energy efficient

If the benefits of a sustainable retrofit are so robust, why isn’t everyone doing one?

PJ PicturePaul L. Jones, CPA, LEED Green Associate, Principle, Emerald Skyline Corporation

A sustainable retrofit includes replacements and upgrades that result in lower energy, operating and maintenance costs as well as improved occupant satisfaction. A sustainable facility will have a small carbon footprint, limited environmental impact and conserves natural resources. They can range from replacing conventional lights to LED bulbs, adding motion-control switches and installing low-flow water fixtures to installing a green roof, replacing the building skin and adding solar panels to all of the above.

When you fully understand the economic benefits of doing a sustainable retrofit which include lower expenses and rent and occupancy premiums resulting in higher NOI as well as reduced cap rates resulting in higher long-term values, you realize how few property owners, managers and tenants have actually made the decision to pursue an upgrade of their building(s), it initially does not compute a United Nations Environmental Program Finance Initiative Investor Briefing entitled “Unlocking the energy efficiency retrofit investment opportunity” reports:

  • Buildings with the Energy Star label had significantly stronger performance than similar unlabeled buildings: 13.5% higher market values, 10% lower utility costs, 5.9% higher Net Operating Income (NOI) per square foot, 4.8% higher rents and 1% higher occupancy rates.
  • A study using Co-star data concluded that LEED-certified buildings and Energy Star rated buildings versus non-rated buildings had 8% higher effective rents (a function of both the rental amount and the occupancy rate) and a 13% sales price premium.

See also my article, “Welcome to Sustainable Benefits – Let’s begin with the benefits of doing a commercial building sustainable retrofit” for additional survey results and case studies that demonstrate the results building owners and managers have realized.

In a 2012 study by The Rockefeller Group and Deutsche Bank Climate Change Advisors, however, reported that approximately $72 billion in capital is needed to be invested in sustainable retrofits to effect profitable energy efficiency in the existing building stock. However, the total spent in 2012 was just $1.5 billion.

Once you understand the relative perspective of the stakeholders in both the investment and the benefits, the resistance to effecting a sustainable retrofit can be understood.   Let’s dissect the framework in which the decision to make sustainable improvements are made and the issues and motivations that cause a property owner not to update and improve their property which are:

  • Short-term investment horizon
  • Incongruous lease structure
  • Capital and operating budget limitations
  • Financing availability, complexity and/or cost
  • Limited knowledge, time and/or motivation to effect energy upgrades

Understanding these investment, operational and financial constraints is the first step in developing solutions that will result in making the sustainability and resiliency of the existing stock of commercial buildings feasible and practical.

Short term investment horizon:

In the era of REITs, CMBS, hedge funds, crowdfunding and private equity, investment hold periods are frequently in the 3 – 7 year range when investors can typically optimize the IRR and other profitability measures or bail on a bad investment and reallocate their capital. As a result, many investors will only consider sustainability measures that have a two-to-three year payback period. Deep energy retrofits with savings of 30% to 50% that result from retrofitting multiple building systems requiring more time and capital to effect are tabled and not done.

Solution: The current and prospective investment environment will continue to reflect hold periods that are relatively short; however, the solution is for investors, owners and managers to realize that a sustainable retrofit enhances the long-term value of the property and will cause investment returns to increase. Including the costs and benefits of upgrading a building is a common way for sponsors to demonstrate the inherent value of a property – especially one that is not fully leased or suffers from functional obsolescence or poor aesthetics and other physical limitations on its marketability to prospective tenants. Many business plans include upgrading a building from one class to a higher class which results in increased rents and lower cap rates. As evidenced by many studies, including sustainability and resilience in the business plan is an increasingly important component in any market-oriented building upgrade. The solution is for sponsors, investors and owners to realize this and to put it into practice.

Future articles will present sustainable ideas many of which can be implemented with no capital investment required.

