national leadership council for the Climate, Mind and Behavior Project. Jason is also the co-founder of the Green Sports Alliance, a non- profit with a mission to advance sustainability through sport.

The Bullitt Foundation is a funder and research partner on the Economics of Change project. The mission of the Bullitt Foundation is to safeguard the natural environment by promoting responsible human activities and sustainable communities in the Pacific Northwest. The Foundation strives to build the intellectual foundations and political support needed for sweeping innovation. www.bullitt.org

The John D. and Catherine T. MacArthur Foundation is a supporter and funder of the Economics of Change project. The foundation supports creative people and effective institutions committed to building a more just, verdant, and peaceful world. www.macfound.org

14 The Economics of Change: Integrated Valuation Tool Development ECONOMICS OF CHANGE ADVISORY COUNCIL

The Advisory Council includes a group of internationally recognized experts in real estate investment and development, ecosystem services, valuation, and related fields. The Council offers ongoing guidance on project methodology and offers multiple pathways to connect the project to leading real estate industry organizations and initiatives.

• Guy Battle, Deloitte Sustainability Services Group (UK)

• Stephen Blank, Urban Land Institute • Uwe Brandes, Georgetown University • Bill Browning, Terrapin Bright Green • Mark Chao, Institute For Market Transformation • Chris Corps, Sequel IRM • Pooran Desai, Bioregional • James Finlay, Wells Fargo • Bill Lashbrook, PNC Bank • Jay Manning, Cascadia Law Group • Molly McCabe, Hayden Tanner LLCS • Scott Muldavin, The Muldavin Company, Inc. • Gary Pivo, University of Arizona • Jonathan Rose, The Rose Companies • Pavan Sukhdev, Gist Advisory • Peter Wilcox, New Buildings Institute

15 TECHNICAL APPENDIX

DETAILED MODELING SPECIFICATIONS FOR VENDOR RFP

16 The Economics of Change: Integrated Valuation Tool Development ECONOMICS OF CHANGE INTEGRATED VALUATION TOOL™

Valuation Algorithms and Data Sets to Support the Measurement of and Estimate the Financial Value of Externalities Related to the Built Environment in the United States

REQUEST FOR PROPOSALS Updated October 22, 2013

RFP ISSUER: The Economics of Change Project Under the Direction of: Richard Graves Executive Director International Living Future Institute 1501 E. Madison Street Suite 150 Seattle, WA 98122 United States (651) 605-5450 [email protected]

RFP CONTACT: Please submit all questions pertaining to this RFP and final responses via email to this contact. Stuart Cowan, Ph.D. Partner Autopoiesis LLC 2047 NE Davis Street Portland, OR 97232 United States (503) 724-3329 [email protected]

17 RFP DATE OF ISSUE: 9:00 AM PST January 15, 2014

RFP DISTRIBUTION: This RFP is being distributed to a total of four (4) firms with exceptional qualifications in the field of identifying, measuring, and providing financial value estimates of a wide range of externalities.

RFP RESPONSE DUE: 5:00 PM PST February 3, 2014

FUNDS AVAILABLE TO PERFORM WORK: A maximum of $250,000.00 is available for this scope of work. It is anticipated that the winning firm will also participate in a future scope of work valued at a maximum of $25,000.00 involving the refinement of work products through selected building case studies.

FORM OF CONTRACT: The final contract will be with the Project Sponsor, International Living Future Institute, and will utilize terms, conditions, and form of contract acceptable to and typically used by the International Living Future Institute.

TRAVEL AND MEETING REQUIREMENTS: The vast bulk of this project will be conducted via weekly long-distance communication include teleconference and web conferences. However, the ability to accommodate two in-person project workshops of two days duration is expected. These workshops will occur in Seattle, Washington, US or New York, NY and should engage as many RFP Responders’ key project personnel as possible. A travel budget for these workshops should be explicitly provided as part of the overall project budget.

RFP RESPONSE REQUIREMENTS: All materials should be transmitted via email in a single PDF format file to the RFP Contact listed above. 1. General Qualifications of the RFP Responder and sub-consultant(s) if any. 2. Description of up to three (3) similar projects successfully performed. 3. A narrative summary of how the RFP Responder will approach the project, including methodology, key staff, hourly rates, and budget. Not to exceed ten (10) pages. 4. A discussion of Intellectual Property constraints associated with the RFP Responders work products. The Project Sponsor wants to make data sets, valuation and measurement algorithms

18 The Economics of Change: Integrated Valuation Tool Development and methodologies, etc. as broadly available as possible through appropriate open source Creative Commons licenses.

