May 10th, 2011

My Plan to Make A Building More Profitable and Use 75% Less Energy from Day 1

BOSTON -

Inspiration is funny sometimes. You never know when you’re going to take something you’ve glanced by in the past and combine it with an experience you’ve had in the present to form a new idea.

About two years ago, I watched this video.

I didn’t think much of it. I like how Tom framed the issue, his argument, the use of existing technologies and the tone of practicality he used when speaking. I always liked the idea of reducing a buildings energy use by 75%, the amount the world needs to reduce it’s carbon emissions to side step mass casualty, because it is more profitable for the building owner to do so.

Two months ago, it hit me that I could retrofit a building. After spending a year and half taking solar thermal, solar pv, and geothermal design training alongside hands on experience in the field having installed well over 300kW of solar pv, tens of solar thermal systems and around 50 tons of geothermal heat pump capacity I have the technical and hands on knowledge to complete a project. This coupled with my business education, and local relationship with contractors, bankers, and real estate agents in my home state made it all clear to me.

One of the technology I’ve been most interested in ductless heat pumps in Maine. The technology can no heat building to less than -5F. More over, the technology is simple to install and cheap.

It’s now my goal to retrofit a building in the best state in the country, Maine, to use 75% less energy and be profitable from day 1. Thank you Tom Rand for the inspiration.

Why real estate you ask?

  1. It’s hands on. I get to actually make something and do meaningful work.
  2. Multi-fasicated. Making the project work will require understanding financing, policy, real estate and legal issues. I love learning a lot of things quickly.
  3. It’s a good story that will spread and the impact will be larger then myself. The biggest thing I can hope for is other property owners become inspired to do the same upgrades.
  4. It a great retirement investment. I know my generation stinks at planning, but I don’t. When I’m 70, I’ll want a place to live and it will be nice to have a building that is paid for.

I wanted to share with you my criteria and justification for retrofitting the building, some are personal issues and other make the business case. I understand that this project will take a long time. If it is completed in the next 5 years, I will be surprised.  But this does not mean that I will not work diligently on it. We’re still in the process of finding a building, but I find writing out a plan is very useful to make the first steps clear in one’s mind.

Here are the goals, criteria, and justification for the project. What do you think?

1. Coming from business school, my primary goal is to show that projects like these work and are more profitable to property owners. Then work to spread the word through education and workshops. The story will be eaten up by the press “young man returns home and creates buildings that use no oil”. Also, working with HeatSpring Learning Institute has showed me the power of educating property owners and contractors. I’d like to create a face to face or online education series to help other property owners maximize their projects. I want to maximize impact.

2. The project must be in apartment building. I know that single homes may look attractive because they are cheaper but only with positive cash flows and significant collatoral will financing the purchasing of the building and upgrades be possible through a local bank.

3. Include utilities in rent. The majority of rental properties in and around Boston and Maine have utility separate from rent. In order for the cash flows to work utilities must be included in the rent and then tenants must be rewarded with lower rent if the utility bills is below a specified benchmark. By including utilities in the rent it incentives me, the property owner to decrease the utility expense because it will mean more profit for me.

4. Purchase and renovate the building in Maine. It is key that the first building will be in Maine for several reasons. The first is the existing relationships and trust. Real estate and contracting are all about trust and because I grew up in Maine I have good relationship with the contractors, bankers, and real estate agents I will need to make the deal work. Also land is increasing in value in coastal Maine as more baby boomers move to retire but it is still cheap compared to city standards. This will also make it easy to attract outside equity investors from cities. After all for a lot of people $100k is not a lot of money.

Maine also has a very old building stock – read inefficient – and is the most heavily reliant on heating oil for the heating season. Heating oil is the most expensive form of heat and is also the most volatile.

5. Complete systems upgrade. There are 5 key areas that will be upgrades so choosing a building that suitable for upgrades will not be a problem. The five areas will be 1) shell 2) water 3) heating 4) hot water 5) electricity.

  • Shell: It will not be difficult to find a building that a shell that needs upgrading. After all, well over 95% of our building stock is not built well. The key will be finding a building that needs work, but not too much work.
  • Water: Water is used in the bathroom and kitchen. We will take a look at all appliances and fixtures and change as needed. Many people don’t know this, but water is typically the second highest utility expense in Maine other then heating. If the building is operating with the city water you must pay for the water and the sewage.
  • Heating: Heating is by far the largest sources of C02 emissions in Maine and also the largest expense. Maine’s geology is also primarily granite, a rock that has a very high conductivity – meaning it can transfer heat very well – which makes it a prime candidate for geothermal heating and cooling, the cheapest heating system to operate with efficiencies that are normally well over 300%.
  • Hot Water: Hot water is typically generate off of the oil boiler. To create hot water, we’ll upgrade the system with solar how water system that will preheat the desuperheater that will run on the geothermal system.
  • Electricity: Maine has a large majority of it’s electricity generated from hydro power so it emits fewer carbon emissions that in most states. However, we will still install a small solar array to offset the increased electricity needs of the geothermal heat pump and some usage as well.

