By Art Gering

The Payoff

At times, simple solutions provide an immediate payback. Two years ago, Washington Real Estate Investment Trust purchased a 267,000-square foot office property in Rockville, Md. Energy costs were running about $2.50 per square foot, higher than the market average of $1.98, Washington REIT’s Edmund Cronin Jr. says.

“The property was not being very well managed by a third-party management company,” he adds.

After the sale, Washington REIT scheduled maintenance on the mechanical equipment and cleaned the ducts. A savings of 40 cents per square foot was immediately realized and those savings dropped to the bottom line.

For REITs, the essential calculus of energy efficiency improvement comes down to how much the improvements will cost and how quickly they pay back.

“There’s always the argument that if tenants are getting the benefit of the energy savings, why would I do an energy project?” asks Scott Lyle, president of Next Edge, an energy management consultancy set up as a taxable REIT subsidiary of Arden.

“You’ve got to do the math on it, look at the escalations passed through to tenants, and the state and federal energy efficiency rebates and tax incentives that are on the table. In the majority of cases, both the landlord and the tenant are participating significantly in the savings.”

Indeed, federal and state rebates and tax incentives can go a long way toward defraying the costs of the energy improvements.

“The California Energy Commission, for example, provides rebates set at a specific dollar amount per kilowatt of reduction for energy efficiency projects such as lighting retrofits or adding variable speed drives to pumps and motors,” Lyle says. “The federal government allows some of these retrofits to be included as tax benefits, usually in the form of accelerated depreciation.”

FelCor Lodging Trust’s Jack Eslick focuses his company’s cost efficiency initiatives in markets where energy costs are high. “A project in California will pay back quicker than one in Dallas, for example,” he says. “Typically, payback is 12 to 18 months.”

Eslick also takes advantage of available rebates and financial incentives. “For a 250-room hotel, an energy efficiency project might cost $50,000 to $70,000, but we’ve been able to cut that in half” by tapping available state and federal money, he explains.