SELECTION CRITERIA: The winning RFP Responder will be chosen on the basis of the following factors: 1. Ability to deliver exceptional work products within the constraints of the RFP, including availability of key project personnel, timeline, and budget. 2. Demonstration of strong experience on relevant related projects for the overall firm and for key project personnel. 3. Clear narrative summary demonstrating a viable approach to the project. 4. Ability to allow as many work products as possible to be distributed under a Creative Commons license by International Living Future Institute. For those work products that will need to remain proprietary under the control of either RFP Responder or Third Parties, provide adequate rationale. 5. Bid amount. While it is anticipated that all RFP Responders will optimize work products within the maximum project budget of $250,000.00, substantive responses with a lower budget will be weighed accordingly. 6. References and industry recognition and credibility of previous (ideally similar) work product.

SELECTION PROCESS: Clarifying questions will be issued via email by 5:00 PM PST February 10, 2014. All RFP responders should be prepared to have a one-hour interview with the RFP sponsors during the week of February 10, 2014. Final notification will be issued to all RFP responders by 5:00 PM February 19, 2014 PST. Finalization of contract will begin immediately thereafter.

SCOPE OF WORK: The overall scope of work concerns the delivery of Valuation Algorithms and Data Sets to Support the Measurement of and Estimate the Financial Value of Externalities Related to the Built Environment in the United States.

0.0 Background The built environment accounts for about 50% of U.S carbon emissions and contributes to a web of significant, interconnected environmental and social problems. Over the past decade, the green building movement has incubated a critical mass of professionals capable of designing and delivering buildings that dramatically reduce or eliminate greenhouse gas emissions while also creating

19 enduring ecological and social value. However, current lending approaches, appraisal protocols and valuation models largely fail to account for ecological and social value creation, distorting the market and slowing innovation and green building market growth.

In order to transcend these barriers, the Economics of Change project was established in 2011 as an interdisciplinary market transformation project under the leadership of the International Living Future Institute (http://living-future.org). By integrating practical knowledge of the real estate market with expertise in sustainable design, complex systems analysis, and ecological economics, a diverse team of experts has been pooled together with the ability to support a catalytic shift in both theory and practice within the real estate investment sector. Economics of Change has defined a theory of change for the real estate industry that includes three closely linked initiatives: • Local, state, and national policy innovation to provide incentives for high-performance green buildings

• Integrated Valuation Tool™ development to inform a new generation of appraisal and valuation models that account for ecological and social value creation • Industry transformation through new standards, protocols, and processes around appraisals, valuation, lending, and investment.

0.1 Integrated Valuation Tool™

This RFP proposal is focused on the creation of an Integrated Valuation Tool™ (IVT). The overall project deliverable is an open-source real estate investment modeling software platform that is compatible with current industry standard platforms such as ARGUS® and EXCEL, yet will enable investors – for the first time – to tap into new value streams for the built environment beyond conventional methods. The Tool will embed a wide range of identified avoided externality risks as well as make transparent new ecological and social value layers presently unrecognized using industry standard methods. The core elements of this work will consider how the five forms of capital (human, social, built, natural, and financial)5 may be directly woven into an investment model to both expand and challenge our current definition of value within the real estate industry. The Scope of Work for this RFP includes four critical deliverables related to the completion of the overall Integrated Valuation Tool™ including:

1. IVT: Externalities and Methodology Report 2. IVT: Measurement and Valuation Algorithms Report 3. IVT: Data Sets Report 4. IVT: Data Sets Library

5 See http://www.forumforthefuture.org/project/five-capitals/overview.

20 The Economics of Change: Integrated Valuation Tool Development 0.2 Key Benefits of the Integrated Valuation Tool™

The Integrated Valuation Tool™ will help shift the market towards restorative new construction and deep green retrofits in three distinct ways: • In the hands of private investors, the Tool will demonstrate potential added income (from positive externalities) or losses (from negative externalities) that may occur in the medium to long-term through changes in policy, tenant preferences, etc., allowing owners to systematically evaluate risks, liabilities, and upside. This will influence and shift decision making towards outcomes that benefit both investors and the public.

• In the hands of policy makers, the Tool will serve as a catalyst to support integrated policy measures that will shepherd an era of full spectrum, true-cost, lifecycle accounting for buildings, districts, and communities. This will give new opportunities for the world’s cities and towns to evolve in more socially and ecologically beneficial ways. • In the hands of public and private project developers, the Tool will provide a transparent and credible accounting of neighborhood, city, and larger-scale benefits that can be used as the basis for negotiating public-private partnerships and mission-related investments.

0.3 Background Documents The following documents are attached to this RFP.

1. Phase I Project Report: The Economics of Change: Catalyzing the Investment Shift Toward a Restorative Built Environment by Jason Twill, David Batker, Stuart Cowan, and Theddi Wright Chappell. Earth Economics: Tacoma, WA: 2011.

2. Integrated Real Estate Investment Modeling Tool: Prototype Version 1.0 by David Batker, Theddi Wright Chappell, Stuart Cowan, and Jason Twill. Earth Economics: Tacoma, WA: 2011.

