Financial Benefits

Businesses Are Facing a New Reality. These Are the Ones That Are Succeeding.

They’re taking responsibility for their effect on people and the environment.

By Peter Lacy
View the original article here.

Astrid Stawiarz Getty Images for UN Global Compact

Astrid Stawiarz Getty Images for UN Global Compact

Evidence is mounting to show that the frequency and ferocity of extreme weather events is intensifying on a global scale. From severe droughts to powerful storms, we are living in an increasingly changeable, uncertain, and unpredictable world.

You don’t have to believe in climate change to accept this new reality. Resilience and the ability to manage challenges impacting us and our environment are of far greater importance to both business and society. Take the recent destructive hurricanes in the U.S. and the Caribbean, or the devastating floods in Nepal, India, and Bangladesh that represent a stark example of this new reality and of our growing vulnerability.

The role of business within this new reality is changing. Businesses have a critical role to play in helping solve the challenges we face through providing services and solutions that support society. In fact, businesses that do not adapt their models run the risk of eroding trust and ultimately, forfeiting customer loyalty.

Uncertainty in the world—from extreme events, to declining natural resources, to the changing skills required for employment—gives forward-thinking C-suite leaders an opportunity to adopt conscious capitalism through the incorporation of key elements like trust, collaboration, and stakeholder orientation into day-to-day business practices. And, as consumers increasingly demand that their brands reflect these objectives, companies that want to remain competitive will need to adapt by joining the circular economy.

At its most basic, the circular economy replaces the current wasteful linear economic model. Instead of organizations relying on finite resources, they conduct sustainable business. They find renewable resources. They remove waste at every stage, from sourcing to recycling—creating a business model that restores and regenerates, rather than depletes and throws away. They look at how products are made, who makes them, and where, as well as how those same products are recycled or sustainably retired. In fact, adopting a circular economy model is not simply about products and services but also the way we do business as companies. It presents an opportunity to move beyond simply meeting sustainability standards to a solution that transforms the current model of business and one that can create a competitive advantage for the leaders.

Leading companies are still innovating, but now in a way that takes responsibility for their effect on people, the environment, and the state of our world. And they have realized that—contrary to popular belief—doing so can still be profitable. Accenture research shows a potential $4.5 trillion reward for achieving sustainable businesses by 2030. And a number of companies are already making progress toward this aim.

Rubicon Global, for instance, a pioneering U.S.-based waste management company that connects customers directly with independent waste haulers, is disrupting the current waste disposal model to reduce waste to landfill, while passing on $1 million in savings to its clients across 80,000 locations.

Nike, another leading example, is rapidly transitioning toward its closed-loop vision with a bold target for FY2020: zero waste from contract footwear manufacturing going to landfill or incineration without energy recovery. To date, 70% of all Nike (NKE, -0.43%) footwear and apparel incorporates recycled materials, using 29 high-performance, closed-loop materials made from factory scraps.

As the circular economy and conscious capitalism take hold, the C-suite is taking note: 64% of UN Global Compact CEOs say sustainability issues play a central role in their strategic planning and business development, while 59% of CEOs report that their company can accurately quantify the business value created through their sustainability initiatives, up from 38% in 2013.

The circular economy, a critical aspect of this change, is already happening—so much so that the World Economic Forum Young Global Leaders, in collaboration with Accenture Strategy and in partnership with Fortune, recognize leaders through The Circulars, the world’s leading circular economy award program. The Circulars, presented each year at the World Economic Forum Annual Meeting in Davos, attracts entries from individuals and organizations across business and civil society, from global giants such as Unilever to innovative startups such as Method. A winner at The Circulars in 2015, Method was built on wholly circular and sustainable principles, ensuring 75% of its products are cradle-to-cradle certified, meaning they are designed and produced in a socially and environmentally responsible way. Method has eliminated countless toxic chemicals from homes by using natural inputs.

These are just a few examples of organizations driving value through circular economy innovation—there are many more. In a world in which conscious capitalism is becoming mainstream, the circular economy has a significant role to play in enabling businesses to make the transition whilst continuing to deliver value to customers, shareholders, and society. As more businesses take the lead, the opportunity that the circular economy represents will become a reality.

The rapid growth of electric cars worldwide, in 4 charts

The article below puts a spotlight on the swift growth of electric vehicle use worldwide. So speedy in fact, EV use has tripled since 2013. This is one of the few areas that the world’s nations are on track to keep climate change below 2 degrees celsius. Let this be a reason to keep up the good work with EV deployment, and highlight the other energy initiatives that could use improvement. With every electric vehicle that hits the road, the demand for places to charge up increases. What if I told you there was a way to not only install a charging station, but an independently owned business that can set its own pricing, access settings, and much more? Keep reading to find out…


The rapid growth of electric cars worldwide, in 4 charts

electric vehicle parking

An increasingly common sight

Written by Brad Plumer on June 6, 2016

One million down, another billion or so to go.

In a new report, the International Energy Agency estimates that 1.26 million electric cars hit the world’s roads in 2015, passing a nifty (if symbolic) milestone. Here’s a chart showing the very rapid growth of both battery electric vehicles (BEVs) and plug-in hybrids (PHEV):

evolution global electric car stock

(IEA, Global EV Outlook 2016)BEV = battery electric vehicles; PHEV = plug-in hybrid vehicles, which typically have both an electric motor and a conventional engine.

The United States now has 400,000 electric vehicles on the road — a massive increase since 2010, though well short of Obama’s goal of 1 million by 2015. Meanwhile, China has become the world’s largest market, overtaking the US in annual sales last year.

Is 1 million a lot? It depends how you look at it. It’s jaw-dropping growth given that there were only a few hundred electric vehicles on the entire planet back in 2005. And the total number of electric vehicles worldwide has tripled just since 2013.

But to put this in perspective, there are more than 1 billion gasoline- and diesel-powered cars on the world’s roads — and demand will keep soaring in the decades ahead as China and India’s middle classes expand. So we have a long, long way to go before electric cars take over the world.

In order to avoid more than 2°C of global warming, the IEA calculates, we’d likely need to see about 150 million electric cars on the road by 2030 and 1 billion by 2050 as part of a broader climate strategy. The good news, the agency says, is that this ambitious electric vehicle target seems much more feasible than it did just a few years ago.

Two big reasons for the rapid growth of EVs: public subsidies and falling battery prices

For starters, more and more countries are enacting policies to build up charging infrastructure and incentivize vehicle purchases. The table below details some of those policies, which include everything from tax breaks to tailpipe emission standards (which favor cleaner electric cars) to HOV lane access:

Electric vehicle uptake

IEA, Global EV Outlook 2016

“Ambitious targets and policy support have lowered vehicle costs, extended vehicle range and reduced consumer barriers in a number of countries,” the report says.

As a result, electric vehicles now make up more than 1 percent of sales in China, France, Denmark, and Sweden. They make up 9.7 percent of sales in the Netherlands, and 23 percent of sales in Norway, which offers some of the most generous tax incentives around, worth about $13,500 per car.

The other huge driver here is falling battery costs, which have fallen by a factor of four since 2008. Since batteries make up around one-third of the price of electric vehicles, getting this number down even further is crucial for widespread adoption.

evolution battery energy density cost

IEA, Global EV Outlook 2016

The Department of Energy estimates that battery costs need to fall to $125 per kilowatt-hour by 2022 to achieve cost-competitiveness with conventional vehicles. The IEA says this “seems realistic” given current rates of technological improvement, and points out that manufacturers like Tesla and GM have set even more ambitious cost targets.

The amount of energy that batteries can hold (known as energy density) has also improved significantly. The IEA cites various reports that electric cars will soon be able to travel more than 180 miles on a single charge — also critical for boosting consumer adoption and alleviating “range anxiety.”

Meanwhile, electric cars get all the attention, but the IEA points out that the electrification of other modes of transport, including motorcycles and buses, is just as important. Particularly in countries where these vehicles are widespread:

The electrification of road transport modes other than cars, namely 2-wheelers, buses and freight delivery vehicles, is currently ongoing in a few localised areas. With an estimated stock exceeding 200 million units, China is the global leader in the electric 2-wheelers market and almost the only relevant player globally, primarily because of the restriction on the use of conventional 2- wheelers in several cities to reduce local pollution. China is also leading the global deployment of electric bus fleets, with more than 170 000 buses already circulating today.

To help solve climate change, electric cars need to do much, much more

Here’s one last chart from the IEA, showing what electric car deployment would have to look like to help meet the emissions-reduction promises put forth at the Paris climate talks last year (around 100 million electric cars by 2030). It also shows the even faster deployment that would be needed to keep global warming below 2 degrees Celsius (about 150 million):

deployment scenarios electric cars

IEA, Global EV Outlook 2016

We’re on track now, but it’s early. In fact, as the IEA points out elsewhere, electric vehicle deployment is basically the only area where the world’s nations are on track to hit the targets needed to stay below 2 degrees Celsius.