Incongruous Lease structure

Commercial buildings, a/k/a income properties, are leased to tenants pursuant to a variety of lease structures with the four most common being as follows:

  1. Gross Lease, or full service gross, is a lease where the landlord/owner collects a stipulated rent amount and is pays all expenses including real estate taxes, insurance and operating expenses that are comprised of utilities, repairs and maintenance and management. The room rate paid for a night in a hotel and a lease for a self-storage unit are examples of gross leases.
    • Apartment leases are typically considered to be a gross lease as the landlord is usually responsible for all operating expenses including real estate taxes, building insurance, common area maintenance and utilities, and property management while the tenant is responsible for the unit’s electricity (and sometimes water) and interior maintenance.
  2. Modified Gross Lease is a gross lease where the landlord/owner collects a stipulated rent amount plus a reimbursement of real estate taxes, insurance and operating expenses which exceed an agreed upon amount which is typically an estimate of the building expenses for the initial lease or calendar year. Typically, at the end of the year, the actual expenses are reconciled to the estimate and any increase is passed to the tenant based on its pro-rata share. Most multi-tenanted office buildings are leased pursuant to modified gross leases.
  3. Net Lease is a lease where the landlord/owner collects a stipulated rent amount plus building expenses which include real estate taxes (net), taxes and insurance (double net); or taxes, insurance and operating expense (triple net) depending on the terms of the lease. If the building is multi-tenanted, the tenant pays its pro rata share.   Most net leases are currently triple net. Retail properties are typically leased using a triple net lease.

In a standard Full Service lease, there is no split incentive in the lease structure as any and all savings realized from a sustainable retrofit inure to the benefit of the owner; however, the property manager may not be incentivized to promote a retrofit as it would be responsible for supervising and effecting the improvements without any additional management fees. With regard to an apartment complex, the landlord’s incentive to invest in energy efficiency measures is limited to the common areas – or to improve the competitive position and marketability of the units to prospective tenants.

In a standard Modified Gross lease as well as a Net lease, the landlord/building owner is not incentivized to invest the time, money and personnel resources to effect a sustainable retrofit as the landlord receives no direct financial benefit as the tenant pays the operating expenses and receives all of the benefit of lower operating costs.

Solution: Creating a lease structure that equitably aligns the costs and benefits of efficiency, sustainability and/or resiliency between building owners and managers, known as a green lease, aligned lease, high performance lease or energy efficient lease, will create sustainable and substantial benefits, both quantitative and qualitative, for both tenants and owners/landlords.

  • According to Jones Lang LaSalle, “A green lease need not be complicated. Often it merely requires structuring terms and agreements already in place, such as temperature settings and building operating hours, in a fashion that provides sustainable cost savings with negatively impacting building performance.”

To effect a green leasing program that includes both current and prospective tenants, engaging a consultant that understands both commercial lease structures and efficiency and sustainability retrofits to maximize the sustainable benefits to be derived therefrom.

Green leases will be addressed in detail in a future article.

Capital and operating budget limitations

Many properties suffer from a breakdown in communication and financial planning between building managers and building owners.   Building managers typically operate a facility pursuant to a one-year budget which causes them to budget and implement projects with a short term (1- 2 years) payback period. Consequently, capital improvements that have a longer payback period are not often recommended by management, or if recommended, not implemented by ownership due to a combination of knowledge, time or motivation to consider an energy upgrade or a perceived lack of available capital. This short-term horizon again limits the nature and extent of any efficiency or sustainable upgrades and prevents ownership from reaping all of the economic benefits that inure from a building retrofit.

Further, many times neither building ownership nor building management understand the nature and availability of financing options, tax credits, utility and local government rebate programs. Some of the programs, or a combination of programs, can result in building owners not having to come out of pocket to fund the improvements; however, the unique nature of them requires time which is typically focused on achieving the primary business goals of the organization.

Solution: Engage a sustainability consultant with knowledge of property operations and management as well as the nature of the available financing, credits and rebates – and how to source and evaluate alternatives in order to minimize actual investment dollars and the cost of any financing incurred.  Conducting a life-cycle analysis in addition to other financial analyses will provide ownership with the information needed to make the business decision.

Future posts will present investment analysis tools and methodologies with examples of the real economics of sustainable retrofits.

Financing availability, complexity and/or cost

Contrary to popular belief, energy efficiency and sustainability retrofits benefit from a variety of financing alternatives. However, for real property professionals who work with mortgage loans, mezzanine loans, preferred equity and similar forms of financing, retrofit financing options ranging from equipment leases to ESCO (Energy Service Company) contracts and PACE (Property Assessed Clean Energy) liens is a whole new world. When you add in the variety of tax credits, utility rebates and vendor financing, the options become complex.

Further, the sources for financing a retrofit are not usually the same ones that provide mortgage financing so it is a new arena which makes accessing sources and evaluating options time consuming and prohibitive.

Solution: Engaging a professional who is familiar with the types and sources of retrofit financing as well as the typical structures and issues of which owners should be aware is the easiest and most efficient way to determine and evaluate the options based on the financial and non-financial objectives of the owner.

