Michael Basch explains how executives can see the light in terms of ROI, real estate value, equity and cash flow.
Payback is out. Return on investment and shareholder value is in. Pass it around.
The number of months or years that energy-efficient technologies took to pay for themselves in energy savings served as a good yardstick for justifying their cost. Not any more. Today, ‘payback’ is not an operative word in the executive suite lexicon.
When there’s not enough money to go around, and there never is, decisions depend more on what a cost or investment does for the company’s bottom line. That’s a place where payback is rarely found. Metrics such as ROI (return on investment) and building value are much more relevant and measurable, and more likely to get the attention of C-Suite execs. But how can energy savings be translated into those criteria?
Return on investment is relatively easy. If a high-performance daylighting system for a 100,000-square-foot, single-story building costs $375,000 and its projected yearly savings in electricity is $92,248 based on a kilowatt-hour rate of 10 cents, the anticipated ROI is 24.6 percent. For companies that have minimum ROI thresholds, this can trigger an initial “go, no-go” decision.
If the ROI is acceptable, the next step – not often taken – is to estimate how the investment in daylighting would enhance the building’s value. In this case, the single story building is valued at $25 million.
If the building’s annual projected earnings are $3 million and total projected costs without the daylighting system are $1.5 million, its net operating income is $1.5 million. Dividing net operating income by the building’s value provides a capitalization rate of 5 6 percent – the rate of return the building owner could anticipate from the facility as an investment.
Determining the affect of energy efficient daylighting on building value requires factoring in two components of energy savings: lighting and heating.
The lighting component is the $92,248 in yearly savings produced by the daylighting system. It reduces overall costs to nearly $1.408 million and pushes up net operating income to $1.592 million. Dividing this higher net income by the 6 percent cap rate boosts building value to $26,533,333, a $1.533 million difference. The actual cost of the system would be amortized and deducted from income taxes over a period of years. In terms of square feet, the building’s value rises $15.33 for a total value of $265.33, a 6 percent increase.
Building value climbs further by factoring in the heating component. Lowering energy demand for lighting reduces demand on the air conditioning load because less lighting means less heat generated.
The savings in the air conditioning load for the 100,000 sq. ft. building is 56.86 tons of cooling. That, in turn, produces $20,980 in energy savings and further drops operating expenses and boosts net operating income. Combining the lighting and air conditioning savings produces a total yearly benefit of $113,228.
Overall costs now total $1.387 million, making net operating income nearly $1.613 million. Using the 6 percent cap rate means the building value increases to $26,883,333, a $1.833 million difference. Not shabby, and certainly worth having your facilities director or manager investigate high performance daylighting.
Energy savings also can favorably affect equity and cash flow.
Multiplying the building’s enhanced value of $1.613 million by the building’s loan to value ratio of 75 percent produces a loan amount of $1.209 million. Deducting the $375,000 cost of the daylighting system from the loan amount leaves $834,921 in unlocked equity.
Taking the savings a step further, a CFO could calculate the benefit to the company’s stock value. Say the stock’s price earnings ratio is 25. Multiplying the total savings of $113, 228 by the PE ratio increases the company’s value by $2,830,700. Spread over the company’s 50 million shares, that value translates to an increase of almost $0.06 a share. Not a bad day’s work.
Bottom line, using high-performance daylighting systems, such as the Ciralight SunTrackerOne, can boost net operating income by significantly reducing operating costs. So efficient is the technology, it enables electric lighting to be turned off for up to 10 hours a day. Each system can produce illumination equivalent to 800 watts of fluorescent lighting or 1000 watts of metal halide lighting.
The systems can increase net cash flow and free money for other investments. Daylighting also increases return on a building owner’s investment, enhances income and increases the property’s overall value. Enhancing building value can justify lease premiums and make properties more marketable.
Looking at energy savings with this top-level perspective is becoming more important. After hovering around $1.85 a sq. ft. from 1985 to 2004, energy costs have begun shooting upward again. Who said, “It’s deja vu all over again?”
Predictions call for cities such as Chicago and San Francisco to see rises in the 20-30 percent range. New York, Boston, Los Angeles and Miami could suffer increases in the 30-40 percent range, and Washington, D.C. could get clobbered with a 60 percent hike.
Beyond saving energy, daylighting shows corporate responsibility. Using daylight to illuminate interiors helps protect the environment to the degree that less electricity, and less pollution, are generated.
Building energy efficiency into the nation’s building stock is front and center again. The new $5 billion energy efficiency retrofit program launched by former President Bill Clinton’s Climate Initiative already is calling attention to corporate and government leaders, who are considered a linchpin in the program’s success. Their buildings generate more than half of urban greenhouse gas emissions, so cutting emissions by reducing their energy demand positions C-Suite executives as good corporate citizens and generates goodwill.
Michael Basch is chief executive officer of Ciralight, an advanced daylighting systems company located in Park City, Utah. He also is a founding Senior Vice President of overnight shipping giant Federal Express. He is applying the business practices used to grow Federal Express to build Ciralight into a market leader serving the commercial need for quality and energy efficient daylighting. His email is firstname.lastname@example.org