3. The Economics of Change: Project Overview by Theddi Wright Chappell, Stuart Cowan, Richard Graves, Jason F. McLennan, and Jason Twill. International Living Future Institute: Seattle, WA. 2013.

1.0 Deliverable: IVT: Externalities and Methodology Report The first deliverable is a comprehensive report detailing the most significant positive and negative externalities affecting natural, social, and human capital resulting from the built environment. For each externality, there will be a qualitative discussion of appropriate boundaries to place on the analysis to ensure a credible result that is transparent and can be explained to key stakeholders including investment professionals and policymakers. There will also be a set of recommended externalities (approximately 10 natural capital and 10 human and social capital) for detailed inclusion in the initial version of the IVT, with an additional set of recommended externalities to be deferred to future project phases.

21 1.1 Candidate Externalities Affecting Natural Capital 1.1.1 Biodiversity 1.1.2 Water Cycles 1.1.3 Material Cycles 1.1.4 Energy 1.1.5 Climate Stability 1.1.6 Land Use 1.1.7 Natural Hazard Reduction 1.1.8 Food Production 1.1.9 Soil Health 1.1.10 Microclimate 1.1.11 Toxins, Carcinogens, Mutagens, etc. 1.1.11 Ecological Footprint

1.1.12 Nine Planetary Boundaries6 1.1.13 Other Ecosystem Services Not Reference Above

1.2 Candidate Externalities Affecting Human and Social Capital 1.2.1 Health 1.2.2 Creativity 1.2.3 Accessibility 1.2.4 Sustainable Mobility 1.2.5 Security 1.2.6 Social Equity 1.2.7 Cultural Diversity 1.2.8 Beauty 1.2.9 Biophilia 1.2.10 Pedagogy and Research Opportunities

1.2.11 Worker Productivity 1.2.12 Comfort

6 See http://en.wikipedia.org/wiki/Planetary_boundaries.

22 The Economics of Change: Integrated Valuation Tool Development 2.0 Deliverable: IVT: Measurement and Valuation Algorithms Report The second deliverable is a comprehensive report detailing how the externalities chosen for initial inclusion, with corresponding boundaries of analysis, will be measured and valued.

2.1 Scale of Built Environment IVT is designed to scale effectively, aggregating the best available information about component building systems to building-level impacts, buildings and infrastructure to districts, and in future phases, districts to cities. Key scales of analysis include:

2.1.1 Building-level components, systems, and assemblies 2.1.2 Infrastructure-level components and systems 2.1.3 District scale 2.1.4 City scale (need compatibility with future aggregation at this scale)

2.2 Type of Construction IVT is designed to address all three of these types of construction: 2.2.1 Existing or New 2.2.1.1 Existing Buildings and Infrastructure 2.2.1.2 Major Retrofits of Buildings and Infrastructure 2.2.1.3 New Buildings and Infrastructure

2.2.2 Major Real Estate Investment Types 2.2.2.1 Multi-Family Housing 2.2.2.2 Office 2.2.2.3 Retail 2.2.2.4 Industrial/Storage 2.2.2.5 Hospitality 2.2.2.6 Health Care 2.2.2.7 Infrastructure

23 2.3 Specifying Built Environment Characteristics Standard templates will be used to describe, qualitatively and quantitatively overall building characteristics along with the attributes of green building features like vegetative roofs, natural ventilation, enhanced air quality and human health through elimination of toxins, etc. in order to derive an assessment of ecological and social benefits (and costs) for a given building or infrastructure project in a specified location. The second deliverable should include a methodological discussion of key data that will need to be included in templates to ensure the most accurate analysis of chosen externalities.

2.4 Geography IVT is designed for initial application in the United States. However, most of the underlying methodologies can be transferred to other key markets including Europe, Asia, and Australia. The second deliverable should include a discussion of how the chosen externalities can be measured and valued across broader geographies (e.g. by accessing additional data sets).

2.5 Measuring Externalities The second deliverable should include methodologies and algorithms for linking specified built environment characteristics with any underlying required data sets to produce quantitative and qualitative measurements of externalities using one or more appropriate measurement units per externality. For instance, if climate stability is a chosen externality, this externality might be measured in tons of carbon dioxide per year related to electricity production for building-level consumption. For worker productivity, this externality might be measured in percentage difference over a similar “baseline” building for a key proxy variable like absenteeism.

A key premise of the Economics of Change project is that measurement of these externalities across multiple forms of capital will already lead to enhancements in policy and investment decision-making without the need to convert to equivalent monetary values, which introduces additional layers of methodological complexity and uncertainty. The methodologies and algorithms for measuring externalities will ideally be incorporated in future Economics of Change software releases using a Creative Commons open source license. Any limitations or exclusions the winning RFP responder wishes to place on those methodologies and algorithms should be clearly stated as part of the second deliverable.

