The prime barrier to broader deployment of LED-based lighting remains high upfront costs despite the energy and maintenance savings that a retrofit can deliver over many years. There are a growing number of financing options for lighting projects, but still building owners struggle to justify major renovations. High-quality LED lighting can deliver real capital improvement, measurable in building market value that can justify many projects.
Here is an example of a completed project for a company in California. The lighting retrofit that they completed cost $60,000. The energy savings and other benefits gave this project a 30-month payback or return on investment (ROI). This client arranged to pay for the lighting and installation utilizing the Amerikana Green Energy “Green Lease” so the project was cash-flow positive the first year. The savings exceeded the amortized costs.
The above story is becoming relatively commonplace in the lighting industry as LED-based products improve in quality and drop in price. The most important benefit to this client was the increase in market value to the property. The savings in energy usage were so pronounced that the property’s market value was increased by $426,000.
All too often an LED lighting retrofit is seen as an expenditure or a maintenance issue. In fact, such a project is a capital improvement that increases the market value of the property.
Consider the previous example: The energy usage for the lighting has been cut by almost 80%. That energy reduction equates to $40,000 per year in reduced operating costs. What is $40,000 per year worth when you calculate the discounted cash flow of the property? Everyone calculates market values in their own way, based on their own concerns about risk and reward and the never-ending debate about cap and discount rates. This client calculated the increase in value at $426,000.
Let’s contemplate some other real examples that Amerikana Green Energy has worked on. A chain of 40 family-style restaurants completed a similar LED retrofit. While the project was Cash-Flow Positive from day, each store gained a little more than $120,000 in value, the increase in value to the chain as a whole was in excess of $4.8 million attributable to the lighting retrofit.
Single-property owners and lessees can also benefit. A warehouse distribution company in Hawaii installed a cutting-edge LED fixtures to replace fluorescent lighting. The annual savings was $79,000 per year. Remember Hawaii has an energy rate of $0.37/kWh. But the increase in benefits had to be discounted as the lease only has another 10 years to go. That said, the initial benefit to this client is $650,000 in market value for the company, and an enhancement to the property to be used to barter when the lease comes up for renewal.
So how do you calculate the increase in value to a property due to the increase in cash flow from an LED lighting retrofit? There are two methods — one of them easy, the other more complex. Amerikana Green Energy prefers to run a DCF (Discounted Cash Flow) model on the increased income stream. This takes some work and some knowledge of the property owner’s plans for the property and aversion to risk.
The easy method is to simply take the annual savings and multiply it by a rate of return. There are a lot of fancy names for how you do this, but let’s just keep it simple. The number is generally between a factor of 6 and 10. So $10,000 in savings per year can mean $60,000 to $100,000 in increased market value.
You can argue that this is too simple an explanation or that the range is too broad. The fact is that most property owners have a number in their heads that they expect to use. We feel the DCF is more accurate, but sometimes you just need a place to start. Our thought is that anything that is a 10X multiple is probably too big an increase, but everyone calculates the value differently; when you remember that utility costs are not likely to drop anytime soon, the decision can be more complex than it first seems.
There are many other elements that can help justify a LED retrofit and that can impact market value. For example, Amerikana Green Energy provides EPAct (Energy Policy Act) 3rd Party Certifications, Cost Segregation-1245/1250 depreciation calculations, Abandonment Cost Tax Accounting, and ROI assistance. We also work with clients’ utility providers to maximize the utility rebate.
Last, we will address the complex topic of maintenance and material savings. LED lighting systems last longer than fluorescents and so owners save in two areas: the cost of the replacement lamps and the labor cost of replacing the bulbs and ballasts, which will practically be eliminated with LEDs.
Remember that savings are more than a factor in determining ROI. The primary factor in justifying retrofits will remain the market value of buildings and other facilities. Each increase in savings adds to the market value of the property, and the total net worth of a project.