One final caveat: As David Biello recently explained at Scientific American, electric cars aren’t inherently greener than their gasoline-powered counterparts. If you use coal-fired power plants to charge all those electric cars, the climate benefits are minimal (or, worse, negative). The IEA is well aware of this, although it also notes that electric car deployment can help support the rollout of cleaner renewable energy, too:

The climate change-related benefits of EVs can be fully harvested under the condition that their use is coupled with a decarbonised grid, an additional challenge for countries that are largely dependent on fossil fuels for power generation. Investment in EV roll-out can support this transition, e.g. increasing the opportunities available to integrate variable renewable energy.

Cleaning up the grid is a sine qua non for electric cars to help ameliorate climate change, although this hardly seems like a deal breaker for the technology. Think of it this way: If we don’t clean up the world’s electric grid, we have little chance of stopping global warming either way. The two have to go hand in hand.

End article.


Following Emerald Skyline’s recently announced partnership with ChargePoint, we have realized more and more the importance of the growth of electric vehicle use worldwide. Equally important as these EVs are the charging stations and infrastructure needed to support them. This rapid growth necessitates installation of charging stations. The industry standard for functionality and aesthetics are ChargePoint stations which are independently owned businesses that set their own pricing, access settings and much more.

To find out more information about the installation of a ChargePoint Electric Vehicle Charging Station at your home, office building, shopping center, hotel or transportation hub and join the EV revolution for a greener tomorrow, please contact us at 305.424.8704 or info@emeraldskyline.com

Segregating the cost components of a “real” property allows for optimal cost recovery to increase after tax income

PJ Pictureby Paul L. Jones, CPA, Director, Emerald Skyline Corporation

In the fourth quarter of 1985, Philip Morris Inc. agreed to buy General Foods for an estimated $5.6 billion. At the time, it was the largest food company acquisition in history. Pursuant to this acquisition, Philip Morris had to allocate the purchase price among cash and cash equivalents, real estate, tangible personal property, identifiable intangible assets and, finally, goodwill.

In conjunction with this cost allocation, Kenneth Leventhal & Company, a CPA firm that specialized in real estate, was hired to value the property, plant and equipment and segregate them into real, personal and land improvement assets to establish basis for its tax returns. I was a leader on the team that completed the study and valuation. The project involved hundreds of properties on six continents, the expertise of an untold number of real estate, engineering and accounting professionals – and over a year – to complete.

The reason we segregated the personal property and land improvement assets was to shorten, to the extent possible, the time required, and maximize the deductions from taxable income, to recover the cost of the assets through depreciation resulting in reduced income tax obligations. Accordingly, the primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for non-residential real property). Personal property assets, consisting of non-structural elements, exterior land improvements and indirect construction costs which are found in a cost segregation study generally include items that are affixed to the building but do not relate to the overall operation and maintenance of the building.

The investment strategy for every rental residential apartment complex and commercial building, including office buildings, shopping centers, industrial facilities, hotels, restaurants, entertainment complexes and all other commercial properties that are being acquired, constructed and/or sustainably renovated to be “Green” should include accelerated depreciation realized from a cost segregation study.

cost-segregationBy increasing the depreciation deduction, current income taxes are reduced and after-tax cash flow increased during the initial years of ownership or completion of substantial sustainable renovations – when their net present value and positive impact on the investor’s internal rate of return is the greatest.

A cost segregation study, in a nutshell, is the process of identifying any personal property and land improvement assets that are grouped with real property assets, and accounting for them separately, in particular, for Federal income tax purposes. The determination of what property components qualify for shorter depreciable lives as personal property is ultimately based on asset-specific facts and circumstances. However, consultants rely heavily on precedents existing in both case law and IRS guidance.

The law, rules and procedures relied upon in cost segregation studies have been around since the enactment of the Investment Tax Credit (ITC) in 1962 which established the legal rationale used to distinguish personal from real property for purposes of the ITC and provides the framework for the same classification process in cost segregation studies.

While the ITC was repealed through the Tax Reform Act of 1986, a landmark tax court decision in the case of Hospital Corporation of America (“HCA”) vs. Commissioner, 109 TC 21 issued in 1997 upheld the application of cost segregation for differentiating the depreciable basis of real, personal and land improvement assets. The HCA case is the seminal case for cost segregation studies and the IRS has agreed that a taxpayer can use a cost segregation study to segregate building costs. Critical to the Tax Court’s analysis was that in formulating accelerated depreciation methods, Congress intended to distinguish between components that constitute IRC section 1250 class property (real property) and property items that constitute section 1245 class property (tangible personal property). This distinction opened the doors to cost segregation.

Armed with this victory, taxpayers have increasingly begun to use cost segregation to their advantage. The IRS reluctantly agreed that cost segregation does not constitute component depreciation (action on decision (AOD) 1999-008). Moreover, cost segregation recently was featured in temporary regulations issued by the Treasury Department (regulations section 1.446-1T). In a chief counsel advisory (CCA), however, the IRS warned taxpayers that an “accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data or taxpayers’ estimates or assumptions that have no supporting records” (CCA 199921045).

Real property eligible for cost segregation includes buildings that have been purchased, constructed, expanded or remodeled since 1987. A cost segregation study is typically cost-effective for buildings purchased or remodeled at a cost greater than $750,000. These studies are most efficient for new buildings recently constructed, but they can also uncover retroactive tax deductions for older buildings, which can generate significant short benefits due to “catch-up” depreciation.

Property owners should consider using a cost segregation study if they:

  • Acquired property in the last 15 years
  • Recently completed or started a construction project
  • Inherited property from an estate and received a stepped-up basis
  • Purchased a partnership share
  • Expect to pay income taxes
  • Plan on holding the property for at least five years

Examples of assets that may qualify to be reclassified as Section 1245 property (tangible personal property) which have shorter depreciable lives include:

  • Land improvements (drainage and irrigation systems, fencing, outdoor lighting, landscaping, parking lots and walkways, etc.);
  • Ornamental fixtures;
  • Wall and floor coverings;
  • Security systems;
  • Cabinets and millwork;
  • Data and communication cabling;
  • Decorative lighting;
  • Window treatments;
  • Production machinery;
  • Electrical and plumbing service to specific equipment;
  • Energy management systems;
  • Equipment, machinery and equipment that meet the “sole justification test” (i.e., building system components the sole justification for the installation of which is the fact that such equipment….are essential for the operation of other machinery or the processing of materials or used in connection with research of experimentation); and
  • Moveable wall partitions, catwalks and mezzanines

According to IRS Publication 544: “The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property.”

In distinguishing between a building’s tangible personal property and structural components, Jay Soled and Charles Falk in a 8/1/2004 article entitled “Cost Segregation Applied” in the Journal of Accountancy, “CPAs, engineers and consultants will find the courts to be a final source of guidance. In Whiteco Industries, Inc. v. Commissioner (65 TC 664 (1975)), for example, the Tax Court set forth the following six questions that can use to determine whether property is inherently permanent and thus a structural component excluded from the definition of tangible personal property:

  • Can the property be moved? Has it been moved? (For example, a shed with a concrete floor vs. a shed with a wooden floor.)
  • How difficult is removal of the property, and how time-consuming is it? (For example, a wine cellar vs. a prefabricated photo-processing lab.)
  • Is the property designed or constructed to remain permanently in place? (For example, a wooden barn vs. a wire chicken coop.)
  • Are there circumstances that tend to show the expected or intended length of affixation—or that the property may or will have to be moved? (For example, permanent concrete pilings vs. floating docks that can be removed in the winter.)
  • How much damage will the property sustain upon its removal? (For example, a steel-encased bank vault vs. an easily removable lighting system attached by bolts.)
  • How is the property affixed to the land? (For example, permanently glued bathroom tile vs. removable billboard.)

Even with ample regulatory, legislative and judicial guidance, making the distinction between tangible personal property and a building’s structural components remains a challenge for CPAs. No bright-line test exists. What is fortunate, however, is that many of the factual issues involving properties of different sorts have been litigated, and their outcomes illuminate the direction a court confronted with similar facts is likely to take.”

The primary property recovery periods are:

  • Buildings = 27.5 years for residential and 39 years for commercial
  • Land Improvements = 15 years
  • Furniture, fixtures & equipment = 7 years
  • FF&E, Retail & service = 5 years
  • Information systems = 5 years

Cost segregation consultants generally employ one of two methods, or a combination of both, that have approved by the IRS:

The first approach is to obtain and examine actual cost data records and construction documents in conjunction with a site visit to identify assets for potential reclassification. This approach is typically used when the property has been recently constructed and documents are readily available. The consultant assigns costs to each component based on any information provided, analysis of the documents and site visit.

The second approach, applicable when the original construction documentation is not available, is typically performed when a study is performed in conjunction with the purchase of the property. This alternative is also performed when the cost segregation study is conducted several years after initial construction. In applying this approach, an engineer or consultant will analyze architectural drawings, mechanical and electrical plans and other blueprints to segregate the structural and general building electrical and mechanical components from those linked to personal property. Using standard construction cost estimating tools, the property is “reverse-engineered” into its separate components. The consultant will also allocate “soft costs,” such as architect and engineering fees, to all components of the building. Total actual property costs are then allocated to the components on a proportional basis.

