Green building strategies can benefit both the environment and your bottom line.
It’s been documented that strategies such as commercial solar and LED lighting retrofits, can deliver better risk-adjusted returns to real estate investors1 than comparable investments.
When combined with CPACE financing, green building investments can not only reduce risk, but also save money and generate incremental profits…
The following are five green building strategies that reduce risk and boost profit…
1) CPACE Financing:
Commercial Property Assessed Clean Energy (CPACE) is type of energy efficiency financing…
CPACE programs lend money for energy efficiency and renewable energy investments.
The first CPACE program was developed by the Connecticut Green Bank. However, CPACE financing is now available from conventional banks in many states across the U.S.
CPACE loans are unique because they can provide up to 100% of the capital for energy efficiency and renewable energy investments, such as solar.
Loans are amortized over long-terms (up to 25 years) and paid for along with your property taxes.2This means the CPACE loans run with the building and are considered “no-recourse loans”.
The best CPACE programs use a “Savings to Investment Ratio” (SIR) ratio in their calculations…
A savings to investment ratio tells you whether or not your savings from energy efficiency outweigh the cost of borrowing the money to make the improvements.
A SIR > 1 verifies that a CPACE loan will pay for itself.
In other words, the cost of amortizing the loan is LESS than the $$ value of the energy savings for the project.
CPACE programs are available in many states across the U.S.
How Does CPACE Reduce Risk (And Boost Profit)?
CPACE reduces risk through a comprehensive energy efficiency underwriting process that verifies that the energy saving measures will save more energy and electricity than they cost to repay.
CPACE also reduces economic risk because you don’t have to come out of pocket to make your real estate investments more valuable.
This means more dry powder for you to use to buy properties or make distributions to your LPs.
CPACE financing enables improvements that boost net operating income (NOI), increase property value, reduce tenant turnover, increase occupancy and reduce cap rates.
CPACE also has inherent tax advantages.
If a CPACE loan is used for a rooftop solar system, the real estate owner can get 100% of the capital from the bank, install the solar photovoltaics and take advantage of the Investment Tax Credit (ITC) for a 30% federal tax credit.
The ITC is good for renewable energy investments including wind, solar and other systems.
CPACE investments may also qualify for Modified Accelerated Cost Recovery System (MACRS) accelerated depreciation…
MACRS can be good for an additional 20% tax benefit each year on the cost of the system.3
2) Solar Plus Storage
As mentioned above, investments in solar energy benefit from the solar ITC (investment tax credit) and MACRS accelerated depreciation.
When combined with energy storage, solar energy can reduce your energy market risk even further, by shaving peak demand costs from your electric bill, while also opening the door to participation in demand response programs.
Energy storage means storing energy on site for later use. This is usually accomplished with battery hardware (such as lithium ion or flow battery systems) plus integrated or 3rd party software that optimizes the battery charging and discharging in the most cost-effective way.
Many real estate owners do not realize that a large portion of their electricity bill comes from “demand charges” by their utility.
Your utility uses the peak demand level to determine the capacity of electricity it needs to provide for your business throughout the year. However, if your peak usage only spikes once per year, that one spike may be costing you on every other day as well… Even when you are using considerably less. 4
For instance in the example above “Building A” has two large peaks of demand throughout the year. These two peaks are causing their electricity bill to be high throughout the year, whether they need that much electricity or not.
To resolve this, energy can be stored using batteries which then discharge when needed during those peaks. The utility then no longer needs to charge you for that capacity…
With solar energy plus storage, you can store inexpensive energy generated from solar or during off peak hours or from renewable sources and then use it during times of peak usage.
Not only can you save money by reducing peak demand, you can also use solar plus storage to enroll in a demand response program as described below.
3) Demand Response
Did you know that your local utility wants to pay you thousands of dollars to reduce your electricity consumption on certain days of the year?
It’s true…
Indeed, some Demand Response (aka “DR”) customers get paid hundreds of thousands of dollars per year in return for doing run of the mill things like temporarily turning off lights, increasing their thermostats in the summer by a few degrees and shutting down non-critical building systems.
Why would utilities pay building owners to do this?
Because the alternative (building additional power plant capacity) would cost utilities even more.
What is Demand Response?
Demand response is defined as a temporary reduction in energy usage for a specific duration, at a time of peak demand.
Utilities use DR to entice their customers to lower their demand for electric power generation during severe (peak) times when demand may outstrip capacity.
While most utilities may have adequate capacity to meet peak demand, such as in hot summer months, incentivizing reduced energy consumption is an alternative to building new power plants in order to meet incremental spikes in demand.
DR customers are paid by DR service providers to reduce their use of electricity during these peak times.
- Commercial real estate owners (office, retail, entertainment facilities, theaters, etc.)
- Industrial real estate owners
- Hospitals
- Municipalities
- Data centers
- Large residential buildings or communities
How Does Demand Response Reduce Risk (And Boost Profit)?
