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Who Pays and Who Benefits from the Improvement?



Before you can quantify the value of improved energy efficiency in a leased property, you need to evaluate carefully who will pay for the improvement and who will benefit from it. Only then can you take the next step: determining how those savings might drive improved profitability, competitiveness, and value.

Take the example of an income-producing office building. If the operating expenses are lowered, the owner, the tenant(s), or both will realize the savings, depending on the expense-sharing provisions of the leases and certain other factors. The portion of the savings that goes to the owner will increase net operating income (NOI – the mother’s milk of real-estate investors), which, in turn, could improve the appraised value of the building when it is refinanced or sold. Meanwhile, the improved comfort and convenience that often accompany energy-efficiency upgrades may help with tenant retention and attraction. The portion of the savings captured by the tenant will lower occupancy cost, which will improve the tenant’s ability to pay rent. The combination of energy savings and the improved look/feel of the space may make the tenant more interested in renewing the lease.

The moral of the story: It does little good for engineers to focus on kilowatts, kilowatt-hours, simple payback period (SPP), and other commonly used metrics to describe and evaluate projects if they forget to consider other vital issues, such as who would pay for the upgrade, who would benefit, and the downstream effects of the projected energy savings.

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Posted by Mark Jewell