The information and documents typically required for a cost segregation study include:

  • legal description of the property
  • Date placed in service
  • Building and land area
  • Survey
  • Architectural and building plans
  • AIA documents 702 & 703
  • Other construction documents and accounting records
  • Depreciation schedules
  • Fixed asset listing
  • Construction loan documents, if available
  • Settlement statement
  • Appraisal

The consultant provides a self-contained cost segregation report, certified by the study’s authors, that will satisfy IRS requirements.

The benefits can be significant. BKD LLP, CPAs calculates that “Each $100,000 in assets reclassified from a 39-year recovery period to a five-year recovery period results in approximately $16,000 in net-present-value savings, assuming a 5% discount rate and a 35% marginal tax rate.

By reclassifying an asset from building (1250) to personal property (1245) property, the magnitude of an additional allowance in the first year can be enormous. For example, a shift of $1 million from 39-year property to 5-year property can augment first-year depreciation deductions by a whopping $575,000 ($25,000 vs. $600,000). Note: The application of the alternative minimum tax may reduce some of the tax savings associated with cost segregation.

Cost segregation studies should be performed by consulting firms with expertise in engineering, construction, tax and accounting. The IRS’ underlying assumption in determining what constitutes a quality study is that the study is performed by “personnel competent in the design, construction, auditing, and estimating procedures relating to building construction.”

Emerald Skyline Corporation, whose principals include real estate, sustainability, resiliency, architecture and accounting professionals is uniquely qualified to provide cost segregation advisory services to building owners, investors, managers and accountants in conjunction with your sustainability and resiliency project. Each cost-segregation study prepared by Emerald Skyline includes an identification of any available Green Building Tax incentives. Often overlooked, these valuable tax credits can amount up to 30% of qualified expenditures and increase the tax benefits of a cost segregation study.

The Price of Water is Rising: Time to start conserving to improve the bottom-line

PJ Pictureby Paul L. Jones, CPA, LEED Green Associate
Emerald Skyline CorporationPRICE of H2O

America’s water treatment and supply networks were built in the decade following World War II – 60 to 70 years ago. The results of those investments fueled a generation of widespread economic growth, prosperity and improvement in public health. However, the thousands of miles of distribution pipes beneath city streets, the lengthy water transport and treatment infrastructure are now cracked and brittle. The bill to repair and renew America’s long-neglected water systems are now coming due – and it will not be cheap.

Distribution pipes, which run for thousands of miles beneath a single city, have aged beyond their useful life and crack open daily. Some assessments estimate the national cost of repairing and replacing old pipes at more than US 1 Trillion over the next 20 years. In addition, new treatment technologies are need to meet the Safe Drinking Water Act and Clean Water Act requirements, and municipal water companies must continue to pay on their debts.

Add to the needed infrastructure costs, the impact of droughts and sea level rise which are affecting the three most populous states in the country (California, Texas and Florida) and water managers are seeking ways to reduce consumption – with price increases as one way to encourage conservation. The EPA has identified at least 36 states that have experienced, or can anticipate, some type of local, regional or statewide water shortage which will have a significant impact on both consumers and commercial facilities.

According to an annual pricing survey by Circle of Blue, the price of water rose six percent in 30 major US cities last year and it has risen 41% since 2010. Brett Walton, Circle of Blue, 4/22/2015

“In Chicago and neighboring communities that depend on the City for their water supply, a 25% rate increase took effect on 1/1/2012. The rate went up again in 2013 by 15%, and will increase again by 15% in 2014. That’s a 55% increase over a 3-year period. Even though American municipalities have traditionally underpriced water, a 55% increase in such a short amount of time is an indication that a serious problem exists – with no resolution in sight.” Klaus Reichardt, Environmental Leader, 10/14/2013

Further, more than 40 US cities are required to make massive investments in wastewater treatment capacity which are driving sewer rate increases as Federal grants that funded the current generation of sewage treatment facilities are no longer available so municipal utility companies must finance these projects on their own. In other words, they will be increasing sewer fees in order to keep our water clean.

“We expect water rates to continue to grow above inflation for some time. We don’t see an end in sight.” Andrew Ward, director of US Public Finance, Fitch Ratings.

It is clear that the cost of water and wastewater services are going to continue to increase at rates well above the consumer price index.

Commercial and institutional buildings use a large portion of municipally-supplied water in the United States. In fact, the EPA estimates that facilities such as schools, hotels, retail stores, office buildings and hospitals account for up to 17% of publicly-supplied and 18% of energy use. The three largest uses of water in office buildings are restrooms, heating and cooling, and landscaping.

END USESAccordingly, implementing water-efficiency measures, while resulting in immediate savings will also serve to reduce the financial impact of future rate increases – a hedge against inflation, if you will. According to the EPA, which has established Water Sense at Work: Best Management Practices for Commercial and Institutional Facilities, “the benefits of implementing water-efficiency measures, in and around office buildings can include reducing operating expenses as well as meeting sustainability goals. In addition to water savings, facilities will see a decrease in energy costs because of the significant amount of energy associated with heating water.

NOTE: Water efficiency refers to long-term reduction in water consumption that is not in response to any current water shortages. Water-efficient systems enable a facility to meet users’ needs while using less water than conventional equivalents.

Water consumption in commercial and institutional buildings is dependent on many factors: The age of the building, the local climate, the use of the facility, the existence of a kitchen facility or restaurant amenity and the type and age of the HVAC system. However, in virtually all venues, the restrooms are the primary consumer of water. Accordingly, the best place for building owners and managers to start is the restroom.

Before introducing some water conservation strategies, the greatest impediment to achieving meaningful water savings in office buildings is the common disconnect between the accountant who pays the bills, the building owner, the tenants, the building manager or engineer and the various third-party contractors that maintain the facility and equipment. In multi-use or multi-tenanted properties, water saving potential is frequently great, but successful implementation of changes always requires a cooperative effort from all of the stakeholders.

Like an energy audit that identifies the main users of energy and benchmarks use, the best way to identify water conservation measures is to establish a water savings plan that benchmarks the ways water is consumed and prioritize them. Water conservation will vary in a commercial setting depending on the building type and use. While hospitals and office buildings require a large water volume for mechanical systems, hotels and restaurants require high usage in laundry and food service applications, respectively.

Determining the applications that have the greatest water consumption is critical to prioritize the overall goals and budget. One way to do this is by installing sub-meters in various facility locations (such as restrooms, cafeteria and food service areas, different floors or blocks of floors, etc.) and then monitoring water consumption in each area. This can provide insight into where water is being used and can also point out inconsistencies in water consumption—information that can sometimes result in significant savings.

For instance, a facility might find that one block of floors uses far less water than another block. Is this because there are fewer people on those floors? Or are there plumbing leaks or older fixtures in the block using more water? Tracking water use allows building engineers to move quickly to identify problem areas within a building’s water systems.

Once the systems and their water usage have been determined, a water savings plan can be developed. A water savings plan will inventory the systems in-place, identify water-efficient alternatives and estimates of the costs and benefits of each component of the plan. The benefits of water efficiency efforts can be measured by calculating the difference between what the building owners/managers previously spent on water and related operating costs and what they spend after water efficiency programs are implemented. The return on investment of new equipment, fixtures, and other water-related items can also be calculated over the lifetime of a water efficiency project, and includes such things as reduced maintenance, water, sewer, and related energy costs.

Typical Water Efficiency Plan Components

Below is a quick summary of how a typical commercial facility can use water more efficiently:

Toilets. Replace older toilets with fixtures that meet or exceed Uniform Plumbing Code (UPC) and International Plumbing Code (IPC) requirements: 1.6 gallons of water per flush. Some newer toilets, including high-efficiency and dual-flush models, use even less water than that. Facility System Solutions, in a 7/14/2014 article entitled “Mandated high-efficiency toilets pay off” reports that since being required by the Energy Policy Act of 1992 “low flow toilets have saved enough water to fulfill the needs of Los Angeles, Chicago and New York for two decades.” Further water reductions are achieved through dual-flush or high-efficiency EPA WaterSense-labeled toilets.

Faucets. Replace existing faucets or install restrictive aerators to reduce water use from approximately 2.2 gallons per minute to 0.5 gallons per minute.

Urinals. Again, replace older fixtures with newer models that use less water (one gallon of water per flush or less). However, facilities can achieve far greater savings by installing waterless urinal systems (unfortunately, many building codes do not allow these fixtures).  Further, according to a study by the Rand Corporation, waterless urinals often provide a significant savings due to their lower annual maintenance costs, in addition to the benefits incurred from reduced water use.

Alternative water sources. Some facilities, and even some legal jurisdictions, have installed or are planning to install “greywater” distribution systems. Grey water is tap water soiled by use in washing machines, tubs, showers, and bathroom sinks that is not sanitary, but it’s also not toxic and generally disease-free. Grey water reclamation is the process that capitalizes on the water’s potential to be reused instead of simply piping it into a sewage system. While this water is considered non-potable (that is, not for human consumption), it can usually be used for toilets and traditional urinals, as well as for plant/landscape irrigation in some cases.

