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3 Reasons Why Commercial Building Upgrades Aren't Approved

Posted on 4/17/2015 8:48 AM by Scott Harmon

Billions of dollars’ worth of commercial building energy efficiency upgrades are proposed each year, but more than 75% of projects that are proposed do not get approved. To understand why, it’s helpful to first discuss why projects do get approved. Contrary to what many think, it’s not ‘saving the environment’ or ‘being green’. There are environmental benefits, to be sure, but the main reason why commercial building owners are approving these projects – such as upgrading lights or replacing aging boilers is to reduce operating costs, which in turn generates cash flow; and, as all building owners know, any reduction in the building owner’s costs increases Net Operating Income, increasing the value of the building itself.  Yet, with such compelling economics, why do three quarters of the proposed projects not move forward?

There are three main reasons for why this happens: no budget, no trust in savings, and not meeting internal hurdle rates. 

1) No Budget

Most energy efficiency projects don’t get approved because there is not a budget. This should not be a surprise to anyone.  Why?  Because unless the equipment is broken or at is end of life, the building owner has no reason to budget for it.  Upgrading lighting, installing building controls and replacing a functioning chiller are often unplanned investment opportunities. The majority are unforeseen and therefore unbudgeted. 

Until recently, financing to overcome a lack of budget has proven to be difficult for two reasons.  First, standard asset-backed equipment financing firms have had difficulty leasing equipment that cannot be repossessed – who’s going to remove and resell lights?  Second, taking small to mid-sized loans from banks can be time-consuming and expensive (for example, if they require a new appraisal).  Today, these loans are much easier to get, as well as those from leasing firms who understand the compelling economics of energy efficiency projects.  As this lending becomes more accessible, ‘lack of budget’ will be a much easier obstacle to overcome.  

2) Lack of Trust

The truth is you really can’t blame building owners for not trusting the forecasted savings in energy efficiency equipment proposals. Presented with a proposal to purchase more efficient equipment, the building owner is asked to (a) replace equipment that’s most likely not broken and (b) make a decision based on the IRR that’s computed by the person selling the equipment.  

Recent studies show that the answer “too good to be true” is one of the key reasons building owners don’t trust their forecasts.  Yet, the products are that good; the technologies are that much better.  Did you know that many boilers and chillers were installed before Microsoft Windows was introduced?  Technology has come a long way in 30 years.  These IRRs are real and can be trusted. Fortunately, there are companies who help energy efficiency equipment companies analyze and present their proposals and economics, providing a 3rd party appraisal of the project.  In addition, many vendors and contractors are committing to measuring the savings after the first year and, in some cases, refunding a percent of the project cost if the savings aren’t achieved.  These efforts go a long way to developing confidence with the building owner, resulting in more projects getting approved.  

3) Meeting Internal Hurdle Rates

Before the recent trend to finance energy efficiency improvements, most purchase decisions had to pass a single test:  the payback test.  How long will it take the building owner to get their cash back?  Every building owner has a hurdle rate for payback.  If the project didn’t meet the internal hurdle rate, there was no chance it was getting approved.  To be sure, payback hurdle rates are important because cash on hand is extremely valuable to business operations. 

However, if 3rd party financing is used, payback is irrelevant - because it’s not the building owner’s cash, it’s the lender’s cash.  And, because these projects have such compelling economics, most of these projects can be cash flow positive from day one, even with interest rates for less-than-prime credits.  Financing should make overcoming internal hurdle rates a relic of the past – like those 30-year old chillers!

There is a tremendous opportunity to improve America’s aging infrastructure, but it’s not because it’s simply the ‘right thing to do.’  These improvements make economic sense.  They generate incremental cash flow and increase the value of the underlying building itself.  Getting building owners to think of these projects, as value-creating investments and not unwanted and unnecessary expenses is the key to unlocking tremendous amounts of energy savings and new cash flow.

Scott Harmon is the CEO of Noesis, reach him at: scott@noesis.com.

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3 Benefits of Specifying Established Branded Nylon for Carpet

Posted on 4/14/2015 10:11 AM by

Bloomsburg carpet. PHOTO CREDIT: Kelly Taaffe Design Inc.

Selecting the right flooring surface for a building is highly critical.  If the wrong choice is made, either from a design or functionality standpoint, the effects can have an immediate negative financial impact. One way building owners and facility managers can protect and maximize their flooring investment is by specifying a carpet made with an established branded nylon. 

Consider this: The floor of any space is typically the most abundant surface.  As a result, the floor covering choice you make will set the foundation for the entire design, including the environment’s furnishings, wall color, light fixtures, and other elements. 

Yet a flooring surface must also be highly functional. For example, carpet in a classroom must be able to withstand heavy foot traffic, soiling, staining, and crushing.  Carpet in an office environment, such as a hallway or a conference room, must look stylish while also offering high performance.  Image the embarrassment of hosting an important customer in your facility where the carpet is starting to fade or unravel at the seams.  

Many nylons today have only recently been introduced to the marketplace and long-term performance attributes are still unproven.  As a result, these nylons do not have a track record of proven performance over an extended period of time in multiple end-use areas. A newer nylon brand might seem attractive today, but without a long history of documented proven service, it may not be the best option. 

Additionally, many nylon brands today are “internal” to the carpet manufacturer.  Carpet manufacturers began making their own commercial-grade nylon several years ago as a way to “upsell” their own carpet products. Unfortunately, these “internal” brands must balance satisfying both internal and external needs. As a result, these internal brands may not always have as stringent of quality specifications for qualities such as color continuity, colorfastness, and color clarity as a third-party branded nylon. 

An established third-party branded nylon brings several advantages to a commercial carpet product.  Three advantages include:

1.  Proven Performance – The old adage of “you get what you pay for” is true when it comes to nylon.  Established nylon brands has been making commercial grade nylon for years.  Over time, they have honed manufacturing and engineering processes to develop a product that has been rigorously tested (internally and externally) and is certified to meet critical commercial end-use applications.  Carpet made with unproven nylon brands may not have the qualified assurance that it will perform as well as expected.

2. Warranties – Most brands offer a variety of warranties to support their claims about how the product should perform.  Examples include independent lifetime warranties for carpet wear, static control, stain removal, and color stability.  Facility managers should fully understand what is covered, by whom, for how long, and with what limitations.  They should also know that warranties from an established, third-party nylon brand can provide additional coverage totally independent from those offered by a carpet manufacturer.

3.  Services & Support – Facility managers know that specifying a product is a process, not just a one-time event.   This process begins with education and understanding:  What does the space require? What would be the best flooring product?  What is the budget available?  When a carpet is selected and installed, it does not end there.  Nor does it end when a carpet eventually meets the end of its useful life. Established nylon brands can offer a multitude of resources to help facility managers every step of the way.  Some brands may have regional representatives that can come onsite to provide specification assistance or maintenance tips.  Others may offer educational literature about their sustainability attributes or recycling methods. 

Not all commercial carpets are the same.  However, those made with an established, third-party branded nylon will typically offer a high quality product, warranties, and value-added services. These  valuable benefits can help facility managers protect and generate a greater return on their flooring investment.  Facility managers have a lot of things to worry about, but the carpet they specify should not be one.  

Tim Blount is the business leader for Zeftron Nylon.  He can be reached at timothy.blount@shawinc.com

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