Protect your profit margins: Controlling and reducing expenses for your properties by Chuck Hurchalla

Chuck Hurchalla, Evolution Energy Partners

Property owners already know how costly it is to run a building and how those costs can eat into their profit margins if they are not tightly managed.

It’s no surprise that the largest expense comes from your fixed costs, but did you know that according to BOMA, utility expenses are the second largest expense category across all building types in the commercial sector? These expenses can be the easiest and most impactful to control and reduce when addressing both consumption (demand) and price (supply) together.

For example, consider a high-rise building with 30,000 s/f of common area space conditioned and lit year round. The annual utility costs exceed $100,000 allocated approximately 40% for HVAC, 25% for lighting and 5% for domestic hot water. Reducing the building’s fuel and electrical consumption by just 20% would realize more than $20,000 in savings. Now let’s revisit those profit margins your utility costs have been eating into every year. According to NYU’s Stern School of Business, the average net income based profit margin for real estate operations and services is 4.96%. That means that the bottom line savings of $20,000 equates to more than $403,000 in newly generated revenue every year.

These savings are not specific to one class of commercial real estate. A recently built 500,000 s/f New York City hotel reduced their electric consumption and corresponding cost by more than $65,000 per year. The project garnered over $160,000 in utility rebates and federal tax benefits and has an 86% ROI (pays back in just 14 months). Additionally, the hotel was given the option to finance the entire project with zero upfront capital, either through traditional third-party financing or utility on-bill financing. During the 60-month financing term, the project savings outpace the monthly finance costs by almost $2,000 per month, generating more than $20,000 in immediate positive cash flow every year.

What measures are involved in this type of program? The aforementioned hotel implemented an LED lighting upgrade, variable frequency drives on pump motors, and enhancements to their building automation system. Additional efficiency options could include free cooling, EC motors, CHP, demand controlled ventilation, exhaust controls, energy management systems, chiller upgrades, and more. There are many proven, industry accepted energy conservation measures available. The key is to engineer and analyze all possible options specific to the particular building’s unique energy profile and electrical and mechanical systems. This helps determine the long payback measures and reduce the project scope to include only the most efficient solutions.

If you do not have the necessary expertise to analyze and develop energy options, consider consulting an experienced energy engineering and services company to help reduce your energy costs. As with most industries, different companies offer different depth and breadth of services, so it is usually best not to bring in a typical contractor with limited options or a sales representative that peddles one energy efficiency product. Instead, look for a firm with the following attributes:

• A company that will do the upfront work at no cost and no obligation. This company should provide you with an ASHRAE Level II report or better showing all recommended solutions and project economics in detail for free. It might narrow down the number of companies you can work with but the best ones don’t ask you to spend a dime until you have all of the information necessary to make an informed decision.

• A company whose staff experts have comprehensive knowledge, experience and success in all of the many available energy efficiency measures out there. The efficiency gained across multiple electrical and mechanical load categories can amass to significant cost reduction and you never know which measures will be best for your building until the analysis is done.

• A company with experts on staff with experience in identifying and qualifying utility incentives and tax credits and deductions. There is a lot of free money out there and you don’t want to leave any on the table. This company should both administer the rebate process and accept the incentives directly as partial payment for the project.

• A company that will perform the installation of their solutions on a design/build, turnkey basis. Ensure the company will handle everything from A to Z including engineering, equipment purchases, labor, waste removal, recycling, permits, etc. You want the project to include everything for one not-to-exceed price.

• A company that has the ability to offer multiple financing solutions such as capital leases, traditional third-party financing, and more creative solutions such as utility bill funding options.

Preserving your profit margins will always be a struggle, but significantly reducing and controlling your second largest expense category can be made easier by choosing the right partner.

Chuck Hurchalla is the president at Evolution Energy Partners (Evolution Sustainability Group), LLC, Exton, PA