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Should Real Estate Deals Include Operating Costs?

William Opalka

office buildingFew real estate deals — sales or leases — disclose or even discuss energy use. But should a higher return on investment based on energy cost be a part of the conversation?

That’s a question posed by Stephen Miller, an associate professor at the University of Idaho College of Law in the Idaho Statesman.

Common commercial leases require the lessee to bear the cost of operations, he wrote, but this strategy also gives the landlord zero incentive to make improvements to building efficiency, primarily because any cost would be incurred by the landlord and the benefit would be to the tenant.

But what if tenants and landlords could somehow share upfront costs and share returns?

That may now make sense as an increasing number of cities and states are mandating that owners of large commercial buildings either disclose energy use on a yearly basis or at the time of sale. The benchmarking rule is taking root in California and in cities like Seattle.

Photo: flickr-user-jess_star87



2 comments on “Should Real Estate Deals Include Operating Costs?

  1. William:

    I think the world of EMT. The articles and subject matter are terrific.

    The implication that buyers/sellers/brokers/lenders/investors don’t consider energy use when underwriting real estate assets for sale/purchase/development is simply incorrect. Utilities are always one of the highest line-item operating expenses for improved real estate. Owners/operators who focus on reducing that line item will positively impact their net operating income. In turn, that has a positive effect on the value of any existing/operating asset. In short, if as asset has a history of efficient operation, it should also enjoy a higher value. Without such a history, however, it’s difficult to extract higher values. For example, retrofits and newly constructed assets have a harder row to hoe when it comes to getting the full value out of their energy efficient building systems. Of course, they’ll benefit from the lower operating costs, but their prospective lessees/buyers/brokers/appraisers/lenders/investors may not want to acknowledge the full potential for those future energy savings.

    Appraisers/technical services divisions of lenders/banks/equity and direct real-estate investors frequently use differing valuation criteria which is of course, problematic. Anything the energy and real estate industries can do to gather, share and compare operating data will benefit the valuation process, particularly for retrofits and newly constructed improvements. That should translate to higher rents from building occupants, more equity from real estate investors and more loan proceeds from debt providers.

    Thanks for the article.

    Jeff

  2. yes, Real Estate sales should require a energy disclosure just as (I assume) that all states require what type of Water/Sewer the house has.

    Utility bills affect the buyers purchasing power.

    Someone with time on their hands could look to Austin, TX. Austin has had a ECAD (Energy Conservation Audit Disclosure) since June 2009. This is a requirement of the seller to provide at the seller’s cost a copy of a recent energy report prior to the buyers’ offer. I think these ECADs had to be done by either RESNET or BPI blessed technicians. Yes, there are some exceptions but I forget. I keep meaning to make a random call down there to an agent and see how this ECAD requirement has slowed down activity, improved transactions or Customer Satisfaction. (both Seller and Buyer)

    Of course the relationship between Landlord and Tenant is entirely different (both residential and commercial). I as a Residential LL I am not particularly inclined to spend money unless there is payback but the market rate for 2 bedroom is what it is. I might be able to squeeze 5-10 a month more. But residential Tenants don’t have a long term plan in place to re-coup any investment.

    Tim Dolan NH Realtor

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