The Effect of Energy Efficiency Investments on Property Value: Part 2

by ‐ Tags: property management, affordable housing

In an earlier posting, we showed how better building performance can significantly increase your property’s cash flow and value.  Today, we will discuss how the property’s improved cash flow profile can have further implications on its financing.   

 

Referring again to our hypothetical 50-unit property located in the Northeast, the net operating income and property value of buildings with poor, average, and excellent levels of efficiencies are listed below.  These building performance levels are based on actual usage data and correspond to the bottom quartile, median, and top quartile of buildings in the WegoWise database.

 

Poor
(bottom quartile)

Average
(median)

Excellent
(top quartile)

Net Operating Income

$ 725,906

$797,818

$ 839,474

Property Value
(based on 8% cap rate)

$ 9,073,830

$ 9,972,728

 

   $ 10,493,430

 

 

How much debt can this property support?  Depending on its efficiency profile, this number can be quite different.  Assuming a 7% loan amortized over 20 years with debt service coverage ratio (DSCR) of at least 1.2 and loan to value (LTV) ratio of at least 0.70, the loan and associated annual debt service amounts are listed in the table below.

 

Poor
(bottom quartile)

Average
(median)

Excellent
(top quartile)

Loan Amount
(maximum that can be supported)

$6,351,681

  $ 6,980,909

 $ 7,345,401

Annual Loan Payments
(Principal & Interest)

$590,934

$ 649,475

 

$ 683,386

 

So what are the implications for your property?  Clearly, better performing buildings with their improved cash flow can support higher loan amounts.  In our example, the excellent performing property can support a loan almost $1 million higher than the poor performing property.  Perhaps this is money that can be used to fund other property improvements, enable additional acquisitions, or retire higher cost debt.  What if you choose to reduce your loan amount, thereby improving your LTV and DSCR?  Perhaps you can negotiate lower loan rates or lower reserve requirements.

A particularly intriguing scenario is if your property is currently poor or average performing and you would like to undertake energy efficiency retrofits to have it become an excellent performer.  How much can you spend on this project for it to be financially viable?  Using WegoWise, you can begin to analyze your potential cash flow improvements from retrofit projects, establish a baseline budget, and understand your ability to refinance your property to monetize those future savings.  

How much did you save from your retrofit? Our building upgrade feature tells you. Use it free for 30 days.