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Juicing up the bottom line with a dash of 'secret sauce'.

For years, real estate management companies have earned their stripes with building owners by tending to the myriad details of keeping a property up and running--from handling repairs, to updating leases, to making sure the building is appropriately warm or cool.

Now, spurred largely by deregulation in energy markets, the real estate management industry is undergoing a radical sea change--from simple service provider charged with safeguarding a property's bottom line, to strategic partner capable of boosting a building's bottom line, and even enhancing the book value of the property itself.

The smartest managers are now offering more than mere service, in the wake of today's opportunities and market complexity. New capabilities and opportunities in the deregulated energy field now provide some building owners and managers with a competitive edge--smart players who think strategically about energy tap into new streams of income, fund critical facility upgrades that enhance the book value of the property by more than the cost of the upgrade, and they build services and offerings to support the sale to new tenants.

Three important channels have proven most valuable in strategic energy management for the real estate sector: direct access to the wholesale market; strategic financing of facility upgrades; and using market volatility to earn back a portion of what a facility spends.

Wholesale Purchasing

Under deregulation, commercial property owners no longer have to purchase energy from a middleman. Instead, they can buy directly from the power plant--this strategy saves and earns far more money than does the more traditional approach of bidding out to all competing retail providers.

Buying from a power plant saves even more when managers can control how much they use and when they use it. This is CB Richard Ellis' approach: the firm sites its strategic partnership in the energy industry as "the secret sauce of our success." After partnering with energy management firm, ConsumerPowerline, in 2001 to help craft some unique commodity buying strategies, CB Richard Ellis reduced its annual energy costs by 10% for one of its New York City properties. Now the firm is using the numbers from that experience to set strategy and to access similar savings for its properties throughout New England, and is actively exploring engagement in other regions, including the mid-west, Texas and the Mid-Atlantic. California presents similar opportunities for the firm.

This translates into benefits across its national portfolio of a potential $25 million total annual savings for CBRE's clients.

Financing Upgrades

Strategic energy asset management often involves facility upgrades designed to lower consumption and increase efficiency--benefits that pay for themselves in the relative near term. But these investments do something more: once an owner factors in available incentives and tax credits, they actually increase the property's book value by more than it costs to implement the investment.

Even gathering government incentives is a strategic exercise. Many owners feel quite smart when they directly approach, for example, the New York State Energy Research and Development Agency (NYSERDA) to help finance facility upgrades. However, most are not privy to the knowledge that NYSERDA contracts with vendors (five) who have committed to a level of performance and demonstrated that they can deliver on that performance. To these, NYSERDA pays more than it will pay to either the direct property owner or to other contractors acting on behalf of that owner.

These "preferred vendors" can provide clients with higher incentives than they would otherwise get and, because that vendor is paid anyway, he or she can offer clients a broader array of services.

A good example of these enhanced services is evident in how Hines, a developer and property management company, has used ConsumerPowerline for its client, Morgan Stanley. Hines contracted ConsumerPowerline to identify, document, and submit for sizable tax benefits available through the Energy Policy Act--these benefits go beyond the state incentives that can help finance the project. Morgan Stanley is smart enough to focus on its core business.

Earning from Volatility

Large energy users do not use all their power all the time. As some have already learned, strategically curtailing or managing energy consumption in line with market volatility can translate into significant revenues.

One avenue where strategically curtailing consumption can yield earnings is via Demand Response--an energy incentive program, where energy users receive financial incentives simply by agreeing to shed nonessential electricity in the event of a power shortage (think of the hottest and coldest days of the year). ConsumerPowerline has paid out more than $20 million dollars over the past few years to clients for this service to the city's reliability. Other firms have paid clients nearly as much through these same markets.

Co-Op City in the Bronx, New York, provides another case in point of how creative energy management can pay off: As the largest co-operatively owned residential housing complex in America, Co-Op City is truly a city unto itself. It has huge energy needs, shelling out more than $15 million annually to foot its energy bill.

By working with Riverbay Corp., Co-Op City smartly invested in upgrading its energy plant to a system which allows the complex to switch between natural gas and oil on a daily basis, depending on which is least expensive. This plant can use steam to generate extra electricity into the grid. Now, management is sharply assessing how to gain further cash benefits for the complex by designing the plant to help the city more quickly recover from a black-out, in the future.

Since Riverbay's power plant must first satisfy Co-op City's needs, before the plant can sell excess power, management has also learned that, if residents reduce their use when they are called to cut back, the power plant will have more to sell. Riverbay is offering more--a service relationship has become a strategic relationship that drives revenues.

In Conclusion:

As energy markets continue to deregulate across the country, property management companies now outflank their competition with this strategic "secret sauce."

While industry leading managers are best at capitalizing on this energy market transformation, others are beginning to follow suit.

Changes to energy markets are now transforming the real estate management field, with opportunities to generate savings and revenues that can boost the bottom line for building owners, while raising the book value and investment cache of the properties under management.

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Author:Gordon, Mike
Publication:Real Estate Weekly
Date:Dec 13, 2006
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