RHB Magazine Nov/Dec 2021 - Energy Efficiency and Capital Expenditure Projects

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Energy efficiency and capital expenditure projects By David Gargaro

Rental property owners are being squeezed financially from multiple directions. Property taxes continue to rise and inflation is putting fiscal pressure on all other operational line items. Canada’s Energy Regulator states that electricity prices are rising faster than the rate of inflation. And according to Manitoba Hydro and other distributors, natural gas costs for large volume consumers (like rental property owners) are expected to rise by up to 18 per cent annually. Rent increases have also been capped. Therefore, it is becoming even more crucial for rental property owners to focus on capital expenditures that reduce or eliminate energy waste. This will enable them to reduce utility costs and unlock energy dollars that can be re-invested into the building.

Make the right energy-efficient investments Upgrading to LED lighting and installing lowflow toilets and fixtures are many rental property owners’ first options to drive efficiency and utility savings. But there are other optimization measures that will help the building to operate at maximum efficiency and reduce operating costs. However, these measures tend to be detailed, and many rental property owners lack the technical prowess to tackle these improvements. Therefore, they often fall back on recommendations from consultants who might oversize equipment to reduce their liability, or contractors who are biased toward a particular system or solution. “Performing a comprehensive and unbiased energy efficiency review can help rental property owners understand what’s working and what’s not,” said Josh Lewis, Engineering Manager, NERVA Energy Group Inc. “Knowledge is power when it comes to energy. If you can’t measure it, you can’t manage it.” Rental property owners should consider return on investment when pursuing CAPEX projects. The most obvious ones are those that improve curb

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appeal, as nicer looking buildings and units attract tenants who are willing to pay more. Safety issues are also a priority, as tenants want and deserve to live in safer buildings. “Consider CAPEX projects that affect tenant comfort, such as lobby and corridor upgrades, as well as suite renovations,” said Philip Sarvinis, P.Eng., Managing Principal, RJC Engineers. “Cleaner, sharper, modern-looking buildings attract clientele who see why it costs more to live there. Also consider amenity areas that keep people in the building, such as gyms.” Mechanical upgrades can be costly. Therefore, it is imperative to reduce the risks of your investments and make informed decisions that will provide quantifiable results. Before making any capital investments, do the following on a building-bybuilding basis: •

Develop an inventory list of each building’s mechanical equipment, including age, size, current state, and efficiency

Review utility data to understand the building’s energy load

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Optimize mechanical equipment to meet each building’s true needs rather than assumptive needs or trends

Engage an energy expert who can identify deficiencies that are affecting performance and wasting energy, and provide “quick wins” and solutions based on unique conditions

Back up measurements with real-world financial performance data; request a performance guarantee to hold your energy partner accountable for results

Prioritize projects with the quickest payback to unlock energy savings that can be re-invested into the building

Consider the trends in regulations, including likely future regulations to require reduced carbon emissions

Ensure that there is a detailed roadmap in place for upgrades and replacements over the next 10-15 years

Optimize your buildings’ energy efficiency Traditionally, when rental property owners wanted to reduce their energy costs, they would replace mechanical equipment when it reached its endof-life, installing new equipment that is of similar design, function, and capacity. That approach is quickly falling out of favour. More rental property owners are realizing that the existing equipment is oversized, not optimized, and may not be in the right configuration or be the best type of technology to carry the building into the future. Optimizing HVAC equipment (e.g., boilers, chillers, make-up air units, fan coils, heat pumps) is one of the better ways to reduce monthly utility costs, defer unnecessary repairs/maintenance, and extend the lifecycle of their mechanical equipment. Most buildings have oversized mechanical systems that have unnecessary redundancies, or that have not been optimized for maximum efficiency. These factors lead to unnecessary energy costs, increased maintenance fees, and premature replacement of expensive equipment. From a timeline perspective, optimization is usually quicker to implement than whole-scale replacements. “The best way to manage costs and timelines for CAPEX projects is by means of a needs analysis,” said Sarvinis. “The property should be reviewed in detailed to determine the condition of each of the elements, what work needs to be done, and then to prioritize the needed works based on safety issues, aesthetics, energy and

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environmental impact, and end of life. This will help to address deferred maintenance issues, reposition the building for sale, support refinancing, and attract new clientele.” Before rental property owners decide to invest in energy efficiency, they must understand the specific needs of their different properties. All rental property owners should get intimately familiar with the operation and energy efficiency of their rental portfolio. Each building is unique and will require a different combination of measures to drive maximum efficiency. “It seems that more and more multifamily rental property owners are getting a better understanding of what tenants like and dislike, what they want and what they need, and treating them as part of the team to get early buy-in for CAPEX projects,” said Sarvinis. “To get the project implemented, they also seem to be getting consultants involved earlier and more often, and not just going to the contractor for prices and to do the work.”