Another “alternative” water source is rainwater which can be harvested where capturing and storing rainwater is an easy and effective way to conserve water through a commercially viable payback period. Selecting a rainwater harvesting system is dependent on the collection area of the commercial site and the intensity of rainfall in the particular region of the country. Once the availability and demand are calculated, the system should be designed to meet the daily demand throughout the dry season.

Cooling tower water recovery is another “alternative” source of water. Cooling towers remove heat from a building’s air conditioning system by evaporating some of the condenser water. Since all cooling towers continually lose water through evaporation, drift, and blowdown, they can consume a significant percentage of a building’s total water usage. Towers that are in good condition, operated properly, and well maintained allow chillers to operate at peak efficiency. Some cooling towers can use recycled water like stormwater or grey water if the concentration ratio is maintained conservatively low. Similarly, blowdown water may be reused elsewhere on-site.

Leak Detection. In most cases, leaky restroom fixtures and pipes are only fixed when they become excessive or cause problems, such as water pooling on floors. Leak detection systems in critical or remote locations tied to a BAS to notify maintenance staff of water leaks ensure a quick response before building walls, ceilings, and equipment are permanently damaged. A formal leak detection program—in which building engineers regularly check all fixtures and major plumbing connections on a set schedule — can save literally thousands of gallons of water annually.

And, finally, educate the users. Water conservation is not only about innovation and good design practices, but also about building an understanding among water consumers to work together to achieve a greener and more energy-efficient environment. It is important to educate users about water scarcity issues and the impact of water conservation practices through signage and awareness campaigns at the point of use.

Conclusion

Usually overshadowed by high-efficiency HVAC systems or LED lighting retrofits in commercial building modernization and sustainability programs, water is increasingly becoming a scarce commodity and implementing a water conservation plan may just be the low hanging fruit of sustainable benefits. From the invention of a water-leak detection system to implementing sustainable retrofits, the Emerald Skyline team can provide you with the tools and guidance you need to save money by saving water.

The Financial Analysis of a Deep Sustainable and Resilient Retrofit

PJ Pictureby Paul L. Jones, CPA, LEED Green Associate, Principal,
Emerald Skyline Corporation

According to a guide to the energy retrofit market entitled “Deep Energy Retrofits: An Emerging Opportunity” and published by the American Institute of Architects (AIA) in conjunction with the Rocky Mountain Institute (RMI), “Energy efficiency in existing buildings is most often addressed by upgrading dated engineering systems such as lighting and HVAC systems with better performing technologies… A design-centered, holistic approach to a retrofit, in which all the interactions in a building’s systems are considered can yield substantially higher energy savings. Retrofits of this type, called deep energy retrofits, aim for energy savings upwards of 50%.”

A green or sustainable building refers to both the real estate (land, building, fixtures, furniture and equipment) and its maintenance, or the use of processes that are environmentally responsible and resource-efficient throughout its life cycle (e.g., site planning, building design, construction, occupancy and operation including maintenance and renovation, and, finally, demolition. In our corporate brochure, we state that “A facility made sustainable by Emerald Skyline Corporation will have a small carbon footprint, high occupant comfort, limited environmental impact and conserved natural resources.”
Accordingly, a deep sustainable retrofit, hereinafter referred to as a “Deep Retrofit,” is designed to lower energy, water and waste disposal bills as well as operating, maintenance and insurance costs with increased marketability and higher long-term values due to a higher tenant capture rate resulting in premium occupancies and rental rates as well as reduced risk resulting in a lower cap rate upon sale. Other benefits include improved employee health, productivity and satisfaction from improved indoor environmental quality.

With recognition of the increasing importance of resiliency in the ability of a building to survive and recover from a catastrophic event, any Deep Retrofit should also include improvements that reduce a building’s vulnerability and risk due to stronger winds, higher storm surge, more frequent flooding, wild fires and other natural hazards that threaten our families, livelihoods, businesses and properties.

As a Deep Retrofit represents a significant modernization of a facility during which over 50% of the building is renovated, the optimum time to implement a Deep Retrofit is upon acquisition, to improve a building that suffers from significant vacancies, to reposition or repurpose a building, pursuant to a new lease (or renewal thereof) to a major tenant or timed to certain events in a property’s life cycle. A Deep Retrofit is a tremendous catalyst for a building’s comeback.

According to Jack Davis in a 6/14/2012 article entitled “Energy-saving Deep Retrofits published by the Urban Land Institute, “Deep retrofits are part energy efficiency project, part real estate project, and can be daunting in their cohesive nature. However, in a 2011 study the New Buildings Institute found that “in most projects, the cost of the efficiency portion was not distinguishable due to the renovation nature of the work.

Mr. Davis makes another valid point: “Psychologically, Deep Retrofits are simply more inspiring that a piecemeal approach. They they do not occur by accident; they imply the involvement of a capable team with a plan and the technical abilities to pull it off. They grab our attention in a unique way. In the competition to secure and retain tenants, with buildings certified under the LEED program becoming the norm in some markets, deep retrofits offer a gut-level indicator that this building is different.”

Study after study (see our Sustainable Benefits article “Welcome to Sustainable Benefits – Let’s begin with the benefits of doing a commercial building sustainable retrofit” February 2015) provides evidence that a LEED (Leadership in Energy and Environmental Design) or Energy Star certified building produces returns beyond those realized from energy savings alone. Therefore, it only makes sense that the financial analysis of a Deep Retrofit should extend beyond the capital budgeting approaches presented in our September eNewsletter.

RMI defines Deep Retrofit Value (DRV) as “the net present value of all of the benefits of a deep energy or sustainability investment.” In the case of a Deep Sustainable Retrofit, the analysis includes a calculation of the change in market value resulting from the implementation of the Deep Retrofit, which is based on the income approach to value in a full property valuation.

The first step in the analysis of a Deep Retrofit is to perform a diagnostic assessment of the Building. The assessment will include:

  • Gain an understanding of the building’s historical performance through an analysis of existing usage of, and expenditures for, energy, water, building maintenance and cleaning supplies as well as tenant behavior
  • Perform a sustainability audit of mechanical, electrical, plumbing and other building systems as deemed appropriate which includes an estimate of the capital investment required as well as a forecast of future utility, maintenance and operating cost savings,
  • Evaluate internal environmental quality, waste disposal practices, purchasing and other operating policies, procedures and practices which will also include a calculation of any savings or incremental costs realized as a result of the Deep Retrofit; and
  • Determine the resiliency of the property by ascertaining the building’s ability to absorb and recover from actual or potential adverse effects of stronger storms, higher storm surge, wildfires and more frequent flooding.

The next step is to complete what RMI refers to as a “Value Element Assessment” which is designed to identify the potential types of value that may be created by the Deep Retrofit. The four key elements of added value are:

  1. Retrofit Development Costs: As noted in the capital budgeting process in our article on the Capital Budgeting Analysis of a Sustainability Project, any direct and indirect savings are measured against the capital cost to be incurred. The Retrofit Capital Cost Equation is as follows: Gross capital cost less avoided capital costs less cost savings through design less cost subsidies, rebates and incentives equals Retrofit Capital Costs
  2. Energy and Non-Energy Operating Costs: The first financial benefit from a Deep Retrofit will appear in the utility bills as both the wattage consumed and the amount of peak-demand billing that is avoided will result in an immediate reduction in the electric and gas bills as well as the water bill. Non-energy operating cost savings are realized from new technology, improved performance information and operating savings from reduced maintenance requirements, and, including resiliency measures in the Deep Retrofit is anticipated to result in reduced property, flood and hazard insurance expenses. Also, a Deep Retrofit will enable a building owner to comply with current and future regulatory reporting requirements due to automated benchmarking data collection.
  3. Rental Revenues: According to a primer for building owners and developers published by the Appraisal Institute in conjunction with The Institute for Market Transformation, Deep Retrofits have the potential to improve tenant-based revenues which are those revenues generated when building owners are able to monetize enhanced demand resulting from the Deep Retrofit.
    • “In many markets, rental premiums are emerging in green buildings as many of today’s best tenants are increasingly willing to pay a premium for green spaces… National studies for commercial office buildings back up this trend on rents and occupancy, as certified green buildings outperform their conventional peers by a wide margin (According to recent studies, the premium can range from 2% to 17%).
    • “Occupancy premiums can lead the case for green investments. If it can be determined that the green features will result in higher occupancy (through market research) than an otherwise similar building, a significant argument can be built for increases in value (from a reduced vacancy factor). Further, a LEED-certified building will attract demand from governmental agencies, Fortune 500 companies, major banks and insurance companies and other tenants who have corporate sustainability guidelines.
    • “Savings may be experienced as a result of tenant retention and the corresponding reduction in lost rents, reduced retrofit costs upon releasing spacer, lower vacancy at turnover and improved lease terms.
    • “Along with this improved occupancy premium, quicker absorption may be experienced in new properties or those that have been repositioned as green.”

