There are a number of ways to add additional value to your commercial property’s net operating income. As part of your due diligence plan you should consider these measures and review the various factors that can cut costs and add value to your investment. There’s adding value through lease up of vacant space; increasing rental rates; property tax reassessment and lowering expenses. Below are a list of items and ideas that are sometimes overlooked by property owners, but can help yield big results in cost savings and increasing value to your commercial real estate investment.
One of the more important issues that can have a major impact on your building expenses is its energy usage. Property taxes and utilities account for over a third of your operating expenses. It can be highly enlightening to find out why and where your utilities are running on the high side (if in fact there are indications that they are higher than normal by the cost and or usage). For instance, you may discover that a major tenant in the building is using an extraordinary amount of energy due to running after hours HVAC or 24/7 crews that weren’t initially agreed to in the beginning of their tenancies. Perhaps a tenant has added additional computer rooms that require more electrical and air conditioning that they didn’t have initially when they moved in.
The type of lighting (for example T-12 vs. T-8 fluorescent fixtures) will use more power as well as various types of HVAC systems, depending upon the different configurations as well as age of system. An energy audit will help to determine where savings can be found that can immediately impact the bottom line in a positive way. Sometimes it can be as simple as installing timers or adjusting the start and stop times on the HVAC units. As energy prices continue to go up this will become an even greater concern that can “make or break” the cash flow of an investment. At a minimum, it will keep you apprised of the building’s current electrical consumption status and allow you to plan how to better conserve utilities going forward. Energy conservation is an ongoing project in a building and one of the first areas that costs can get out of control quickly.
Some of the simpler but effective conservation methods that can be used in order to conserve electrical usage are:
· Establishing guidelines for tenants and the janitorial service to turn off lights in the suites when they are not being used or after they’ve been cleaned. Educating the tenants as to how to conserve electricity and how they benefit by keeping expenses lower, will go far in keeping utility costs lower
· Switching to lower voltage or less lighting when possible in some of the common areas.
· Placing light sensors in the restrooms and private offices and other rooms in suites so that the lights go off when no one is there.
· Minimizing exterior lighting, if possible, without compromising security concerns. For instance, landscape lighting.
You’ll find just by making some simple adjustments, a significant amount of money can be saved, and will create additional value to the building by reducing expenses. This can play a crucial role in your due diligence process plan and create a tremendous amount of additional value.
An Important Note: Depending upon which state you are purchasing property in, the utility contracts may be transferable. If so, make sure that the contract for the electricity stays with the property and not transferred by the seller (assuming the terms are more favorable than if you would have to go out and reproduce it the day of closing). This must be done while negotiating the Purchase and Sale Agreement and included as part of the contracts to be assumed by buyer, but no later than prior to removing your due diligence contingencies.
Some other areas that should be scrutinized for possible energy conservation are:
Parking Structure Lighting
Cutting out or down lighting in late evenings, i.e. 11pm to 5am, and shut off during daylight hours (weather permitting).
Tenant “bill backs” for Usage
Many leases have provisions allowing certain kilowatt usage per square foot, thereby determining just how much electrical usage is considered acceptable. If tenant’s usage is suspect, then a meter can be installed, at their expense, and they can be billed back for any excess usage.
Evaluation of HVAC Efficiencies
An evaluation of the HVAC system in a building will help to determine what types of energy savings can be achieved. For example, in a chilled water system it is important to make sure that the water temperature is cold enough so that maximum tonnage is being delivered throughout the building, thereby satisfying the building’s needs more quickly and efficiently.
Eddy Current Test
This test helps to determine the integrity of the tubes within the HVAC chiller. Make sure that a recent test has been performed and obtain a copy for technical review.
This is one of the largest potential problem issues in a building’s HVAC system. Think of it as the veins in a body. If the system is experiencing major leaks or the air compressor is not functioning properly, or the air dryer is not functioning, thus causing the system to be corrupted with water, the building’s HVAC system will run out of control. This could be an expensive problem in terms of energy savings and repairs.
EMS (Energy Management System) aka BAS (Building Automation System)
The EMS system, which most buildings have installed, is in essence a “time clock” that also regulates the HVAC system and other building functions such as; lighting, locking and unlocking doors, etc. It is important to determine the age and functionality of the system and whether it could be considered obsolete, as well as the vendor support available. Is there a current maintenance agreement in place? Can the system be expanded? Will the license for the EMS system stay with the building? Who locally can provide repair and training to our employees? Can the system be accessed by website? Insure that all passwords will be provided to you at the close of escrow. The password will allow the highest level of access to the entire system.
These are just some of the cost savings ideas that can be implemented in commercial properties. Obviously, not all properties have these systems or utilize these systems. By being proactive and creative about cost savings there is value to be found in your investment.
To learn more about how to purchase commercial real estate please purchase my book at amazon.com: . It has many more tips on how to evaluate, create value, cut expenses and investigate properties so that you can make an intelligent and informed decision while looking to invest in income properties.
Author: Brian Hennessey
He can be reached at firstname.lastname@example.org