The various retrofit financing options, examples of tax credits and utility and municipal rebates will be described and explained in future posts.

Limited knowledge, time and/or motivation to effect energy upgrades

In today’s competitive commercial real estate environment that is still recovering from the devastatingly harsh Great Recession of 2007, keeping your focus on the primary business of keeping space leased (as hoteliers say – heads in the beds) and watching every penny to the bottom-line is the first priority of owners and managers.

Even though the results of an efficiency, sustainability and/or resiliency retrofit provide a substantial boost to the net operating income (and cash flow) of a property, it does not become a high priority item due to lack of understanding of the process, the capital, management and labor requirements, the extent of the potential disruption to operations and tenants as well as knowledge of the additional value (rent premiums, occupancy premiums, higher quality tenancy, lower cap rate, increased investment value) and business benefits (reputation, image, goodwill) to be derived therefrom.

Also, many times building management staff, who may have the understanding of the sustainability technology will not have the financial literacy to present a compelling case to ownership.

Further, many energy service providers (who are typically considered to be the expert in facilitating a retrofit) do not know or understand the financing options that are available to building owners. Accordingly, these professionals are not able to property advise an owner on energy project financing.  Accordingly, many owners are not aware of, nor understand, the variety of financing mechanisms available to them.

Solution: Learn enough to realize that it is worth the time to learn about the options that are available, hire a sustainability consultant, architect or engineer to analyze the property, benchmark its energy and water usage and understand other maintenance practices, have the systems retro-commissioned to determine how well they are performing and develop an efficiency, sustainability and/or resiliency retrofit plan. Implement the plan and start realizing the benefits.

Our Sustainable Benefits blog will be your resource to learn and understand the new world we are transitioning into – one in which we leave the world better off for having lived (Emerson).

Top 25 Cities with Most ENERGY STAR Buildings

April 10, 2014
View the original article here

The EPA announced the sixth annual list of the top 25 U.S. metropolitan areas with the most ENERGY STAR certified buildings. The cities on this list demonstrate the economic and environmental benefits achieved by facility owners and managers when they apply a proven approach to energy efficiency to their buildings.

The Top 10 cities on the list are: Los Angeles; Washington, D.C.; Atlanta; New York; San Francisco; Chicago; Dallas; Denver; Philadelphia; and Houston.

“Not only are the ENERGY STAR’s top 25 cities saving money on energy costs and increasing energy efficiency, but they are promoting public health by decreasing greenhouse gas emissions from commercial buildings,” said Administrator Gina McCarthy. “Every city has an important role to play in reducing emissions and carbon pollution, and increasing energy efficiency to combat the impacts of our changing climate.”

Energy use in commercial buildings accounts for 17 percent of U.S. greenhouse gas emissions at a cost of more than $100 billion per year. ENERGY SSTAR-certified office buildings cost $0.50 less per square foot to operate than average office buildings, and use nearly two times less energy per square foot than average office buildings.

The data also show that more than 23,000 buildings across America earned this certification by the end of 2013. These buildings saved more than $3.1 billion on utility bills and prevented greenhouse gas emissions equal to the annual electricity use from 2.2 million homes.

First released in 2008, the list of cities with the most ENERGY STAR-certified buildings continues to demonstrate how cities across America are embracing energy efficiency as a simple and effective way to save money and prevent pollution. Los Angeles has remained the top city since 2008 while Washington, D.C. continues to hold onto second place for the fifth consecutive year. Atlanta moved up from the number five to number three. For the first time, Philadelphia entered the top 10, ranking ninth.

Commercial buildings that earn EPA’s ENERGY STAR must perform in the top 25 percent of similar buildings nationwide and must be independently verified by a licensed professional engineer or a registered architect. These certified buildings use an average of 35 percent less energy and are responsible for 35 percent less carbon dioxide emissions than typical buildings. Many types of commercial buildings can earn the title, including office buildings, K-12 schools, hotels and retail stores.

Products, homes and buildings that earn the label prevent greenhouse gas emissions by meeting strict energy efficiency requirements set by the U.S. EPA. In 2013 alone, Americans saved an estimated $30 billion on their utility bills and prevented greenhouse gas emissions equal to the annual electricity use of more than 38 million homes with the help of ENERGY STAR. The label can now be found on products in more than 70 different categories, with more than 4.5 billion sold. More than 1.5 million new homes and 23,000 commercial buildings and industrial plants have earned the label.