Control utility costs Rental property owners have a number of options to proactively control their utility costs and carbon emissions. First, they can optimize the performance of the mechanical plant with real-time data to drive maximum efficiency. It is important to understand the size of the energy load required by the building at all times, rather than relying on outdoor temperature metrics. The mechanical plant will often produce excess heating or cooling, which forces the equipment to work harder and longer than it should, creating unnecessary energy waste. A proper building optimization program can provide multiple energy demand data points to ensure the plant knows exactly what the building is calling for to deliver optimal efficiency. Second, rental property owners should examine tenant behaviour to identify and minimize energy abusers. A significant percentage of heating and cooling loads are due to tenant abuse. There are several strategies to minimize these losses. Typical suites have standard thermostats that allow tenants to set low temperatures in the summer and high temperatures in the winter. Limiting the available temperature setpoint range can reduce tenant abuse and lower energy usage without affecting comfort or satisfaction. “Also, a building’s stack effect can cause occupants, especially on upper floors in the winter, to self-regulate their suites by opening windows and balcony doors,” said Lewis. continued on page 28

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“Window and door sensors, for example, can communicate directly with the suite thermostat and can help curb this type of behaviour, delivering countless operational and financial benefits.” Third, rental property owners can control and deliver ventilation to the building. The make-up air system is one of the largest users of energy in rental properties. These systems are often overdesigned, so they deliver more air than required to satisfy the demand during most of the day. Also, these systems are often unbalanced, so they deliver more air to the floors closest to the equipment, rather than evenly spreading it across the building. “To optimize the operation of the make-up air system, seal the ductwork, install intelligent time-of-day controls, rebalance the airflow, and implement energy recovery,” said Lewis. “This can lower energy usage and provide a healthier and more comfortable experience for the tenants.”

Unlock funding for CAPEX projects If rental property owners lack internal funds to invest in CAPEX projects, there has never been an easier time to access the financing required to move projects forward. There are options beyond incentives from utility companies that partially offset investments in measures to improve energy efficiency. In Ontario, the IESO SaveOnEnergy program and Enbridge Incentives & Conservation program provide these incentives. Traditional financing typically involves either loans or leases from a financial institution or private capital. The prime interest rate in Canada has been below 2 per cent since 2008. Since the stock market is volatile, there are many investors seeking safe returns in the three to eight per cent range. This has provided many alternatives to traditional financing at reasonable rates. In most cases, the cost of financing is low enough to not significantly impact the payback period of most CAPEX projects. “The specialized financing market has also grown, and it can provide even better value to the rental property owners,” said Lewis. “Savings-back arrangements, such as energy performance contracts or energy services agreements, allow rental property owners to de-risk CAPEX projects. They can include terms that guarantee a minimum amount of energy cost savings, or lock in a reasonable energy cost over time that is tied to service(s) within the building. While the financing rate may be higher for these types of agreements, it is counterbalanced by the benefit

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of having performance guarantees locked in by the vendors.” There has been an uptick in support from all levels of government for CAPEX projects, especially those that result in reducing fossil fuel usage and lowering greenhouse gas emissions. One funding program from the federal government is the Canada Infrastructure Bank (CIB) Commercial Building Retrofit, which is intended to fund decarbonization retrofits in privately-owned commercial, industrial, and multi-unit residential buildings. The program offers long-term loans at 3 per cent or better, and can be applied for by a building owner or companies offering energy services contracts. The CIB requires a $25 million minimum in any loan package, but is encouraging “aggregators” to bundle together portfolios of different owners to achieve that minimum. Other examples include the CMHC Energy Efficient Premium Refund, the Clean BC Building Innovation Fund, and the City of Edmonton Building Energy Retrofit Accelerator. Looking into the future, based on U.S. examples, property-assessed clean energy (PACE) financing could potentially unlock private capital for building retrofits, resulting in energy and emissions reductions, more resilient buildings, economic development, and job creation. While this type of financing is in its earliest stages, PACE offers the opportunity to tie the financing to the property, and it is primarily paid back through property taxes. This means the financing can be off-balance sheet, and is easily transferred if the ownership of the property changes. “Given the wide range of current methods to unlock funding for CAPEX projects, including traditional, specialized, and government, there is virtually no reason to delay investments and upgrades that reduce energy costs, as every year the missed opportunity grows larger,” said Lewis. “Would you rather pay the utility companies an ever-increasing amount every year? Or would you rather save on your utility costs, and use the savings to offset the cost of financing on CAPEX projects that provide long-term value?”

Conclusion Energy costs will continue to rise, and it will be difficult to increase rents to keep up. Therefore, it makes financial sense to focus on energy efficiency when considering CAPEX projects. Optimize your building’s equipment for energy efficiency, control your utility costs, and focus on making the right investments for your rental property. Then look for ways to unlock the funding needed to finance your CAPEX projects.