Archive for June, 2016

Innovative Ways for Reducing Carbon Emissions from Building Operations

Innovative Ways for Reducing Carbon Emissions from Building Operations

Architects and construction companies have long worked in partnership to erect attractive, visually appealing structures which are functionally efficient. In the era of cheap and plentiful energy, little attention was paid to environmental issues such as renewable resources, conservation, or air quality. As these issues moved to the forefront progressive companies and designers have begun to devise ways to retrofit older structures in an effort to reducing carbon emissions and to build in energy saving and environmentally sound features in new construction.

One key to Reducing Your Carbon Footprint in older buildings is to accept the premise that small changes add up to big savings. The best way to approach change is to plan each step. Incremental changes also result in immediate positive feedback in the form of a “shades of green” or step-wise process toward the ultimate goal. A good place to begin is with the obvious—replacement of leaky windows and doors with newer, energy efficient ones, use of films over exterior windows to reduce solar heat buildup, and installment of LED lighting where feasible to replace fluorescent bulbs. Motion-activated LED lighting is also a good idea for hallways, restrooms, storage annexes, and any other seldom trafficked areas. Sound planning for transforming an existing building into a Green Building requires intermediate goal-setting as a means of attaining the final goal. Without a roadmap, the final destination remains unclear.

Reducing Carbon Emissions For New Construction Development

For new construction, Reducing Carbon Emissions from Building Operations presents many opportunities. Beginning with initial drafting and in concert with existing state and municipal codes and siting considerations, the roofing materials, wall surfaces, wall coverings, and colors can be energy saving features. In the same manner, landscaping can be used to address water usage. A large amount of energy is consumed with the supply, use, treatment, and disposal of water. Xeriscaping, recycling water from showers, drinking fountains, and sinks for landscaping are possible avenues, as is the installation of gutters, rain spouts, and water storage areas. All passive and active recycling of water save energy and conserve resources.

Materials used in the actual construction of the building can add to the energy savings as well. Recycled building materials are readily available at little or no more initial cost than traditionally manufactured items. The primary example is the increased usage of steel in new construction. Steel is inherently recyclable after its initial production and is being used to replace wood and other structural components whenever feasible. Building in energy efficiency is one of the tenets of LEED, the Leadership in Energy and Environmental Design certification program for green building championed by the US Green Building Council.

The largest energy consuming feature of most buildings is the HVAC. As much as 40 percent of the energy utilized can be attributed to that single source. Planning for efficient environmental heating and cooling can be the highest payoff in demonstrating How Green Project Management Can be effective in Reducing Carbon Emissions by designing savings into the blueprints. Central controls instead of individual thermostats and careful attention to the placement of air returns and vents to avoid drafty areas and hot spots can all contribute to savings. HVAC units have become more efficient as a result of pressure from responsible builders and will conserve energy usage immediately. Replacement of filters regularly and installation and programming of smart timers to regulate heating and cooling in empty spaces or during non-working hours add to the possible savings.

Responsible builders are designing in energy saving measures to reduce the carbon footprint of new construction and in retrofitting older structures when possible. No feature that reduces emissions or conserves energy usage is too small. The cumulative effect of many small changes can play a significant role in the overall effort to build better, waste less, and care for the environment.


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Preparing and Reading a Commercial Real Estate Pro Forma Statement

Preparing and Reading a Commercial Real Estate Pro Forma Statement

Commercial Real Estate Pro Forma Statement Explained

Real estate pro formas are cash flow projections for existing, improved or re-purposed real property. The most reliable are based on past performance of a going concern. Few development projects have a past, turning to an assumed past performance based on “comparable” properties. How we define comparable is the key meaning to the pro forma. How we apply comparability becomes an array of assumptions the trade of which is the art of underwriting. Real estate has its own jargon and most real estate pro formas are difficult to understand for investors that are not well versed in real estate. All real estate pro formas can be simplified into 6 basic components from which investors can focus and explore important financial questions.

