Unlocking Value from Holistic Approach to Building Upgrades

Blog Summary: Many commercial building energy efficiency upgrades are proposed each year, but more than 75% of projects that are proposed do not get approved. This is why...

Per Scott Harmon from Building Buzz[1], many commercial building energy efficiency upgrades are proposed each year, but more than 75% of projects that are proposed do not get approved. There are three main reasons why this happens:

 1.      No Budget: Most projects don’t get approved because there is not a budget. Unless the equipment is broken or at end of life, the building owner has no reason to budget for it.  Upgrading lighting, installing building controls and replacing a functioning chiller are often unplanned investment opportunities. The majority are unforeseen and therefore unbudgeted.

2.      Lack of Trust: Building owners do not trust the forecasted savings in energy efficiency equipment proposals. Presented with a proposal to purchase more efficient equipment, the building owner is asked to (a) replace equipment that’s most likely not broken and (b) make a decision based on the IRR that’s computed by the person selling the equipment.

3.      Meeting Internal Hurdle Rates: Most purchase decisions had to pass a payback test.  How long will it take the building owner to get their cash back? Every building owner has a hurdle rate for payback.  If the project doesn’t meet the internal hurdle rate, there is no chance it will get approved.   

Minerva’s turnkey building upgrade program takes a holistic approach that combines energy efficiency, water efficiency, renewable energy, building envelop and seismic upgrades and with third party financing, such as PACE. Property Assessed Clean Energy (PACE) is a form of capital that building owners can use to fund energy efficiency and renewable energy projects eliminating the need for the upfront capital investment In California, PACE can be used to cover the costs of seismic retrofits, as well as energy and water upgrades. PACE authorizes municipalities or counties to work with private capital providers to provide upfront financing to commercial property owners for qualifying improvement projects, and to collect the repayment through annual or semi-annual assessments on the property’s tax bill.

By addressing multiple goals in one renovation project, owners can transform one-component-at-a-time projects into synergistic, high-return projects.  The economics for many of these projects can be cash flow neutral or positive from day one. Thus, the traditional “split incentive” barrier, whereby the owners pay for the capital expenses for energy efficiency upgrades, while the tenants receive the energy savings benefits through a reduction in their proportionate share of the base building operating expenses can be overcome with this program. Building owners can now view their building upgrade projects as value-creating investments and not unwanted, unnecessary expenses for themselves and their tenants. 

Having been in the construction business for many years, I am very excited about this program.  To learn more about how to unlock value from the holistic approach to building upgrades, please join us for the Better, Safer Building event on 2/2/17. http://tinyurl.com/z67jmle.  


Marianna GrossmanComment