San Francisco Building Ordinance: Why Owners Shouldn’t Just Treat This Like a Tax

This is the third and final post in our three part series that explores San Francisco’s Existing Commercial Building Energy Ordinance. In the first post, we went over why the legislation was passed, the second post talked about how to comply if you own a building and here we will discuss how owners can make the most of this new requirement.

As a building owner or manager it is tempting to believe that your building is operating as well as it could be – or even if it isn’t that you don’t have the time or money to do anything about it.

If that is the case, you might be tempted to find the cheapest audit you can and just throw away the results as you focus on other things that matter more to you day to day, like occupancy and tenant comfort. While this approach is common, it may not be the best way to stay competitive in the ultra-competitive San Francisco real estate market.

Here are a few reasons why:

  • Electricity prices continue to go up
  • Demand for green buildings is on the rise
  • Reduced energy costs will either increase your NOI or decrease your CAMs, providing real value to the building through increased Cap rate and decreased vacancy.

Let’s explore a little further…

The cost of electricity is going up. It has gone up more or less steadily since the 1970’s and considering the massive capital overhauls that the electric grid needs in the next 10 to 20 years, that trend is only likely to accelerate. Depending on the lease structure of your building, this could be a strike against your bottom line or your tenants’, but either way there is going to be less expendable income in the future unless usage goes down accordingly. Keeping energy costs down will be good for your bottom line and attracting tenants.

The demand for green commercial office space is going up. This is probably not news to you if you own a building in San Francisco, but the data only gets clearer every year. The Urban Land Institute’s 2013 Emerging Trends in Real Estate emphasizes yet again how important green features are for attracting companies. Here is what they have to say: “Green buildings with high ratings under the Leadership in Energy and Environmental Design (LEED) program and energy-efficient systems leapfrog the competition: tenants calculate operating savings and find they can attract young talent who favor “cool space” and nods by their employers to environmental correctness.”

Other cities, such as New York, have already started disclosing energy star scores and, unsurprisingly, high profile buildings are getting called out by name for either under or over performing. Odds are you don’t want to be one of those buildings that ends up at the bottom of the barrel, so it is important to get energy use under control now.

Efficiency will make you more profitable – and sellable – either through increased NOI or decreased CAMs (which impact occupancy). Energy efficiency is, hands down, among the best investments available on the market right now with internal rates of return easily exceeding 15 or 20%. On top of that, efficiency will impact valuation through increased NOI. With some lease types, the NOI will improve directly from reduced costs while with others a decrease in CAM costs will attract new tenants, decreasing vacancy and increasing the NOI. Either way, the value of your building will increase substantially by investing in good energy efficiency projects (or decrease if you let your neighbors get ahead).

Ok, you say. You get it, it is important to be efficient – but you are pretty sure you already are! Well, as data nerds, we have to ask: How do you know? We have been to hundreds of commercial properties with energy star scores ranging from 8 to 100, and we have found cost effective energy efficiency opportunities in every single one to the tune of 5-30% reductions (see some of our case studies for examples). The thing about energy waste is that it is really hard to see. Good energy audit firms bring in tons of tools and lots of expertise specifically about efficiency and are able to find things that even a good facility chief might miss.

This is double-edged sword though – finding good projects takes real work and if you go with the cheapest audit you can find, you might not get a product you can use. Instead of opening the opportunity to accrue literally tens of thousands of dollars to your bottom line, you will be throwing away that money.

What about upfront capital? There are tons of low-interest financing options for energy efficiency investments – including zero interest loans from PG&E or deferred payments from Carbon Lighthouse directly. Many efficiency measures can also be passed through as CAMs, saving you from bearing the brunt of a 15-year depreciation schedule.

We hope that we have made a compelling case to treat these audits as an opportunity. You have to do it anyway, so you might as well make the money work for you.

(P.S. There are so many other benefits to good energy efficiency projects, we can’t even begin to cover them here, but a few are that Energy Star certified buildings are exempt from audits and that efficient buildings put less wear and tear on mechanical systems – increasing lifetime and further reducing operating costs.)

2 Responses to San Francisco Building Ordinance: Why Owners Shouldn’t Just Treat This Like a Tax

    • Lindsay Stephens says:

      Thanks for the great question Albert! NOI is “Net Operating Income” and CAM is “Common Area Maintenance”. Energy audits can identify excellent energy savings opportunities which can lead to some great financial benefits. By implementing cost saving energy efficiency measures, building owners can see an increase in their NOI and/or a decrease in CAM.

      Reply

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