A Income/Environmental Win-Win
In an owner-occupied property, it is easy to generate compelling justifications for making energy-efficient improvements. The same party that pays the costs of the improvement enjoys the resulting savings and benefits. Provided that the owner has access to capital and the rate of return is attractive, the upgrade is likely to be approved.
In a non-owner-occupied property, evaluating and implementing energy-efficient upgrades can be mote challenging. Leasing and property management practices often create disincentives to upgrading the energy efficiency of leased space. Variations in lease types and lengths, expense-sharing formulas, and other factors can make it difficult to assess the costs and benefits of upgrades. Considering the number of variables involved, calculating the true financial benefit of an upgrade from the owner's point of view can be a daunting task, especially in situations involving more than a few tenants.
Nevertheless, improving energy efficiency is an excellent way to lower building operating expenses, improve net operating income,and increase the asset value of an income property. For example, at a capitalization rate of 10 percent, every dollar in avoided energy expense may be worth an additional $10 in appraised value. This is certainly something to keep in mind when evaluating the cost of an upgrade and is particularly valuable if the owner is planning to sell or refinance the property soon.
An Alliance for Savings
Realizing the challenges faced by owners and managers attempting to apply energy-efficient technologies to income-producing property, the EPA has recently introduced the ENERGY STAR[R] Buildings program, Real Estate Management Ally Partnership (REMA), and QuikScope, a new software tool that simplifies the preparation of compelling upgrade proposals.
The EPA is well-qualified to offer income property owners and managers advice on matters of energy efficiency. For the last several years, ENERGY STAR Buildings and Green Lights[R] have provided high-quality, unbiased technical information and planning assistance on how to harness the economic and environmental benefits of improved energy efficiency. So far, more than 2,500 private and public-sector organizations have participated in these programs. Their properties represent more than 8 billion square feet, or more than 1 out of every 10 square feet of commercial and industrial space in the United States. With over 2 billion square feet of upgrades completed to date, these partners have already collectively saved more than $651 million per year on energy.
Like ENERGY STAR Buildings, REMA is a voluntary partnership program designed to provide managers with new tools and techniques for improving energy efficiency. Using innovative lease language, custom-designed software, and other mechanisms, the REMA program enables managers to address the "who pays, who benefits" side of energy-efficiency upgrades. By identifying and recommending profitable investments in energy efficiency, managers can make owners' properties more competitive in the marketplace because these upgrades simultaneously lower operating expenses and provide tenants with valuable amenities such as better climate control. Using REMA's tools and techniques also yields significant environmental benefits, which, in turn, can produce positive publicity for both building owners and tenants.
Amerimar Enterprises Inc. is a Charter REMA member based in Philadelphia. Vice President John Smyth says, "The economic and environmental benefits of energy efficiency typically make income property more competitive, resulting in better tenant retention and attraction. Lower expenses also produce higher net operating income and increased property value." Smyth notes that this increased NOI should be included as a financial benefit of the energy upgrades.
Beyond Gross Leases and Common Areas
Although some of the more than 11 billion square feet of non-owner-occupied commercial space in the U. …