Amplifying Real Estate Value through Energy & Water Management: From ESCO to “Energy Services Partner”

The energy service company (ESCO) business model could become significantly more effective by integrating the energy-efficiency purveyor and their capital into the underlying building ownership and operation partnership, rather than the current model in which the ESCO remains an outsider with higher transaction costs and limited interest and participation in the value created by the cost savings. Resource conservation advocates rarely use the language of real estate to articulate the cost effectiveness of capital improvements aimed at reducing utility costs in commercial and residential income properties. Conventional methods that rely on rarefied academic notions of simple payback time or a narrow definition of return on investment fail to capture a significant component of the true market value created by virtue of reduced operating expenses. Improvements in energy and water efficiency can increase the fundamental profitability of real estate investments by raising Net Operating Income (NOI), and hence returns during the holding period, and, ultimately, proceeds at time of sale. We introduce the concept of an “Energy Services Partner”, who takes an equity interest in a real estate partnership in exchange for providing the expertise and capital required to reduce utility operating costs. Profit to all partners increases considerably as a result. This approach would also help to address a crisis facing ESCOs today stemming from their considerable liabilities (through guaranteed savings) and negligible offsetting assets.