When you’re selling efficiency solutions in landlord/tenant settings, there are times where you’ll hear the “I’m moving” objection. It comes in two flavors.
The first situation refers to a landlord.
Let’s say they plan to sell the building in three years. They might tell you, “Well, our plan is to limit that building’s capital expenditures because we're selling it." You might respond, “If you invest money in this building to spruce it up, it could very well increase your net operating income, which would help you sell the property for a higher price.”
An example I often use is somebody investing a dollar per square foot to improve their building’s efficiency. Let’s say they capture 25 cents per square foot in savings. If that building were sold at a capitalization rate of 10%, then that 25 cents would mean the building would enjoy $2.50 more per square foot using the Direct Capitalization variety of the Income Approach to Appraisal. This is a very clear example of how these investments work: you’ll get two and a half times your money back upon sale. As a side note, a higher appraisal also comes in handy when doing a cash-out refinance.
There are other reasons as well. If a landlord makes these improvements, they could attract more tenants, prevent complaints, and decrease operating expenses during the final three years of building ownership. The sum of those other benefits would likely outweigh any financial investments they made in energy improvements.
The second situation involves a tenant.
You might hear them ask, "Why would I make an investment with a four-year payback from energy savings if I’m planning to leave in less than four years?" The answer, of course, depends on the non-utility-cost financial and non-financial benefits they could enjoy thanks to said improvement.
I have read countless studies about those benefits: better illumination, better indoor air quality, better thermal comfort and so on. What about better productivity? What is that “virtual” payroll benefit worth? If the tenant could increase the morale of its employees, even by as little as 1%, that would likely recoup the cost of the retrofit several times before the end of their existing lease.
The fact that the tenant would be leaving the energy-saving equipment behind might initially seem like a loss; however, once the value proposition is expanded to include non-utility-cost and non-financial savings, the tenant should see the light (pun intended).
For more strategies and tactics when selling efficiency solutions in these complex settings, check out our forthcoming webinar, Making Efficiency Work in Landlord/Tenant Settings. It’s free for current Selling in 6™ Members!