The 2014 Energy Star Top Cities are:
1. Los Angeles
2. Washington, DC
3. Atlanta
4. New York
5. San Francisco
6. Chicago
7. Dallas-Fort Worth
8. Denver
9. Philadelphia
10. Houston
11. Charlotte
12. Phoenix
13. Boston
14. Seattle
15. San Diego
16. Minneapolis-St. Paul
17. Sacramento
18. Miami
19. Cincinnati
20. San Jose
21. Columbus, Ohio
22. Riverside, Calif.
23. Detroit
24. Portland, Ore.
25. Louisville

More on the 2013 top cities: www.energystar.gov/topcities

More on Energy Star certified buildings: www.energystar.gov/buildinglist

With Temperatures Dropping, Interest in Energy Savings at Multifamily Properties Should be Heating Up

By Tal Eyal, FirstService Residential, 1/15/2014
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While winter made its official debut on December 21, the cold weather has been upon us for some time now and has gotten to extreme levels, including 20-year record lows across the country at the start of the year.
For boards, managers and other key decision-makers at multifamily housing properties, the dropping temperatures bring a rising interest in energy saving strategies, and a renewed focus on negotiating better utility rates. Facing a host of pressing management challenges throughout the year tends to put the issue of energy efficiency on the back burner. But each year, as the cost of heating common areas rises and fluctuates, the questions flare back up again: how can we save on costs and reduce our carbon footprint, and how can we help residents do the same? The fact is, by helping residents reduce their energy costs, properties are more likely to gain buy-in for those critical capital projects that come along.

With this in mind, some condo associations and executive groups have created energy committees to explore potential infrastructure improvements to common areas that create efficiency, and to determine how to negotiate better energy rates. Other HOAs—and rental property managers—have worked with their management companies to take concrete steps toward savings: conducting energy audits, implementing comprehensive energy conservation plans, and leveraging their collective purchasing power.

At FirstService Residential, for example, through our affiliate FS Energy, which focuses exclusively on energy management and advisory services, we have implemented a benchmarking and energy savings program for nearly 600 of our multifamily properties. The program, which began in New York City, has expanded to properties in Florida, and is launching in Chicago. In essence, the approach involves analyzing a building’s energy use and comparing it to similar structures; developing an energy maintenance plan to reduce consumption based on the findings of the initial analysis; and in the case of our northern properties, integrating an Energy Aggregation Purchasing Program to reduce natural gas and electricity costs.

The simple fact is that energy conservation is not just an important environmental goal, it should be a critical financial goal for every multifamily property. The correlation between better energy practices and real savings is irrefutable. Our program in NYC has realized more than $19 million in cost savings, while reducing the carbon footprint of our buildings by 68,630 metric tons, or 15.6 percent. We expect a similarly positive result in other regions of the country.

Ultimately, every multifamily property can benefit from some basic energy planning, along with some long-term infrastructure considerations. Some of the most important steps for properties to take include:
Conduct an energy audit: By assessing current energy usage patterns and costs, and by determining where conservation opportunities exist within a property, management can begin to develop a plan for savings. Every property that has not conducted a comprehensive energy audit should get one under way.

Pursue efficiency: Not only should boards and managers implement a procurement policy that prioritizes energy efficient products—including lighting, water heaters, and water saving devices—for common areas, they should develop a communications plan to encourage individual residents to take similar actions. Building management should consider offering regular energy savings tips in communications with owners and residents, along with opportunities to purchase energy efficient products at wholesale prices.

Train property management staff in energy conservation: Simple steps such as programming thermostats in common areas around usage patterns, and turning off lights in unoccupied rooms, can lead to savings. Staff should be trained to pursue strategies that reduce energy use.

Consider infrastructure improvements: Based on the outcome of their energy audit, properties may want to undertake more significant energy saving improvements, such better insulation, insulating window film, landscaping changes, and automated systems that monitor energy use.

While the winter weather puts energy use in the hot seat, the fact is that conservation and savings are year-round endeavors. Just consider the fact that in warmer climates, such as Florida and Southern California, cooling is the greatest expense. Even in New England, A/C use in the warmer months is a significant energy drain. With this in mind, decision-makers at multifamily properties should keep energy issues high on their list of priorities.

Tal Eyal is founder and president of FS Energy, the energy management subsidiary of FirstService Residential which advises residential property management clients of ways to reduce energy consumption, costs and emissions while improving property values and quality of life. Eyal oversees FS Energy’s operations, energy procurement business, as well as the data analysis and reporting of energy usage.