While the calculation of the increased income is the same as for a traditional building investment analysis, the determination of the key assumptions requires extensive market research to support the assumptions which are input into a discounted cash flow model, like ARGUS® Valuation DCF.

  1. Sales Revenue Premium: Increased property values are realized from the higher net operating income realized due to reduced expenses and increased tenant revenues, lower capitalization and discount rates which result from risk-mitigating protections sustainable and resilient buildings provide property owners and banks, higher quality tenants, and increased investor demand. Recent surveys show that green commercial buildings trade at a premium ranging from 6% to 35% depending on the certification and the market. Studies have shown that capitalization rates for Energy Star and LEED-certified buildings are between 50 and 100 basis points lower than those for brown buildings.

Since the analysis is to determine the premium due to sustainability and resiliency improvements made to a commercial building. To complete this analysis, it requires the creation of a Cash flow projection under two scenarios:

  1. Baseline: A baseline projection is prepared based on the property in its current operating condition and market position; and
  2. Post-retrofit: This projection incorporates the retrofit development costs, the reduced operating expenses, the premium rental revenue and the any anticipated reduction in cap rate.

The difference in net operating income and the reversionary value is discounted based on the risk profile of the property and the investment to determine the value add from completing the Deep Retrofit.

The benefits of a Deep Retrofit can be significant!

With over 30 years of experience in acquisition due diligence, property valuation and cash flow forecasting as well as the ability to conduct the diagnostic assessment and create a Deep Retrofit program and budget, Emerald Skyline is uniquely qualified to be your advocate in planning, analyzing and executing your sustainable and resilient retrofit project.

The Capital Budgeting Analysis of a Sustainability Project

by Paul L. Jones, CPA, LEED Green Associate, Principal,
Emerald Skyline Corporation

calcRegardless of whether you are building your ark and waiting for the sea level to rise or if you are a climate-change denier, the writing is on the wall: sooner or later, you will need to modernize your building to improve its sustainability and resiliency. Accounting for almost 40% of the world’s energy consumption and greenhouse gas emissions, buildings are considered a high-impact sector for urgent mitigation action on climate change.

Accordingly, building owners, managers and tenants need to assess the opportunities and possibilities for improving sustainability in order to optimize the benefits realized – both physically through reduced consumption and waste and financially through proper planning, budgeting and financing.

Let’s begin by recognizing that there is a robust business case for investing in sustainability and resiliency measures (see the Sustainable Benefits article “Welcome to Sustainable Benefits – Let’s begin with the benefits of doing a commercial building sustainable retrofit….”) which enables the stakeholders to improves profits, saves the planet and be socially responsible corporate citizen (the “Triple Bottom Line”).

The first step in creating a sustainable retrofit program is to benchmark the property. According to Ms. Clare Broderick in her article, Creating an Energy Efficient Plan – One Step at a Time, (GlobeSt.com, 3/4/2015), “There is much truth to the adage, “whatever you measure improves”.  Whether you are responsible for one building or a portfolio of properties you need to know your starting point in order to gather quantifiable results.”

Another step to facilitate the cooperation and sharing of costs and benefits between the landlord and the tenant is to align the interests through a Green Lease (for more on Green Leases, see the Sustainable Benefits article “Overcome Obstacles to Going Green with Green Leases“). Systematically including sustainability clauses at lease creation or renewal facilitates energy efficiency, sustainability and resiliency retrofit projects.

Sustainability and resiliency measures are not all capital-intensive. Many relate to building operations – like aligning operating hours with actual building occupancy or changing the time when cleaning crews work. Conventional wisdom states that the best way to start a sustainability program is to begin with free or low-cost measures which creates an environment where people who work or visit a building start thinking about reducing, reusing and recycling. (see the Sustainable Benefits article “Going green – Fifty free or low cost ways for commercial property owners, managers and tenants to begin.”).

While low cost measures and the replacement of energy-inefficient lighting and equipment occurs at the time of natural replacement as part of the annual capital budgeting process for property maintenance, the timing for a significant building sustainable retrofit is usually determined by the investment or occupancy cycle of the building:

  • To attract a new tenant or retain an existing one;
  • As part of the process to prepare a property for sale; and
  • Upon acquisition as part of a value-enhancement business plan.

Maximizing the benefits from investing in the modernization (sustainability) and risk-reduction (resiliency) of a building utilizes a capital budgeting approach and requires the diagnostic review of the building which provides an understanding of the current equipment in use and an assessment of the improvements that can be made to accomplish your sustainability goals and objectives. The key to stakeholder action is to use capital budgeting based on forward-looking investment plans that facilitates the decision-making process.

In addition to planned equipment replacement upgrades, the first type of upgrade which is typically analyzed and approved as part of the annual management plan involves low-impact initiatives which generally have a short payback and can be implemented in currently occupied/leased buildings. These measures include commissioning an energy audit, replacing lighting and installing occupancy sensors and mid-level building energy management and control systems with interval energy data monitoring among other programs. In the case of these types of improvements, the capital budgeting decision can be limited to the relevant costs and benefits as hereinafter described.

The second is referred to as a “deep refurbishment” or “deep retrofit” project that aim to achieve high energy performance of the whole building which may include upgrading the building envelope, replacing the base building lighting systems, installing next generation smart building automation systems, adding solar or other renewable energy systems that require significant capital investment that cannot be recovered solely through the energy savings of the first few years, and the financial analysis of investment opportunities needs to include the impact on asset values.

Simple capital budgeting measures that are commonly used by engineers and contractors in proposals are the Payback Period and the Return on Investment:

  • The Payback Period in capital budgeting is the amount of time necessary to recapture the investment in a retrofit project, or to reach the break-even point. For example, the cost to upgrade lighting to LED is $25,000 which is forecasted to generate $14,000 in energy and maintenance savings would have a 1.79 year payback period (Cost divided by annual savings or earnings).
  • The Return on Investment is the inverse of the Payback Period and calculates the percentage return on an investment relative to the investment’s cost. In our example, the Return on Investment would be 56% (annual savings or earnings divided by cost).

While both the Payback Period and Return on Investment provide a quick way to evaluate and compare capital projects, the next level of analysis is multi-year and involves the time value of money which are commonly used in analyzing real estate investments. They are the Discounted Cash Flow, Internal Rate of Return. Another method is the Profitability Index and, finally, the method that is recommended in evaluating alternative investments is Life Cycle Costing. For all of these measures, it is important to forecast anticipated savings, earnings and costs over the investment horizon (typically, the life of the equipment):

  • The Discounted Cash Flow (“DCF”) method “discounts” the estimates of future savings, earnings and costs using the cost of capital or other investment threshold to arrive at a present value estimate. The cost of the project is then deducted from the present value to arrive at the Net Present Value (“NPV”). The project is acceptable if the NPV is greater than zero. It can also then be used to compare to other projects.
  • The Internal Rate of Return (IRR) is the rate at which the NPV of cash flows of a project is zero (i. e, the rate at which the present value of the future cash flows equals the initial investment). This is a yield calculation and the project is acceptable if the project IRR is greater than the Cost of Capital or other investment return threshold.
  • The Profitability Index (“PI”) is calculated by dividing the present value of the project’s future savings, earnings and costs by the initial investment. A PI greater than 1.0 indicates that the profitability is positive while a PI of less than 1.0 indicates that the project will lose money (the NPV would be less than zero). It is a useful tool for ranking alternative projects because it allows for the quantification of the value created per unit of investment. Most of the time the PI will be consistent with the NPV methodology; however, they may be in conflict due to different project scale or different pattern of cash flows. Conventional wisdom is to use the NPV when the PI is in conflict with it.

In each of the NPV, IRR and PI, the future savings are determined using the difference in future consumption/expenditures based on the economy of the new equipment or process over the anticipated costs of continuing use of the existing equipment.

  • Life Cycle Costing (“LCC”) is a tool to determine the most cost-effective option among different competing alternatives to purchase, own, operate, maintain and, finally, dispose of an investment in property, plant, equipment or process. According to BusinessDictionary.com, it is the “Sum of all recurring and one-time (non-recurring) costs over the full life span or a specified period of a good, service, structure or system. It includes purchase price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life.”