Demand response reduces risk for property owners because they receive information about their electricity usage while being paid to curtail. DR providers also often provide a leaderboard about how other building owners are doing relative to your building.
This is a positive feedback loop akin to the gauge on the dashboard of a Prius indicating your gas mileage performance against other drivers.
DR programs also reduce the risk of a brown out or blackout in your local area. They also boost profit by paying you to turn off systems you may not even be using at the time of a “peak event”.
Learn more by downloading our Special Report: How to Profit From Demand Response.
4) Smart Sensors:
Sensors are increasingly being used in smart buildings and smart homes.
Examples of smart building sensors include:
- Water leak sensors
- Temperature sensors
- Humidity sensors
- Air quality sensors
- Water flow sensors
You can buy these smart sensors yourself from Amazon and install them, or you can work with a smart building company to outsource everything and have them monitor their performance for you…
How Do Smart Sensors Reduce Risk (And Boost Profit)?
Sensors reduce risk because they are designed to alert you or your team under certain conditions when you want to be notified.
Sensors can be battery powered, and connected wirelessly to monitor conditions in your building 24 hours a day, 365 days a year.
For example, if your building has a small leak you might not discover it for weeks… However, if a moisture sensor triggers an alert, it can report back to you via an app on your smartphone immediately. Because the price of water in the U.S. is expensive in most places, discovering these leaks can pay for the cost of the system many times over.
While moisture sensors can identify water where it is not supposed to be, water flow sensors can reduce the risk of not knowing about invisible water leaks. Leaks can happen where you can’t see them, such as from a cracked water pipe below ground, or from a decorative water feature with a leak in its foundation.
Temperature sensors can be used in refrigeration systems to alert when food or other critical refrigerated items get into the “danger zone” from 41-140 degrees.5
Air quality sensors can alert when conditions within a building have deteriorated. Air quality sensors can measure factors including carbon dioxide levels, volatile organic compounds (VOCs) and fresh air exchanges.
Indoor air quality can have an impact on human productivity and cognitive function. Research from the Harvard T.H. Chan School of Public Health has shown that factors such as temperature, VOCs, carbon dioxide levels and ventilation rates can have an effect on our productivity.
5) SCIPS:
With steel-reinforced inner layers of insulation sandwiched between exterior layers of concrete, Structural Concrete Insulated Panels (SCIPs) are not only highly resilient but also energy efficient.
SCIPs arrive to the construction site, usually customized and pre-formed, on a truck. Then they can be quickly assembled like Legos into almost any type of building including single family and multi-family residential, mixed use and commercial.
Benefits of panelized construction for building occupants include energy efficiency, longer life cycle and resilience, reduced risk of fire, wind, water and earthquake loss. And for contractors, building with SCIPs ensures speed of construction, lower costs, greater accuracy and reduced waste.
How Do SCIPs Reduce Risk (And Boost Profit)?
SCIPs reduce property risk because they are fire-proof, wind-proof and water resistant… Indeed, SCIPs are evaluated and used to rebuild after natural disasters in California, Florida and Texas because of their resilience.
SCIPs should reduce costs to builders because they can be assembled quickly, reducing labor costs and shortening construction time and project life-cycles.
SCIPs should reduce insurance costs for property owners because they are highly fire, wind and water rated which should lead to lower insurance premiums.
Final Thoughts on Green Building Strategies
Each of the aforementioned strategies can help reduce your real estate risk risk and increase profit…
I can attest to each of these green building strategies working because I’ve put these strategies in place or have insurance clients who successfully provide these services.
They’re also replicable, which means they can work for your properties… While the results may vary, the opportunities are most assuredly real.
Once you make these improvements, be sure to revisit your property insurance to verify your property values are accurately covered – and also check for any coinsurance clause in your policy. A coinsurance clause may penalize you if you’re not valuing your properties at or near to their full replacement value.
If you have questions about insurance for your buildings, or are interested in green building or would like to make your buildings more profitable, schedule an appointment with me. You can also email me or call me at 203-200-0445.
Footnotes
- Risk adjusted returns are those that provide less risk for the same financial return over a period of time.
- Technically this makes CPACE loans “liens”. Banks will agree to put the CPACE loan ahead of their capital in the capital stack. This is usually not a big deal… Why? Because if default rates for CPACE loans are incredibly low (almost nonexistent) and if a default does occur, the only outstanding amount that can be “called” is the accrued liability, meaning if a borrower is late on a $1,000 payment, that is all that is due. The entire CPACE loan does not suddenly “accelerate” meaning that it the remaining balance, if any, is not due.
- I am not a CPA/accountant and don’t play one on the Internet or TV… Check with your accountant on all of these items as they may or may not apply to your situation.
- For a deeper dive into how energy storage works read this post.
- Hot food should be kept above 140 degrees and cold food below 41 degrees.
