Guest post from Andrew Cooper
Energy efficiency is not just about being green; it’s also about adding value to your investment property… especially when it comes to multi-family residential and commercial properties.
As per Pierre-Paul Turgeon’s “Uncle IRV”, the value of a multi-residential or commercial property is equal to the net operating income (NOI) divided by the cap rate of the area.
- To increase the value, you can increase NOI or reduce the cap rate. Since the cap rate is pretty well established for a particular area, increasing NOI is the most viable alternative.
- To increase NOI, you can increase rent, reduce vacancy or reduce expenses. As sophisticated investors, you are probably working hard at the first two items. Energy efficiency is about minimizing waste and reducing energy expense. It’s often overlooked as a tool to increase property value.
There are direct and indirect benefits to improvements in energy efficiency. The indirect benefits like occupancy comfort levels, improved safety due to better lighting and appealing to tenants who are “green conscious” are difficult to quantify, so even though it can add value, we will ignore this touchy-feely stuff. The direct benefit is the reduction in energy expense as a result of reduced energy consumption and reduced maintenance costs; this is what we are interested in.
So why do we not improve efficiency? One reason is that it seems expensive. A new 12W LED to replace a 60W incandescent lamp will cost $25 to $35. This seems expensive, but when you consider that over the course of a year, you will reduce operating energy expense by $71 per lamp. At a cap rate of 10% this one LED will increase the building value by $70, a pretty decent return on your investment. At current cap rates of 6% in places like Calgary and Edmonton, this value increase is more like $15 for every dollar saved. The new LED should last 9 to10 years2, so there is also a reduction in the maintenance expense related to relamping.
Although they do not last as long as an LED, compact fluorescent lights (CFL), also offer good savings at a lower cost. Changing old T12 fluorescent lamps and ballasts with new T8 fluorescent lamps and electronic ballasts will give you energy and maintenance savings.
With lighting, the biggest bang for your buck comes with lighting controls. Electronic timers which automatically switch off lights after a certain time or occupancy sensors which only switch on lights if someone is present can reduce lighting energy consumption by 30 TO 50%3. If lights are off, they use no power, so if no-one is there have the lights go off. These are relatively inexpensive and easy to install.
How much lighting do you have in common areas? How much could you save?
Clogged HVAC filters, old inefficient furnaces or boilers, non-insulated ducting and piping, open doors in heated common areas, wall and attic insulation and throttled water valves on a chiller system all increase your expenses and reduce the value of your investment accordingly. These can be fairly easily addressed.
When considering the purchase of a new piece of equipment, a furnace for example, look at the bigger picture. A more efficient furnace may cost more, but will be cheaper to run and hence increase the value of your investment. A little extra spent when re-insulating will reduce heating and cooling costs. On-demand hot water heaters are an excellent option if sized correctly and only use energy when you need hot water.
A great deal of this can be identified by you walking around with a critical eye. For the more “hands-off” investor, you could arrange an energy audit by a qualified person and possibly qualify for Provincial rebates if you do so. If you want to go for the whole enchilada, there is a great reference manual at the URL below:
Natural Resources Canada’s Office of Energy Efficiency has a web page, URL below, with loads of information and links to details on possible financial assistance in all of the Provinces and Territories. Check it out.
If you are a technical type, check out Natural Resources Canada’s “Tools and Calculators for Buildings and Equipment” at:
The old saying goes that a “penny saved is a penny earned”. With multi-family residential and commercial properties, at a cap rate of 10%, you can change this to “a dollar saved is 10 dollars earned”. So be energy efficient, go green and boost the value of your investment.
Andrew Cooper P.Eng, B.Comm, CEM, CMVP
New Gold Inc.
New Afton Mine
1. 8hrs operation per day, 365 days/yr, $0.05/kWhr
2. 8hrs operation per day, 365 days/yr. LED Lamp life of 25,000 hours
3. facilitiesnet.com – August 2008 – Energy Efficiency. Lighting Controls: Maximizing System Efficiency