This is the second in a three part series on strategies to close the operational performance gap; the 10-30% savings that can be achieved in low- and high-performing buildings by enhancing the synergies of existing building systems.
When positioning properties for purchase, funding for operational and capital improvement projects is typically suspended to minimize exposure on the investment. However, there is a strong business case for implementing strategic no- and low-cost operational improvements that quickly increase NOI and enhance asset value. Evaluating strategic opportunities to accentuate the positive attributes of your property and proactively addressing potential red flags that may surface during the due diligence process will enhance marketing efforts and remove unneeded distractions. Additionally, the property team can add significant value to building showings by demonstrating to prospective buyers that they will be purchasing a high performing property managed by an engaged and cohesive team.
Close the operational performance gap
When positioning properties for purchase, evaluate opportunities that will quickly increase NOI, enhance asset value, and close the operational performance gap. This strategy is most successful in buildings with full service or gross tenant leases, where the ownership is responsible for utility costs.
The evaluation of property performance and potential improvement opportunities should start with your property's EPA Portfolio Manager ENERGY STAR benchmark. Portfolio Manager is a no-cost, online program that rates building performance on a 1 to 100 scale and compares with similar buildings across the country. An ENERGY STAR score of 50 represents the national average, while a score of 75 indicates that a building is performing in the top 25th percentile of similar buildings across the country. In general, the lower the ENERGY STAR score, the greater the opportunity for utility cost reductions. Even in high performing buildings with ENERGY STAR scores greater than 75, qualified and experienced operations professionals can typically identify no- and low-cost operational improvements that can reduce utility costs by 5-20%.
Early in the disposition planning process, engage an operations professional to perform an assessment of your property to identify no- and low-cost opportunities. Select a professional who can look beyond capital-intensive equipment replacements and enhance asset value through strategically improving building operations. Clearly communicate the ownership’s near-term financial goals and focus the scope of work on opportunities with quick returns. Ideally, this process would begin at least one year before the property’s disposition to provide sufficient time for utility savings to hit the balance sheet prior to the transaction.
Examples of Operational Improvements with Quick Returns
(Payback periods typically less than 6 months)
- Adjustment of equipment operating schedules to better align with standard tenant lease hours
- Optimization of air- and water-side economizers during the “shoulder” months
- Programming enhanced control sequences into the building automation system (BAS)
- Controlling air leakage from openings in the building envelope (i.e., HVAC ducts, penetrations, and doors)
- Addressing deferred HVAC equipment maintenance to improve system efficiency and appearances (i.e., cleaning AHU coils, repairing leaking valves, etc.)
- Replacement of existing incandescent or outdated fluorescent lamps (i.e., T12 tubes) with higher efficiency LED, fluorescent, or CFL lamps, rather than wholesale fixture replacements
- Lighting controls, such as occupancy sensors for interior lighting and photosensors for exterior lighting
- Low-flow aerators on bathroom faucets and low-flush valves on toilets and urinals
Strategically improve building appearances and address red flags
Evaluate strategic opportunities to accentuate the positive attributes of your building and strengthen the perception that your property is well managed, operated, and maintained. For example, consider the following strategies:
- Remove storage materials from mechanical, electrical, and telecom rooms to reduce clutter and provide easy access for potential buyers and their due diligence teams.
- Improve the lighting quality in the main lobby and repaint the walls for a strong first impression.
- If the central plant appears dull and dingy, clean the equipment, improve the lighting quality, and consider painting as necessary.
Ensure that all equipment safety guards and protection barriers are in place.
Proactively address potential deficiencies and red flags that may surface during the due diligence process and complicate the transaction. For example, ensure that your critical equipment parts program is comprehensive to demonstrate that you can quickly source repair parts and labor for critical equipment that is nearing the end of its life expectancy or is no longer being manufactured. This will demonstrate that a plan is in place for continued equipment operations, shifting the focus away from capital reserves.
Make building showings a team effort
The property team can add significant value to building showings by demonstrating to prospective buyers that they will be purchasing a high performing property managed by an engaged and cohesive property team. The Property Manager can show potential buyers how monthly operating costs are reconciled, tenant recoveries are maximized, and the steps taken to improve tenant satisfaction and retention. The Chief Engineer can provide an in-depth overview of the building’s operating and preventative maintenance procedures, critical parts program, explain how tenant HVAC requests are quickly and appropriately addressed, and highlight measures implemented to reduce utility costs and improve tenant comfort.
Additionally, the Chief Engineer can be a valuable asset during due diligence walkthroughs by accentuating the building’s positive attributes and demonstrating how perceived deficiencies do not negatively impact building operations. Building showings also provide an opportunity for the property team to sell their experience and services to the new ownership.