Technology vendors are frustrated because building owners don't greenlight excellent sustainability proposals. Owners are frustrated because vendors present programs no CFO could accept.
But the problem often isn’t the technology; it’s the pitch.
Vendors with building efficiency technologies often offer proposals that can’t be accepted. A communication gap between building owners and vendors is a major stumbling block to making real estate more efficient. This article will detail the most common mistakes commercial building owners see in pitches for efficiency technologies.
1. The free beer/free kitten fallacy
Most vendors rightly propose free pilots as a way to get owners familiar with their product’s value proposition. Unfortunately, the vast majority of these pilots are not really free. To illustrate, there is a vast difference between a free beer and a free kitten in terms of overall costs, and most pilots fall into the latter category.
The first driver of costs for free pilots is the transaction costs. These include the time an owner must spend negotiating a contract with a new vendor, signing nondisclosure agreements, verifying insurance, procuring energy and water bills, and demonstrating IT and data security best practices.
Two other issues that make “free” pilots costly are the time required to train building personnel in how to use a new product and the tenant impact. Education can be especially complicated for building optimization software, which often falls into the “cutting butter with a chainsaw” trap – that is, providing so much functionality that the system becomes difficult to master for otherwise busy engineers and managers. Also, some efficiency technologies, such as plug load management equipment, require owners to impact tenants, which asset managers typically are highly reluctant to do.
2. ‘I have control issues’
Another major pitfall that trips up efficiency vendors is a shaky understanding of who is responsible for energy, water and waste costs in a building. Companies often assume the owner has full control over a building’s energy use and would benefit from any energy savings. This is true of Full Service Gross leases, typical in a multitenant building. With triple net leases, in which the tenant pays for some or all of their operating expenses directly, this is not the case.
Further complicating matters is that some property owners also manage their buildings and therefore can implement efficiency solutions, while others use third-party property managers and relinquish control over the day-to-day building decisions. These situations can cause confusion as to who has ultimate responsibility to reduce energy and water costs.
Finally, it typically never is the case that a single person can make a go or no-go budget decision. Many organizations have technical experts as well as property-specific managers and financial managers. All of them need to come together to decide on new technologies.
3. The spin cycle
In addition to control concerns, issues related to business cycles and practices can work against good pitches for efficiency technology. Typically, building owners begin creating their capital budgets in June, finishing the process before the end of September, so pitches in October that require upfront funding will be delayed at least a year. Also, some efficiency technologies have a hardware and a software component, but these often come from separate buckets of budget money, which may have differing levels of recoverability as a pass-through to tenants. For obvious reasons, owners prefer to invest in recoverable projects.
Other cost issues associated with efficiency technologies can delay projects, or cause such a headache for the owner that it is easier to say no. For some owners, projects above a certain cost threshold trigger a competitive bidding requirement in which the owner needs to source at least three competitive, apples-to-apples bids. Many efficiency projects, especially those related to renewables, rely on tax credits to pencil out, and not all real estate owners have a tax appetite; Real Estate Investment Trusts (REITs) in particular cannot take advantage of tax incentives. Finally, some efficiency vendors propose a business model that would result in non-rental income, triggering "bad income" provisions that can cause issues from a REIT compliance standpoint.
4. ‘Show me the money’
Finally, owners and vendors often struggle to model the financial benefits of particular efficiency investments. Making matters worse, every building owner does internal financial modeling differently. For example, some owners for leasing reasons can rely only on simple payback as a financial metric, while others can use other assessment criteria, such as Net Present Value and Internal Rate of Return. Some can incorporate criteria such as increased value at sale, or avoided maintenance, increased employee productivity and improved corporate reputation, while others cannot.
Owners typically prefer to self-finance for a variety of reasons, and are wary of investments that only work based on complicated third-party financing mechanisms. These can generate onerous legal fees and increase the liabilities that owners have to record on their books.
The last and perhaps most difficult hurdle to overcome is with efficiency technologies that have returns that, though tangible, are impossible to model. Building energy optimization software falls into this category, as do leak detection technologies. Owners look for risk-adjusted return, which requires well-defined risk; unknown or ill-defined risks are hard to sell to decision committees. What typically does not work is a precise savings estimate based on historic average savings, such as 20 percent of an annual energy bill.
One answer is to provide a performance guarantee for savings within certain parameters. For example, if a vendor believes that an investment in their technology will save 20 percent, they could guarantee at least a 5 percent savings if an owner agrees to certain engagement requirements.
All of these issues can pose barriers to implementation for otherwise good technologies. With additional understanding of owner issues, vendors can better structure pitches and pilots to avoid many of these pitfalls That should lead to more successful engagements as well as reducing energy, water, and landfill space consumption.
This story was created in collaboration with Aaron Binkley of Prologis, Daniele Horton of Verdani Partners and Will Teichman from Kimco Realty as part of a presentation for Greenbuild 2013, held Nov. 20-22. Image of building by vahamrick via Shutterstock