Consider the following example in the selection between two air handling units (from “Sustainability/LEED and Life Cycle Costing – Their Role in Value Based Design and Decision-Making” by Stephen Kirk, PhD, and Alphonse J. Dell’Isola, PE, date unknown):

Consider the selection between two air handling units. A 10% discount rate, a 24-year life cycle and a differential energy rate escalation of 2% per year are assumed. Other relevant data (NOTE: For all capital budgeting decisions, only incremental cash flows are included. Accordingly, sunk costs – those costs that have already been incurred – cannot be a part of the incremental cash flows used in the financial analysis of a capital project.) are:

Type of Cost Alternative 1 Alternative 2
Energy Efficient Economy
Initial cost $15,000 $10,000
Energy (annual) 1,800 2,200
Maintenance (annual) 500 800
Useful life 12 years 8 years

 

The solution begins by converting all annual or recurring costs to the present time. Using the present worth annuity factor, the recurring costs of maintenance would be:

Alternative One: maintenance (present worth) = $500 x (8.985) = $4,492

Alternative Two: maintenance (present worth) = $800 x (8.985) = $7,188

According to the discount rate tables, the present worth of the energy costs for each alternative would be:

Alternative One: energy (escal. @ 2%) = $1800 x (10.668) = $19,202

Alternative Two: energy (escal. @ 2%) = $2200 x (10.668) = $23,470

 

Replacement or nonrecurring costs are considered next. When one or more alternatives has a shorter or longer life than the life cycle specified, an adjustment for the unequal life is necessary. If the life of an alternative is shorter than the project’s life cycle, the item continues to be replaced until the life cycle is reached. On the other hand, if the item life is longer than the specified life cycle, then a terminal or salvage value for the item is recognized at the end of the life cycle. This treatment using the present value factors is illustrated as follows:

 

Alternative Two: replacement (n = 8) = $10,000 x (0.4665) = $4,665

Alternative One: replacement (n = 12) = $15,000 x (0.3186) = $4,779

Alternative Two: replacement (n = 16) = $10,000 x (0.2176) = $2,176

The salvage value for both systems equals zero since they both complete replacement cycles at the end of the twenty-four year life cycle. A summary of present worth life cycle costs follows:

 

Type of Cost Alternative 1 Alternative 2
Energy Efficient Economy
Initial cost $15,000 $10,000
Maintenance (recurring) cost 4,492 7,188
Energy (recurring) cost 19,202 23,470
Replacement (nonrecurring), year 8 0 4,665
Replacement (nonrecurring), year 12 4,779 0
Replacement (nonrecurring), year 16 0 2,176
Salvage, year 24 0 0
Total present worth life cycle costs $43,473 $47,499

 

The first alternative would be selected on the basis of this LCC analysis.

Of course, any analysis should reflect the rebates that are available from manufacturers, utilities and governmental agencies.

As you can tell, the simple Payback Period and ROI analyses may be appropriate for small projects, like replacing the lighting, but using the DCF, IRR and PI methods provide better information while Life Cycle Costing Analysis provides the best basis for evaluating a project, or alternatives among projects, in making the capital budgeting decision.

As a CPA, I know that these analyses require time and skill to accurately prepare, but making sound capital budgeting decisions when improving a property using these techniques is the lynchpin of profitability. Emerald Skyline Corporation is uniquely qualified to be your advocate in planning, analyzing and executing your sustainable and resilient retrofit project.

In my next article, I will present the investment analysis of a “Deep Retrofit” as pioneered by Rocky Mountain Institute.

When assessing risk and reward in acquiring commercial real estate – be sure to cover all your bases including sustainability and resiliency

PJ Picture

 

by Paul L. Jones, CPA, LEED Green Associate

It is a great day – you have just put a property you like under contract. Now the work begins…conducting your acquisition due diligence. You know the program:

  • Obtain the deliverables from the seller
  • Research title for exceptions and obtain insurance binder
  • Ensure compliance with building and zoning codes
  • Engage the appraiser
  • Hire an engineer to conduct a property condition assessment
  • Hire an environmental engineer to prepare a Phase I environmental site assessment
  • Abstract leases and agree to the rent roll, check expense pass-through calculations and conclude on in-place and prospective income
  • Analyze the market and assess the property’s competitive profile including Green certification, utility expenses (electricity, gas, water and waste) and resiliency
  • Review all existing contractual relationships and obligations, including property maintenance, service and other agreements, warranties (equipment, roof, elevator, etc.)
  • Obtain property insurance quote and coverage binder
  • Establish the veracity of the operating statements and establish an operating budget
  • Update the cash flow forecast and yield assessment to evaluate the purchase price and desirability of the investment

What if I were to tell you that with all this work, you may not have covered all your bases. Let’s go back to the purpose of your acquisition due diligence: to ensure that you are getting what you thought you were getting and to assess, eliminate or quantify the risk and rewards in the investment.

Just like your market analysis which looks at both current conditions as well as the pipeline of future competition and the affordability of new competitive construction; In a rapidly changing environment, it is important for purchasers and investors in real estate to evaluate the property’s operating and energy efficiency, indoor environmental quality and resiliency as well as anticipate future environmental, regulatory and operating conditions.

Regardless of your personal position on climate change and sea level rise, commercial real estate is going to be affected – and because of real estate’s primary characteristic – it is immovable – the effects can be significant.

  • According to the report, “Risky Business: the Economic Risks of Climate Change in the United States” which was published last summer, “If we continue on our current path, by 2050 between $66 and $106 billion worth of existing coastal property will likely be below sea level.”
  • FEMA is anticipating a 45% growth in the areas susceptible to flooding due primarily from sea level rise by the end of this Century – just 85 years away.
  • According to the Institute for Market Transformation, “fourteen cities, two states and one county in the United States have passed laws requiring benchmarking and disclosure of energy use in buildings.” To learn more about where and under what conditions benchmarking is required, go to org. (FYI – these requirements are soon to affect over 5 billion square feet of space AND the EPA estimates that buildings that are benchmarked save an estimated 7% in energy over three years).

PJ Building Benchmarking

I live in Miami. Last week, we were in the cone of TS Erica which looked like it could grow into a hurricane. Businesses and people in South Florida began making preparations by buying staples like gas, batteries, non-perishable food supplies and reviewed their disaster plans. Thanks God the storm did not materialize and all we had was a hard rain which did cause flooding throughout our community. Climate change and sea rise are similar – you prepare for the worst and hope for the best. It does not hurt that in preparing for the worst, we actually are able to delay the time for the rise to occur (through a reduced carbon footprint). Accordingly, prudent investors are well advised to include the following additional due diligence procedures to assess the sustainability and resiliency risk inherent in the property.

  • Obtain information on the risks the local community experiences due to climate change which could range from increased storm intensity and flooding due to sea level rise, wild fires and water restrictions due to drought conditions, or increased utility usage due to higher average temperatures.
  • Obtain information on new or prospective municipal environmental requirements and evaluate the property leases and operations to determine the ease and cost of compliance.
    • For instance, if benchmarking is going to be required, do the leases in place require the tenant to share utility usage information (if, as is the case with many properties, the tenant pays utilities directly).
  • In an era of increasing utility costs and more efficient lighting, HVAC and other systems, do the leases provide for a proper sharing of the cost of replacing the equipment if it results in a reduction in utility usage? See my article on Green Leases in the Sustainable Benefits archives.
  • Obtain current and prospective FEMA flood maps to ascertain the risk and timeline the property will be in a flood zone in the future.
  • If the property is not a Green-rated building (LEED, EnergyStar, etc.), have the engineer assess the age and efficiency of the building systems.
  • From your insurance agent, obtain information regarding anticipated future availability and rate increases.
  • In evaluating the competitive leasing market, evaluate the relative absorption, rents, occupancies and tenant quality of Green buildings vs. traditional buildings to determine the market demand for sustainable buildings.
  • Evaluate the building’s ability to absorb and recover from to actual or potential adverse effects of stronger storms (wind and rain), higher storm surge and more frequent flooding in coastal areas or tornados, wildfires and dust storms in other areas. Each location has its own set of risks. Some resiliency due diligence questions to ask are:
    • Is the building site and entrance flood-proof?
    • Is the landscape design hazard-resistant?
    • Does the building have back-up power systems including HVAC and water)?
    • How secure is the interior environment from damage due to higher storm intensity?

The checklist of due diligence items and questions to be answered with regard to a property’s sustainability, resiliency and ability to comply with ever evolving government, insurance company and tenant requirements needs to be customized based on the location of the property as well as its class and quality.

In a November 2014 article, “Do-or-Die Due Diligence, Auction.com Vice President Andre Cuadrado warns “The due diligence process is one of the most important, yet challenging aspects of investing in real estate. If it’s not conducted thoroughly with a keen eye, an investor could end up with bad deals and lose millions of dollars.”

Cuadrado advises investors to spend the time and resources necessary to conduct due diligence thoroughly. “Some people try to save money on the process,” he notes, “but it’s expensive to be cheap when conducting due diligence, as your investment may end up not being what you thought it was.”

Remember, as Sun Tzu is quoted from The Art of War: “Every battle is won before it is even fought.” This is true for real estate investing as well – complete and thorough due diligence is the key to risk reduction and profit enhancement.

The breadth and depth of our experience and understanding of commercial real estate due diligence, sustainability and resiliency, Emerald Skyline Corporation is uniquely qualified to be your advocate in planning and executing your due diligence needs.

Welcome to Sustainable Benefits – Let’s begin with the benefits of doing a commercial building sustainable retrofit….

2/12/15

PJ Picture
By Paul L. Jones
, Founder,
Director, Financial Advisory Services for Emerald Skyline Corporation

 

“Who is more foolish: The child afraid of the dark or the man afraid of the light?” (Maurice Freehill, British WW I flying ace).