6. All financed. The key to making the project profitable from day 1 will be financing. The investment group that owns the property will put 20% down, as mandated on commerical business loans in Maine since the financial criss,  but will finance the rest. This means that the Internal Rate of Return of all upgrades will need to be greater then the interest rate on the loan. Easy enough.

The second key to is being financed is that the building will need to be profitable without any upgrades to the shell. What does this mean? The revenue of the building when it’s purchased must be able to cover it’s expenses. This means we’ll be purchasing near turn key properties and only making the MORE profitable by upgrading them.

7. Built for retirement. The key to the project being low risk is that our goal will be to hold onto it for at least the 20 years. Real estate has value because of cash flow and the value of reselling the building. This will make it very difficult for us to loose money on the project. Why you ask? Because if we are only paying a down payment on the property even if the value of the property drops 10% after 10 years, it is very likely that the amount of equity we own in the property will be well over what the down payment on the property was.

8. In house work. The key to making the upgrades make sense is that all of the work will be down in house. What does this mean? Myself and our team will complete all of the repairs. I have plenty of experience designing and installing renewable energy systems and my best friend, Gilbert, runs a construction company that focuses on green building and retrofits, a perfect combination. Not only does this ensure that we will complete quality work, but it will make the property more PROFITABLE.

Typically, contractors will make a profit of between 10% and 20% on each job. Let’s do a little math on why doing the job in house will be critical for the project. If a geothermal installing would cost around $45k and save $5k in heating costs the first year, the simple IRR will be about 11%. If we complete the work in house, it will cost us at least 15% less, so around $38K to install the system with the same $5k savings the first year. This boosts the simple IRR to around 13%. That doesn’t seem like a lot, but if the mortgage rate is 7% is means the profits of the upgrades will jump from 4% to 6%, a 50% improvement. That’s free money, in the bank.

What do you think?

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Chris Williams

About Chris Williams

Chris Williams is the editor of Green Light Distrikt and Chief Marketing Officer at HeatSpring . He has experience in business development, prototyping and new venture research with a focus on geothermal heat pumps, solar thermal and solar photovoltaic technologies. Chris is an IGSHPA accredited geothermal installer and NABCEP certified solar installer. Chris is focused on solving customer facing issues in the creation and adoption of clean energy technologies and products. Chris has installed over 300kW of solar and tens of geothermal systems. He's invented the PV Pal , developed many trainings at HeatSpring, publishes the NABCEP Study Guide , the Hitchhikers Guide to Cleantech and has done due diligence research for Urgent VC . Feel free to connect with him @topherwiliams , on Linkedin , or through email about new ventures, collaborating, writing, research or whatever is on your mind.

  • Luke Thomas

    I’ll videotape it……

  • http://www.thegreenlightdistrikt.com Chris Williams

    For sure man! It’s going to be great once we find a property. Finding right property and the money is the hardest part, after that it’ll be easy. But I’d like to document the whole thing, maybe create a mini-video blog series about it? Me and my friends are hilarious and job sites in general tend to be fun.

    Chris

  • Smasse64

    my only main problem is your assumption that you can buy an apartment complex, in decent condition, and have the price asked/paid by profitable from day 1..ie..most apartment sellers usually price the properties such that improvements to facility and rental increases are needed inorder to get a positive cash flow. Maybe the market is not so strong in coastal Maine, and maybe apartment sellers will sell at positive cash flow pricing…but it is fairly rare and may take a special situation…ie..bankruptcy,forclosure,death of owner…to pull off..

  • http://www.heatpumpreview.net/ heat pump reviews

    This is really a good post.Am totally agreed with this fact that inspiration sometimes funny but by doing act which other people think impossible is the real output any one need by an inspiration.I like your experience you shared in the post Chris.

  • http://www.thegreenlightdistrikt.com Chris Williams

    Good point. Basically, I just run through the P+L of the building while in negotiations. If the costs are greater then the revenue I ask the building owner why would I ever pay him to loose money? If it needs improvements, that will also be taken into the asking price. It’s mainly about timing as well, finding sellers that just need the cash and can’t hold out.  Bottom line, a building will never be in 100% condition, but I won’t take anything less then 90% and already has/can secure enough cash flow to justify investing 60k-70k in new systems. 

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  • http://www.heatpumpreview.net/trane-heat-pumps.html Trane heat pump

    Hello,
    Gerry. your future plans are really the best ones. No one till now could ever thought of saving the energy as you will. And the plan you have shared is really the one that i will follow surely.
    Mike

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