  1. Sources of Income

The two basic questions of a pro forma are what is the fundamental source(s) of revenue, and what are the risks associated with these sources? There are significant differences between sales and rental incomes. Further rental incomes are in many forms the terms of which are quintessential to the risk and reliability of cash flow projections. Some real estate investments offer “other income sources” such as concession rights, and the portfolio of sources paints the big picture of what the investments is about.

  1. Timing

Pro formas look at sales or rental income, or some combination, over the course of time. There returns are based on current value of positive or negative cash flows over the course of time called the “planning horizon.” The horizon may be 5 to 10 years but it’s the first 3-years that are the most significant. Technically sources of income are entered separately in the pro forma at a estimated current contracted amounts Values are often based on comparable properties and escalated over time along with escalating expenses. Sources and uses are timed based on assumptions. Each pro forma is a snapshot in time. Various “scenarios” are studied when evaluating risk, as are “sensitivities” of cash flows to key determinants such as commercial lending rates and other capital market conditions. Projected returns are highly sensitive to the timing of these factors. Supply, demand, evolving capital market conditions, vacancy rates, absorption rates, lease terms, work letters, and other contractual events play significant roles in the timing of cash flows. Timing often controls the financial outcome of any given pro forma scenario and investors need to carefully explore and understand the timing behind pro formas they are presented.  .

  1. Gross versus Effective Income

Gross income is the “top line” of a pro forma, and it is the sum total of all sales or rent rolls, or a combination. Effective Gross Income (EGI) is gross income minus adjustments for risks such as vacancy and where absorption is accounted in the timing of gross revenue.  EGI is the “top line”  from which expenses are deducted to project cash flows. EGI is an adjusted gross revenue potential for rental properties at the current contracted lease rates and vacancy allowances, and forecasted with escalation factors into the out years.

  1. Operating Expenses

Operating expenses is the grand list of all costs to be paid from EGI before paying returns to investors. This includes all landlord and property owner costs such as broker fees, common utility charges and property taxes. There are surprises and landmines in the grand list that most new investors to real estate do not understand. Sales and rent rolls must be sufficiently large and robust to cover expenses long-term in order for the real estate to be commercially viable, and scenario analysis may demonstrate there may be sustained periods of time when investors are not getting paid. All pro formas that project positive returns assume a long-term balance between sustainable sources of income and a timing, nature, and escalation expenses in economic harmony. Scenario analysis gives investors insight into worse case scenarios which are critical to understanding individual fit of an investor to the speculative nature of some investments.

  1. Net Operating Income

Net Operating Income (NOI) is EGI minus Expenses. NOI is the key variable  behind whether a real estate investment will produce positive or negative returns..

NOI can be reasonably accurate when based on existing operations. It is significantly more difficult to project NOI for a property that is yet to be developed, especially if the investor is not certain of how to maximize potential or does not fully understand the specific market and its cycles. For this reason NOI projections rely heavily on comparables.

  1. Returns

Projected returns to investors are expressed in different ways but all returns are based on NOI. Internal Rate of Return (IRR) is an industry norm for returns. It is expressed as a percentage usually stated as a “leveraged” meaning the returns to equity investors assume some level of commercial debt was used helped to finance the investment on a long term basis. Therefore the amount and terms of that commercial debt is key driver behind IRR. Moreover there are many assumptions and factors influencing any particular pro formas’ outcome. Underwriting studies scenarios and sensitivity of a pro forma to a range of risk factors that influence outcome. Most such studies demonstrate ranges from negative to positive returns, and weighted averages are used by sophisticated organizations to compare one investment to another. New investors to real estate often find themselves presented with a single pro forma or possibly even a “back of the envelope” analysis. The investor needs to critically challenge and test the underwriting behind the pro forma along with its assumptions, and understand the risks they truly face. Performance during the first 3-years is the most critical. By itself a single pro forma showing a snapshot in time is out of context with the underlying risks of real estate. .

The Beacon Projects Group is a management consulting firm that specializes project finance for real estate investments. We provide comprehensive pro forma analysis, underwriting, project management, and real estate development advisory services throughout the New England area. We can assist investors in their efforts to develop their commercial real estate and with new commercial real estate construction projects


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