Figure 1 Empire State Building - LEED Gold

Figure 1 Empire State Building – LEED Gold

Throughout my 36-year career in commercial real estate, commercial buildings have generally been classified from A to C based on location, construction quality and tenancy. Class A buildings represent the cream of the crop. They secure credit-quality tenants, command the highest rents, enjoy premium occupancies, are professionally managed and have a risk profile that supports lower cap rates and higher values. Class B buildings are similar to Class A but are dated yet not functionally obsolete. Class C buildings are generally over 20 years old, are architecturally unattractive, in secondary or tertiary locations and have some functional obsolescence with out-dated building systems and technology. NOTE: No formal international standard exists for classifying a building, but one of the most important things to consider about building classifications is that buildings should be viewed in context and relative to other buildings within the sub-market; a Class A building in one market may not be a Class A building in another.

Based on years analyzing investments in income properties, it appears to me that in the recovery from the Great Recession the commercial real estate market has evolved to include energy efficiency and environmental design as a requirement for improving the marketability of a building – not to mention optimizing its operating income and value.

COMMERCIAL OFFICE BUILDINGS

On December 1, 2014, Buildings.com, in an article entitled “GSA Verifies Impact of Green Facilities,” reported that a study conducted by GSA and the Pacific Northwest Laboratory conducted a post-occupancy study of Federal office buildings, which varied in age and size and had been retrofit to reduce energy and water consumption. The following results were based on a review of one year of operating data and surveys of the occupants which was compared to the national average of commercial buildings: High performance, green buildings:

  • cost 19% less to maintain
  • Use 25% less energy and water
  • Emit 36% fewer carbon dioxide emissions
  • Have a 27% higher rate of occupant satisfaction.

One of the most famous sustainable retrofit projects undertaken was the updating of the 2.85 msf Empire State Building whose ownership directed that sustainability be at the core of the building operations and upgrades implemented as part of the $550 million Empire State ReBuilding program. According to Craig Bloomfield, of Jones Lang LaSalle (JLL), “After the energy efficiency retrofit was underway, JLL led a separate study of the feasibility study of LEED certification” which “showed that LEED Gold certification was within reach at an incremental cost of about $0.25 psf.

Graphics on financial benefits of high-performance buildings

Source: Institute for Market Transformation: Studies consistently show that ENERGY STAR and LEED-certified commercial buildings achieve higher rental rates, sales prices and occupancy rates.

Source: Institute for Market Transformation: Studies consistently show that ENERGY STAR and LEED-certified commercial buildings achieve higher rental rates, sales prices and occupancy rates.

According to the report “Green Building and Property Value” published by the Institute for Market Transformation and the Appraisal Institute, a trend is emerging where green buildings are both capturing higher quality tenants and commanding rent premiums. As indicated by the above graph summarizing four national studies for commercial office buildings back up this trend on rents and occupancy, as “certified green buildings outperform their conventional peers by a wide margin.”

  • According to the EnergyStar.gov website, “Transwestern Commercial Services, a national full-service real estate firm, has generated impressive returns through sound energy management. In 2006, Transwestern invested over $12 million in efficiency upgrades, for an average 25% energy savings. The Company estimates that dedication to energy management has increased the portfolio’s value by at least $344 million.”
  • According to John Bonnell and Jackie Hines of JLL – Phoenix, “In Phoenix, owners of LEED-certified buildings can capture a premium of 29 percent over buildings without this distinction.” The premium for Green buildings had disappeared during the Great Recession and reemergence in the first quarter of 2014 as a result of improving Phoenix market dynamics which is being realized in other major markets as well.

RETAIL

For retail buildings, the tenants are driving the shift to sustainability with green building as consumers become increasingly aware of the environment and the need to reduce, reuse and recycle. According to the “LEED in Motion: Retail” report published by the USGBC in October 2014, “LEED-certified retail locations prioritize human health: among their many health benefits, they have better indoor environmental quality, meaning customers and staff breathe easier and are more comfortable. In a business where customer experience is everything, this is particularly valuable.’ Green retail buildings also out-perform conventional buildings and generate financial savings:

  • On average, Starbucks, which just opened their 500th LEED-certified store, has realized an average savings of 30% in energy usage and 60% less water consumption.
  • McGraw-Hill Construction, which surveyed retail owners, found that green retail buildings realized an average 8% annual savings in operating expenses and a 7% increase in asset value.

It is noteworthy that, according to the third annual Solar Means Business report published by the Solar Energy Industries Association, the top corporate solar user in the United States is Walmart. In fact, almost half of the top-25 solar users are retailers (the others are Kohl’s, Costco, IKEA (9 out of 10 stores are solar powered), Macy’s, Target, Staples, Bed Bath & Beyond, Walgreens, Safeway, Toys ‘R’ Us, and White Rose Foods). Other Top-25 solar users with a significant retail footprint include Apple, L’Oreal, Verizon and AT&T.

In the competitive retail market, the study also noted that being distinguished for pro-active and responsible corporate social responsibility attracts customers and investors.

MULTI-FAMILY BUILDINGS

In a study of 236 apartment complexes conducted by Bright Power and The Stewards of Affordable Housing released last July, 236 properties in two programs, HUD’s nationwide Green Retrofit Program and the Energy Savers program available from Illinois’ Elevate Energy and the Community Investment Corp. One year of pre- and post-retrofit utility bills were analyzed. The researchers found the following:

  • Properties in the Green Retrofit Program had realized a 26% reduction in water consumption – or $95/unit annually.
  • The energy consumption in the Green Retrofit Program was reduced by 18% representing an annual savings of $213/unit.
  • Surveyed buildings in the Energy Savers program had reduced gas consumption by 26% and had reduced excess waste by an average of 47%.
  • The water saving measures in the Green Retrofit program reflected a simple payback period of one year while the energy savings measures had a simple payback period of 15 years.

In an article be Chrissa Pagitsas, Director – Multi-family Green Initiative for Fannie Mae, reports that 17 multifamily properties have achieved Energy Star® certification with two of them, Jeffrey Parkway Apartments in Chicago and ECO Modern Flats in Fayetteville, Arkansas, receiving financing from Fannie Mae.

  • The Eco Modern Flats complex is over 40 years old. With the goal of reducing operating expenses, the project was retrofit in 2010 with energy and water efficiency improvements including low-flow showerheads and faucets, dual flush toilets, ENERGY STAR® certified appliances, efficient lighting, closed-cell insulation, white roofing, solar hot water and low-e windows. As a result of the retrofit, the property achieved a 45% reduction in water consumption, a 23% drop in annual electricity use including a 50% savings in summer electricity consumption while increasing the in-unit amenities, obtaining LEED Platinum certification and increasing occupancy by 30% resulting in a significant increase to Net Operating Income.

Multi-family properties made sustainable gain a competitive advantage in marketing to young professionals and other target audiences who prefer to live in an environment that is healthy and energy-efficient which saves money on utilities.

HOTELS

In a 2014 study conducted by Cornel University, researchers compared the earnings of 93 LEED-certified hotels in the US to 514 non-certified competitors. The study included a mix of franchised, chain and independent facilities in urban and suburban markets with three-quarters of the properties having between 75 and 299 rooms.

The results show that green or sustainable hotels had increased both their Average Daily Rate (ADR) and revenue per available room (RevPAR) with LEED properties reporting an ADR that was $20.00 higher than the non-certified properties (prior to certification, they reported an ADR premium of $169 vs. $160).

The researchers noted that these premiums were realized in price-competitive markets and that the amount of the premium was unexpected. From the results, they concluded that Eco-minded travelers were willing to pay a modest premium to stay at a verified green facility.

Further, the savings realized in electricity and water usage as well as reductions in waste disposal fees and costs as well as reduced maintenance costs go straight to the bottom line resulting in increased Net Operating Income. Here are some examples:

  • The Hampton Inn & Suites, a 94-room facility in Bakersfield, had REC Solar install carport-mounted solar panels which is offsetting 44% of the electricity costs, or up to $8,800/month – adding over $100,000 to the property’s bottom-line.
  • The 80-room Chatwall Hotel in New York completed an LED lighting retrofit project mid-year 2014 which will result in a first year savings of almost $125,000. The cost: just about $1.00 per LED light after rebates.

According to Flex Your Power and ENERGY STAR® statistics, the hospitality industry spends approximately $4 billion on energy annually with electricity, including the HVAC system, accounting for 60% to 70% of utility costs. In fact, excluding labor, energy is typically the largest expense that hoteliers encounter and the fastest growing operating expense in the industry (www.cpr-energy.com). The EPA has concluded that even a 10% improvement in energy efficiency is comparable to realizing a $0.62 and $1.35 increase in ADR for limited service and full service hotels, respectively.

Many studies show that hotels do not realize the full benefit of many energy efficiency measures as guests feel no obligation to employ sustainable practices and wastes the opportunity for savings afforded by the hotel’s energy efficiency measures; however, almost half realize savings in excess of 20% reflecting that many operators have found ways to enlist guest cooperation in saving electricity and water.

