Question

As manager of an important REIT, you are committed to sustainability and optimizing the efficiency of your assets. You have set a goal to reduce your energy consumption by 30% over your baseline and you have seen much success to date by doing the low hanging fruit. However, you still need another 10% savings to meet your goal and your property managers are telling you that to make further progress in their buildings will take capital investment to effectively increase their efficiency. For next year you have been given a $15M budget to allocate for capital improvements in the portfolio. Your property managers have given you their essential capital budgets and the must do items total $25M (roof repairs and replacements, parking lot repairs, HVAC replacements, etc). How will you fund energy retrofits? Misc. Information The portfolio of buildings is rated in ENERGY STAR Portfolio Manager from 1 to 100 (Targeted range of highest efficiency is 75 to 100) The Property Managers are financially incentivized to meet their goals Desired payback for typical energy conservation measures is 2-4 years (200 - 500 words should be enough to provide a complete answer)

Answer 1

There is no right or wrong answer to this question. I am putting together my thoughts below, so that you can add further meat and your own thoughts to come up with an answer within the stipulated length.

• Funds required = $ 25 M
• Budget available = $ 15 M
• Shortfall = external funds needed = $ 25 - 15 = $ 10 M

Energy retrofits can be funded:

• Apply for Government loans and grants:
  • The interest rate is quite low
  • Grants need not be returned back however energy certificates need to be produced.
  • This process may be long drawn
• Enter into commercial leases
  • Leasing a part of the portfolio to generate annuity income that can be used to fund the shortfall or provide security to get some external borrowing from investors or lenders
• By long term debt of around $ 10 M. The debt has to be long term so that you cross over the desired payback for typical energy conservation measures (of 2-4 years)
  • The debt needs to be serviced through a level end of year payment
  • The interest rate has to be negotiated and kept downward to 3 - 4%
  • A part of the portfolio of the buildings will have to be mortgaged to provide security.
• Go for capital leasing of the assets