Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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35 March | April | 2016 CCIM.com Benchmarking to Manage Risk Representing 20 to 35 percent of aver- age annual operating costs, according to BOMA, utility costs are the most variable operating expense for commercial office buildings and can signif cantly impact NOI and asset value. While many benchmarking tools exist, the Environmental Protection Agency's Energy Star Portfolio Manager is the national standard with 40 percent of U.S. commercial building space bench- marked in the tool. Portfolio Manager is a no-cost, online program that rates building performance on a 1 to 100 scale and compares it with sim- ilar buildings across the country. An Energy Star score of 50 represents the national average, while a score of 75 indicates that a building is performing in the top 25th percentile of similar buildings across the country and is eligible for the Energy Star certif cation, the industry-wide standard for energy-ef cient properties. While the Portfolio Manager program is not a perfect solution, it utilizes the largest data set and provides an apples-to-apples comparison, allowing real estate owners to compare the energy performance of their buildings with similar buildings in their portfolio and across the country. It should be noted that Portfolio Manager compares the end result, energy used per square foot, also known as energy use intensity or EUI, and there are many factors that contribute to a building's overall performance. An ever-increasing number of cities and states across the country, including Califor- nia; Washington State; Austin, Texas; Phila- delphia; San Francisco; and Seattle require the disclosure of Portfolio Manager-gener- ated utility consumption and cost data dur- ing real estate transactions and ref nancing. Disclosing energy performance data shows the buyer, lessee, and lender whether the property they are buying, leasing, or lend- ing on is an energy hog or a high performer. T is information provides a detailed history of property performance that may uncover hidden risks or opportunities and add value to the transaction. However, benchmarking utility data in Portfolio Manager or a similar tool does not guarantee data accuracy. Potential buy- ers should request the trailing one-to-two years' worth of utility bills and compare with the utility costs reported on the seller's balance sheet. T e true value of this analysis is supported by the risk of under-reporting utility costs and the direct impact on NOI and asset value. For example, under-reporting annual util- ity costs by $90,000 in a 400,000-square-foot of ce building with full-service tenant leases at a 6 percent capitalization rate artif cially inf ates asset value by up to $1.5 million. Once confirmed, annual utility costs should then be compared with tenant utility income on the balance sheet to conf rm that utility costs are recovered in accordance with FINDING ADDED VALUE THROUGH OPERATIONS Quick Returns (Payback periods < 1 year) Optimize existing building automation system controls. Replace existing incandescent and fl uorescent bulbs with high effi ciency LED bulbs instead of replacing all fi xtures. Control air leakage from openings in the building envelope (such as HVAC ducts, doors, and penetrations). Add lighting controls, such as occupancy and daylight sensors. Enhance HVAC equipment maintenance practices. Install low-fl ow aerators on bathroom faucets and low-fl ush valves on toilets and urinals. Extended Returns (Payback periods of 1 to 3 years) Install variable frequency drive controls on pumps and fan motors. Replace incandescent and fl uorescent lighting fi xtures with high effi ciency LED fi xtures. Optimize HVAC free cooling economizers. Install centralized lighting control systems. Upgrade lighting fi xtures that operate during standard tenant lease hours. Install demand-controlled ventilation for buildings and parking garages. Add refl ective roof coatings. KampolG/Thinkstock