How to Improve CRE Profitability Without the Capital Expense

Tenant satisfaction is an important factor in the commercial real estate profitability equation. Properties with high tenant satisfaction have low vacancy rates and can charge premium lease rates, thus driving profitability.

Unfortunately tenant satisfaction often requires a capital expense that can negatively affect Net Operating Income (NOI), at least in the short run. Financing capital expenditures is a drain on the bottom line, thereby reducing available cash on hand that can be used to fund growth initiatives or pay for normal operating expenses. And, without sufficient levels of cash on hand, maintenance is frequently delayed and the property deteriorates along with tenant satisfaction.

How Do You Improve Tenant Satisfaction?

Increased tenant satisfaction through implementing a green building strategy was recently detailed in a new report. The report explained why green buildings have low vacancies, high tenant satisfaction and capture a premium rent rate and ultimate sale price.

“Environmentally friendly office buildings have higher rents and occupancy rates as well as more satisfied tenants, says the study by Guelph real estate and housing professor Avis Devine.”

The problem with a green renovation of commercial real estate is the associated capital expense that ultimately saves the tenant money, but not necessarily the building owner. The expense actually reduces building profitability in the short term, resulting in less money for revenue-generating activities including tenant acquisition.

When improvements to Commercial Real Estate can be made without an associated capital expense, profitability is maintained or even increased while tenant satisfaction increases. Tenant satisfaction is a key element in the profitability of a property, and PACE funded projects is a key way to improve that satisfaction while increasing the value of the property without a capital investment or reducing available cash on hand.

A Profitable Alternative to Paying for Renovations Using a Capital Expense

The problem of a capital expense reducing profitability is one of the primary reasons The Energy Alliance Group (EAG) of Michigan utilizes Property Assessed Clean Energy (PACE) financing. The unique characteristics of PACE financing supports energy efficiency upgrades through the use of a financing mechanism that guarantees a cash flow positive outcome while increasing tenant satisfaction and profitability!

“The opportunity that PACE offers is the ability to do the project while allowing for cash on hand to go toward growing the business rather than updating the buildings.”

PACE financed renovation projects improve Commercial Real Estate profitability because of the following factors:

Increases Net Operating Income (NOI) through a reduction of energy expenses
Improves tenant satisfaction – minimizes tenant energy costs while improving comfort
Asset value increase – modernization of older, inefficient technologies
Protects cash on hand – 100% project financing, no down payment, no capital expense
Low annual payments – up to 20 year financing
Limits owner liability – non-recourse (financing secured by property)
Budget reduction – financing is repaid via operational savings
Improves cash flow – reduces unnecessary energy expenditures and cash flow positive
Financing determined by value of property – not owner’s credit status
Financing transfers seamlessly with property upon sale
Eliminates the split incentive – improvements benefit both owner and tenant
Upgrades result in older buildings becoming more marketable
Supports comprehensive projects instead of only high ROI projects (eliminates ROI due to zero money down).

A number of these key advantages are simply not available with a commercial bank loan:

Source: PACENation

Would you like to learn more about Property Assessed Clean Energy financing or what kind of upgrades qualify for PACE? EAG’s CEO, Scott Ringlein, has created a free webcast which provides an in-depth discussion on the benefits of PACE financing. To register for the next available session click here: The Top 10 Benefits of Property Assessed Clean Energy (PACE)

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