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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36 March | April | 2016 Commercial Investment Real Estate Property owners and managers are continuously looking for ways to set their holdings apart from competitors, whether by including unique amenities or touting location. In recent years the corporate real estate sector has incorporated sustainability in their port- folios, which has the potential to improve energy related cost savings and also appeals to tenants and their employees. To help determine what energy ef ciency upgrade options exist, the U.S. Department of Energy has developed the Building Energy Asset Score (www.energy.gov/eere/buildings/building-energy-asset-score), which assesses the physi- cal and structural ef ciency of a building at no cost to the user. "We developed the Asset Score to f ll a critical gap in the market — helping build- ing owners f gure out how ef cient their building is compared to others, based upon its construction and installed equipment," says Roland Risser, director of DOE's Building Technologies Of ce. "With the Asset Score, people buying a building now have the same knowledge as people buying a car. Our goal is to empower both building owners and potential buy- ers with the information they need to make smart investments in energy ef ciency." As of January 2016, the Asset Score has been used to evaluate the energy ef - ciency of 825 commercial and multifamily residential buildings totaling more than 83 million square feet in more than 30 states. Buildings totaling an additional 155 million sf are in the process of utilizing the Asset Score. A nationally standardized tool, the Asset Score generates an energy ef ciency rating based on building data related to its underlying energy assets such as the building envelope, lighting, hot water, and HVAC systems. T ese features have a substantial impact on building performance despite operational and occupant behavior modif cations. T e Asset Score runs a sophisticated whole-building energy simulation and generates a report that provides an energy ef ciency score ranging from 1 to 10. A complement to the U.S. Environmental Protection Agency's Energy Star Portfolio Manager energy management tool, the score is an assessment of the building's individual systems, an estimate of the total amount of energy used and consumed by end use, and ef ciency upgrade opportunities. T e generation of a simple energy ef ciency rating score enables Asset Score users to compare their buildings against others and determine what measures will improve performance and add value to holdings. T e Asset Score can guide energy improve- ments for building owners and third-party management companies. It enables energy service companies to enhance existing services and tools, allows for state and local governments to identify energy cost-saving opportunities within their own portfolios, and assists utilities in identifying customers eligible for energy ef ciency rebates. Monica Kanojia is a communications consultant for the U.S. Department of Energy. Contact her at Monica.Kanojia@ee.doe.gov. Encouraging Energy Effi ciency by Moni nojia performance of existing building equipment, rather than capital-intensive equipment replacements, often provides the greatest returns for potential buyers. Addressing energy savings opportuni- ties during due diligence simply accelerates NOI reductions before operating and capital budget restrictions are in place. While this approach won't make or break a transaction, it adds value to the deal — the icing on the cake. To determine where to look for opera- tional savings, it is important to f rst under- stand your client's investment goals. If the property is a short-term hold and your cli- ent has limited capital to invest in improving building operations, look at those improve- ments with payback periods of less than one year to immediately increase NOI and asset value. If the property is a long-term hold, consider expanding the list of opportunities to include improvement projects with one- to three-year payback periods and the replace- ment of electrical and mechanical equipment nearing the end of its life expectancy. Many utilities of er generous incentives for energy ef ciency upgrades that can reduce project costs by up to 100 percent, signif - cantly improving your client's returns. For example, Duke Energy, AEP Ohio, and Entergy Arkansas all install compact f uores- cent lamps and high ef ciency faucet aerators and showerheads in apartment units at no cost. T is project can improve client returns by lowering the cost of occupancy, increas- ing resident retention, and reducing lamp replacement and labor costs that typically fall under the operating budget. Engaging Professional Help Even in high performing buildings with Energy Star scores greater than 75, a qualif ed professional can typically identify improve- ment opportunities that reduce property utility costs between 5 and 20 percent with minimal capital. Early in the due diligence process, engage an engineering or operations consulting company to perform a detailed operational assessment of the property. T is assessment may be an addendum to the condition assessment, or may be performed by an operations consulting company with expertise in enhancing building operations. When evaluating companies to perform tenant lease requirements. T is will mini- mize potential risks associated with over- or under-recovering tenant utility costs. Building Operational Value Energy Star scores are a strong indicator of property performance. In general, the lower the score, the greater the opportunity for util- ity cost reductions. T e due diligence period provides a window of opportunity to under- write low-cost operational improvements to ensure the projects are funded and increases in NOI and asset value are realized. Targeting operational opportunities that improve the