According to the US Energy Information Administration (EIA) 2012 Commercial Buildings Survey, the United States had approx. 87.4 billion square feet of floorspace in 5.6 million buildings that were larger than 1,000 sf which also excluded heavy industrial manufacturing facilities. Ninety percent of the buildings that will exist in2035 have already been built – and buildings consume 80% of energy used in cities worldwide and represents almost 20% of all energy consumption in the United States.

Source: US Department of Energy 2013 Renewable Energy Data Book, 1/22/2015

Source: US Department of Energy 2013 Renewable Energy Data Book, 1/22/2015

 

The evidence is clear – building and operating sustainably pays dividends – in improved NOI from cost savings and increased revenues. Attracting higher quality tenants, improving market perception and reducing risk indicates that going Green is becoming a key for maintaining the Class of a building – keys to improving long-term values through lower cap rates.

So, why aren’t more building owners and managers going green? We will seek to discern this matter in our next Sustainable Benefits.

The Invisible Hand

6/10/14

PJ Picture

 

By Paul L. Jones, Founder,
Director, Financial Advisory Services for Emerald Skyline Corporation

 

 

Adam Smith, author of The Wealth of Nations, gave definition and meaning to the economics and laid out the foundation for the economic system on which the U.S. was based. As noted in the introduction to the Condensed Wealth of Nations published by the Adam Smith Research Trust, “It took the outdated, received wisdom about trade, commerce, and public policy, and re-stated them according to completely new principles that we still use fruitfully today.” (http://www.adamsmith.org/sites/default/files/resources/condensed-WoN.pdf)

The economic system we have come to know as capitalism facilitates a free market economy built on the concept that both sides benefit from trade and that the market had an “automatic mechanism that allocated resources with great efficiency” which we know as the Invisible Hand. According to Smith,

“Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” The Wealth of Nations, Book IV, Chapter II, p. 456.

It is the invisible hand on which we continue to rely as we count on the developers, owners, managers and tenants of commercial real estate to act in their own best interests – which, undoubtedly, is to improve operating cash flow and maximize the value of their properties.

In my first two posts, I highlighted some of the economic benefits to eradicating functional obsolescence in an existing building and avoiding it in a new building.   The studies that have been performed all indicate that a sustainable retrofit puts money into the pockets of all of the stakeholders in a property.   Now, here are some more statistics that hopefully get your attention (as reported by Rob Roth, , Ph.D., Chief Executive Officer, EnergyActio, in the recently released “2014 INSIDER Knowledge” published by Environmental Leader (www.environmentalleader.com) :

“In the United States, the average commercial building wastes approximately 30% of the energy that owners and tenants pay for. On an annual basis, energy waste costs owners and tenants more than $60 billion which is equivalent to:

  • $60 billion in lost business profits
  • $857 billion in lost capitalized asset value (at a 7.0% cap rate)
  • Funding for 1.3 million jobs (at the 2013 average wage of $45,790).”

In an article posted by NREI/Green Real Estate Strategies yesterday (6/9/2014), John Bonnell and Jackie Hines of Jones Lange LaSalle in Phoenix, report that “LEED-certified buildings can capture a premium of 29 percent over buildings without this distinction.” They further report that “It appears that a green building is no longer a luxury, but a requirement here to stay.”

As more owners, investors, managers and tenants pursue the Sustainable Benefits to be derived from remediating functional obsolescence through a sustainable retrofit, the invisible hand will enable us to achieve the societal goals of reducing our carbon footprint, minimizing our contribution to climate change and extending the life of our natural resources.

Remember, reuse, reduce and recycle.

Be well and be blessed, Paul

Monetizing Sustainability Investments for Business Decision Making

Tod Christenson, John Platko, Antea Group, 5/27/2014

View the original article here

Today’s sustainability investment options are extensive and broad ranging, including relatively straightforward efforts (e.g., energy conservation projects) to multi-year/multi-stakeholder initiatives (like those that target social and environmental improvements deep within an organization’s supply-chain). While doing any or all of these could yield significant benefits, it is often unclear which will generate the greatest, most enduring value. Faced with this dilemma, leaders often struggle to understand which choices are best and how they should evaluate the many alternatives to ensure the most effective, efficient and sustainable decisions are made.

One way to improve would be to encourage better, more quantitative analyses that examine the full costs and benefits associated each investment in sustainability, combined with an analysis of which could make the greatest contribution for the business, the environment and society simultaneously.

While most understand that “when the economics work, the social and environmental benefits last,” many barriers remain for those wishing to accelerate the pace and effectiveness at which sustainability initiatives are funded and implemented, including:

  • the lack of a demonstrated link between sustainability and business value;
  • failure to communicate the strategic potential of such efforts in a way investment decision-makers can understand and appreciate; and
  • not leveraging proven, familiar processes (that other company functions have applied) to accelerate decision-making and scale solution implementation.

Accenture’s 2013 CEO survey (UN-Global Compact – Accenture CEO Study 2013: Sustainable business and the pace of change) seems to agree, reporting that 37% of 1,000 top executives feel that the lack of a clear link to business value is a critical factor in deterring them from taking faster action on sustainability. It should be noted that this percentage is increasing: in 2007, just 18% reported a failure to trace such a link and in 2010, this figure rose to 30%.

Our experience confirms this trend, as we regularly note good projects that do not receive sufficient (or any) investment as these initiatives are perceived as failing to deliver competitive business value.

From our vantage point, there are two principal challenges that need to be overcome for sustainability to be viewed as a more critical contributor:

First, the “equations” for presenting business cases do not sufficiently include all the benefits of investing in sustainability – specifically, these efforts should include an accounting of potential contributions such investments could make in terms of:

  • Offsetting of risk (brand risk, reputation risk, supply/commodity risk, regulatory risk, etc.);
  • Delivering efficiency gains; and/or
  • Adding revenue/market share (via innovation and/or building brand/reputational equity).

Without accounting for and quantifying all these dimensions, sustainability investments risk appearing less important than other business investments and hence are perceived as not carrying as much “strategic weight.”

Second, sustainability departments are generally not equipped to build and pitch multi-dimensional business cases – this requires a combination of strategic, financial and political skills rarely found among these practitioners. Challenging questions are being posed, and few confident answers are being provided:

  • Are we realizing value expected from existing, funded sustainability initiatives?
  • We have many sustainability investment choices, but which ones are the best for our business?
  • How confident are we that our actions will yield the tangible and intangible benefits promised by the business case?
  • Do we understand the true business impact and cost of doing nothing?
  • How do we increase the reliability and credibility of our business case analyses, and therein, how can we increase the confidence of our sustainability investment decision-making?

Value Creation: Business & Sustainability

Linking sustainability to value creation is becoming a new imperative for business leaders. As such, investments in sustainability must be more connected to both business and societal benefits, improving management of risks/costs and stimulating growth and/or innovation, while simultaneously helping companies better meet societal and environmental expectations and obligations. When building the case, leading organizations are increasingly articulating associated sustainability benefits within a clear and simple framework, one that illustrates how these investments can better protect, strengthen, and/or advance the business.

Frequently, benefits of this sort are intangible, uncertain and generally difficult to quantify in ways that are credible and agreeable to all decision-makers. Determining the appropriate level of analysis, who must be engaged, what input is required, etc., is often a challenge requiring innovative, clever leadership, clear process and strong cross functional engagement to ensure success. Commonly, those that pursue such efforts ensure they always ask:

  • Am I using the right vernacular, do I understand, and more importantly, use terminology and methods familiar to financial and other decision-makers, or am I only talking in “sustainability speak?”
  • Have I considered all relevant costs or benefits (tangible or intangible) in my analysis?
  • Have I engaged the appropriate internal domain or functional experts to gather data, experience and methods needed to build a credible, monetized investment analysis?
  • Have I accommodated and considered future variability and other possibilities that could impact decisions or outcomes?

Innovators Are Creating the Case for Sustainability Today

Ultimately, value-adding sustainability investments protect, strengthen and/or advance business endeavors while simultaneously improving the environment and society’s well-being. Clearer demonstration of such value creation capability is becoming more common as innovative organizations repurpose standard management and strategic tools to deliver a more compelling case for sustainable investment and action.

As a consultant to private industry for more than 30 years, Tod Christenson partners with clients to develop and implement fit-for-purpose and innovative solutions to drive sustainability across the entire value chain. He has unique skills and expertise in the areas of strategic thinking and planning methods, sustainability, corporate social responsibility, organizational diagnosis and coaching, and benchmarking.

John Platko has nearly 30 years of business, sustainability, environmental, health and safety leadership experience. His client engagements involve the development and implementation of strategies, plans and programs that emphasize simultaneous creation of business, environmental and social value for private sector clients operating domestically and internationally. John has led projects in more than 40 countries in North America, Latin America, Europe and the Pacific Rim. He is a founding member of the company’s sustainability practice; a leader in Antea Group’s Accounting For Sustainability – AA4S decision-support service; and the primary architect of iEHS, the company’s web-based environmental, health, safety and sustainability information management platform.