Best Practice Guide

Commercial Office Buildings

Funding and Approval

Selling the Program

To have an energy project approved and funded, it must successfully compete with other capital investment proposals. The good news is that energy projects reduce operating expenses by as much as 30 percent. Whenever operating expenses decrease, net operating income (NOI) rises; this is one of the few ways to stimulate internal growth and is especially important since opportunities for external growth - buying and building - can be limited. NOI is used to calculate asset value, so is important for evaluating the long-term financial health of a company. For every $1 invested in energy efficiency, asset value increases by as much as $3.

The first step in getting a project approved is to understand the internal investment criteria of the company, often quantified in terms of the rate of return on investment (RRI). Use this information to weigh the cost-benefit of potential projects. Whenever possible, calculate the life-cycle cost, not just first-cost, since this can be misleading. Assess the levelized cost and relative net present value of projects so that the cost of capital and the tradeoffs between investment options can be fully evaluated. For income properties, look at lease structures to calculate how much of a project's estimated energy costs savings is retained by the building owner as opposed to the tenants.

The next step is to explore creative funding strategies, such as government and utility incentive programs. To secure rebates and grants before a project is fully implemented, carefully align the project to meet program requirements and then establish open communications with the local utility or authorizing government agency to facilitate approval. When working with contractors, discuss how performance contracts or performance guarantees might reduce first-costs or lower the risk of investment by tying payment to end results, usually measured in terms of cost reduction or utility meter readings.

When articulating the benefits of an energy project to internal stakeholders, speak dollars rather than kilowatts. Express both cost savings as well as the resulting increase in NOI. Mention intangible financial benefits like increases in worker productivity, tenant satisfaction and retention, competitive market advantage, and positive public relations stemming from environmental leadership. Energy managers who base their case on the financial sense of projects help demonstrate how building operations impact the bottom line just like any other company unit, and should receive similar consideration when investment dollars are at stake.

ENERGY STAR Financial Tools

ENERGY STAR Financial Tools
ENERGY STAR provides three tools that help assess the economics of energy projects. The Financial Value Calculator estimates potential financial returns that could result from increased energy efficiency. QuikScope helps allocate costs and savings between owners and tenants. The cash flow calculator helps decision makers assess the financing options for energy efficiency equipment.

Common Financial Definitions

Common Financial Definitions

Simple Payback - the length of time needed to pay back the initial capital investment, usually expressed in years.

Life-Cycle Cost Analysis - the total cost of a design choice over its serviceable life.

Levelized Cost - the present value of the total cost of an investment, converted to equal annual payments.

Net Present Value - the net result of an investment, expressed in today's dollars.

Return on Investment - the income an investment provides in a year.

More definitions plus links to calculators can be found in Appendix 1.

Business Examples

Glenborough Realty Trust learned the importance of effective communication. A local utility offered to provide a $70,000 rebate to offset costs for a lighting retrofit at a New Jersey property. However, the property staff were unsuccessful for more than two years to win management approval, in part because the project was not proposed in a way that made financial sense. After the project was shown to have an eight-month payback rate and had the utility's guarantee that the rebate would be available, senior management approved the project. This was one of the first of many lighting retrofits undertaken at Glenborough's more than 60 properties, and helped establish the momentum for other energy projects. As a result, Glenborough initiated its portfolio-wide Energy Management Program and instituted a company criteria of immediately performing projects that fall within a two-year payback period. In its first year, the Energy Program achieved annual energy savings estimated at $125,000. Glenborough estimates that another 33 projects slated for 2005 will reduce operating expenses by an additional $372,918 each year.

Arden Realty, Southern California's largest office landlord, recognizes the economic as well as the environmental benefits of investing in energy efficiency. Arden's energy efficiency initiatives, through its subsidiary, next>edge, are supported at the highest level of management and are considered an integral part of Arden's operational strategies.


Resources

GreenBiz.com, Executive Briefing: Energy Management and Shareholder Value.

Innovest Strategic Value Advisors, Energy Management & Investor Returns: The Real Estate Sector.

Jewell, M.T., Energy-Efficiency Economics: What You Need to Know." HPAC Engineering: January 2003.

Hoots, M. Finance for FMs an excerpt from Capital Planning and Budgeting - IFMA's Facility Management Finance Competency Course (2005). Appeared in Buildings.com, October 2005.

Current electricity prices from the California Energy Commission.

Current natural gas prices from the California Energy Commission.

Energy Design Resources, eVALUator online calculator is an easy-to-use Windows-based program that calculates the lifecycle benefits of investments that improve building design.

BPG Appendix 1: Financial Calculators and Online Resources (PDF download, 84 KB)