Control Your Costs: Understand Energy
CONTROL YOUR COSTS: UNDERSTAND ENERGY
Flat rent, high vacancy and escalating taxes & operating costs are requiring property owners to become more aggressive in controlling overall building costs.
Energy is the 2nd highest operating cost for a commercial property. Simple changes to building procedures, understanding the utility market, upgrading equipment and controls, bulk purchasing, and maximizing on available incentives, are just a few ways to take control of your costs, position your real estate above the competition and most importantly put more money in your pocket.
Over the past few years, Upstate New York has experienced tremendous volatility in the energy sector. Many energy forecasters relate these fluctuations to climate change, crude oil inventories (higher supply and lower demand), as well as inadequate natural gas distribution systems that supply the upstate corridor of New York. Let’s face it; we have seen firsthand long drawn-out seasonal temperatures nearing all-time highs and lows. These abnormal inconsistencies affect the overall energy supply and demand available to the consumer resulting in increased costs and impacting overall profitability.
Now more than ever, commercial real estate owners need to be focused on utility cost as well as conservation and efficiency measures. Each year, commercial buildings waste approximately 30% of the energy they consume. Prospective tenants are no longer just looking at rental rates but have recruited representation to evaluate overall occupancy costs including utility costs in their property selection process. Building operating staff must be held more accountable and are playing a larger role in energy efficiency with their daily activities.
GET EDUCATED ON ENERGY
Before you proceed with an energy efficiency program it is imperative that you understand energy itself - how it is delivered, how usage is calculated, rate categories, daily rate variations, peak times, building demand, etc. You must also understand the impact of general building operations and systems on usage and rates. Contact your utility representative and have them setup (free of charge) educational workshops. Many full service real estate companies provide this re-source as well. The more you educate yourself and your staff about energy; the more you will lower energy costs and increase the bottom line.
ENERGY COSTS IMPACT YOUR PROPERTY VALUE
Reducing energy costs adds more dollars to your bottom line; it also impacts the valuation of your property for disposition or re-financing. Lenders and investors place significant emphasis on the bottom line for calculating valuation. The commonly used Capitalization Rate Method projects valuation through a property’s Net Operating Income (revenue less expenses). For example, if a bottom line is increased by $10,000 year through implemented energy strategies, this would add $125,000 of value using an 8% capitalization rate!
CONTROL UTILITY COSTS THROUGH TENANT LEASES
Tenant utility terms can significantly impact both landlord and tenant regarding utility costs and their escalations. Whether the utility costs are included in the base rent; separately metered for direct payment; charged back through submeters; building pro-rata share calculations; or otherwise, how leases are structured is critical in energy cost controls. Additional individual tenant consumption from abnormal hours of operation or tenant equipment and systems, can be controlled in the lease dictating economic consequences from outside “building business hours” or excessive use beyond specifically identified “industry standard” electricity usage. That general office tenant that is now three years into their lease that started as an 8am – 6pm operation is now a 24/7 high energy consumption user. Does the lease restrict them from this use? How is the Landlord passing through utility cost escalations? What are your rights as a landlord? It is very important to frequently audit your tenant’s usage to stay on track with your initial financial pro-forma. Provide your tenants with a Tenant Handbook that discusses hours of operations of building systems including lighting, heating, ventilation, air conditioning, etc.
How many times are we faced with sudden equipment failure when we were hoping to get two more years out of it? Doesn’t it make sense to have a capital plan and budget in place allowing you to make better educated decisions for equipment replacement options and timing? If there is no choice but to replace equipment, why leave cash incentives or “time pay-back returns” on the table from bad purchasing decisions. Take advantage of the free baseline building evaluations offered by many property management firms as well as the utility companies.
ELECTRICITY AND NATURAL GAS PURCHASING
Since the late 1990’s, New York gas and electricity consumers have had the option to shop or “price out” their energy or commodity provider. The New York State Public Service Commission (PSC) refers to this as “unbundling” your energy bill; separating charges for delivering energy to your business from charges for the energy itself. Alternate gas and electric providers, known as Energy Service Companies, or ESCOs, in New York, compete for your business in most utility areas. Many Capital Region building owners have reaped hundreds of thousands of dollars in benefits by contracting with these 3rd party providers. I encourage you to know your rights and choices as a consumer, price out your energy as if you were buying a car, and utilize your utility company as a resource to provide you with the necessary information to make a financially prudent decision.
LOCAL AND GOVERNMENTAL INCENTIVES
There are currently hundreds of thousands of dollars in incentives available for the taking. The time to act is NOW! Local and governmental resources are available to achieve maximum efficiency and financial return. Reach out to your local utility company and ask them to guide you to those available incentives. Explore all of your options and don’t jump on the first incentive that is offered to you. A little research can provide maximum return. One other point worth mentioning is that most incentive programs forbid you from seeking more than one incentive per project. Look at them all and go with the program that provides the best return. Below I have referenced a few websites that can provide you with efficiency options and incentive plans. However, I do find that “face to face” interaction proves to be invaluable.
3RD PARTY PROPERTY MANAGEMENT
Another effective option is the recruitment of a 3rd property management company. Today’s management companies are expected be well versed in all aspects of building operations, improvements, energy, accounting, and most importantly the client’s financial & operational objectives and expectations. The management entity can assist by providing a framework for an effective building energy plan that includes energy cost saving strategies, staff training, accountability, benchmarks, goals, and the ability to recruit outside resources. It’s not just about turning on the mechanical systems, changing light bulbs, and mowing the lawn. Today’s manager performs in an advisory role to facilitate maximum building efficiency and income potential by controlling the asset through operating budgets, capital exposure, operating cost monitoring, identifying available resources and financial incentives, and most importantly partnering with their client to achieve their objectives.
The energy game is filled with complexities that can appear intimidating and difficult to translate. Climate changes, commodities that are impacted not just by supply but also world affairs will continue to create volatility and cause uncertainties and fluctuation in the energy markets. I urge you to pay attention to the options and strategies available for your property as well as engage property management, utility, and government resources to help create the right energy plan for you. Feel free to pick up the phone and call me at 518-462-7491. I would be happy to share our success stories, as well as guide you on a path towards operating and energy efficiency.
Carrow Real Estate Services provides value to clients by reducing operating costs, increasing occupancy rates, and developing actionable marketing plans to produce positive cash flow. Learn more about how Carrow Real Estate Services can help you make better business decisions.