2.6 Valuing Externalities The second deliverable should include a methodologies and algorithms for linking each of the measured externalities with any underlying required data sets to produce equivalent financial values. This valuation process is inherently complex and uncertain, and should be accompanied with a discussion about validity and how to establish meaningful (e.g. 95%) confidence intervals.

24 The Economics of Change: Integrated Valuation Tool Development It is anticipated that the second deliverable will employ appropriate methods from the field of ecological economics to determine a range of equivalent economic values, taking into account demographic, climatic, and other site-specific factors as well as inherent uncertainties in the modeling process. The methodologies and algorithms for valuing externalities will ideally be incorporated in future Economics of Change software releases using a Creative Commons open source license. Any limitations or exclusions the winning RFP responder wishes to place on those methodologies and algorithms should be clearly stated as part of the second deliverable. These valuation algorithms may include:

2.6.1 Hedonic pricing (statistical modeling based on a sample set of existing buildings to determine the relative contribution to building market value of specific factors like proximity to open space or fresh food)

2.6.2 Market price-based approaches when there are existing markets for benefits 2.6.3 Cost-based approaches that estimate the cost to provide a benefit stream (e.g. occupant health and well-being) using other methods

2.6.4 Production function-based approaches, contingent valuation, choice modeling, group valuation, and other widely accepted methods 2.6.5 Benefit transfer techniques to extrapolate values from one geography to another 2.6.6 Other algorithms as needed

3.0 Deliverable: IVT: Data Sets Report The third deliverable is a comprehensive report on the data sets required to perform (1) the measurement of chosen externalities; and (2) the economic valuation of chosen externalities. Intellectual property and cost issues relating to data sets are critically important for the Economics of Change project. This deliverable should provide a precise specification of the proposed data sets including sources, licensing issues, and data types and characteristics (metadata). The data sets supporting measurement and valuation of externalities will ideally be incorporated in future Economics of Change software releases using a Creative Commons open source license. Data sets in the public domain are therefore the highest priority. There is a very limited budget for licensing data sets, and use of expensive, opaque, difficult to license, or overly complex data sets is discouraged. If necessary, lack of availability of suitable data sets may drive a reconsideration of externalities measurement and valuation methodologies and algorithms to ensure compatibility with appropriate data sets.

25 It is anticipated that data sets will include building databases; ecological and social benefits derived from green features, systems, and whole buildings; bioclimatic data; demographic data; and a range of other integrated value modeling data sets.

3.1 Preferred Data Set Characteristics 3.1.1 Reasonable size 3.1.2 Reliable with good understanding of any limitations 3.1.3 Strong metadata 3.1.4 Ability to cite source in detail as part of future software development 3.1.5 Highest priority: currently in public domain and available for use within broader Creative Commons open source licensing 3.1.6 Second priority: proprietary to RFP responder but available for free licensing within Economics of Change project 3.1.7 Third priority: proprietary to third-party but available for free licensing within Economics of Change project 3.1.8 Lowest priority: proprietary to third-party but available for licensing to Economics of Change project

4.0 Deliverable: IVT: Data Sets Library The fourth deliverable includes all data sets required to perform (1) the measurement of chosen externalities; and (2) the economic valuation of chosen externalities. These data sets should be made accessible through a password-protected file sharing protocol, and should be accompanied by any required licenses (either from the winning RFP Responder or a third party) for use by the International Living Future Institute in future Economics of Change software releases.

Scope of Work Delivery Schedule: This schedule may be adjusted with mutual agreement between RFP Issuer and winning RFP Responder in order to optimize overall project delivery. February 19, 2014 Winning RFP Responder Chosen; Contract negotiations begin March 2014 Kickoff Project Workshop in Seattle, Washington, US on mutually agreed date April 30, 2014 Draft Externalities and Methodology Document May 15, 2014 Detailed response from RFP Issuer to Draft Externalities and Methodology Document June 15, 2014 Draft Measurement and Valuation Algorithms Document

26 The Economics of Change: Integrated Valuation Tool Development June 30, 2014 Detailed response from RFP Issuer to Draft Measurement and Valuation Algorithms Document July 1, 2014 Begin work on Building Case studies under separate Scope of Work (anticipated) August 31, 2014 Draft Data Sets Document September 2014 Second Project Workshop in Seattle, Washington, US on mutually agreed date September 15, 2014 Detailed response from RFP Issuer to Draft Data Sets Document October 31, 2014 Near Final version of all deliverables due: Externalities and Methodology Document; Measurement and Valuation Algorithms Document; Data Sets Document; Underlying Data Sets November 15, 2014 Detailed response from RFP Issuer to all work products December 15, 2014 Final version of all deliverables due

27 living-FUTURE.org/economicsofchange

Front and back cover photo courtesy of Denmarsh Photography, Inc.