A Landlord has many opportunities to upgrade their buildings. However, we must keep the return on this investment (ROI) in mind. Any upgrade that increases income and increases tenant loyalty is something worth considering. As with most investments, timing is a big consideration and that is what we are going to concentrate on in this article.
LED lighting gives you better, brighter light with lower maintenance costs. There are now fixtures and bulbs available for literally every application and they reduce electricity costs by at least half, and more depending on the fixture they are replacing. Modernizing your building comes along with the new fixtures, light levels and colors.
Who is going to pay for it, the landlord or the tenant? The person occupying the building has the most to gain from upgraded lighting. The landlord has the benefit of a modernized building with lower electricity costs and lower maintenance costs. The entity who pays the bill has a lower electricity bill. It is this savings that should be paying for the upgrade, one way or the other.
If the tenant also pays the electricity bill and has more than 3 years to go on their lease, they will benefit with a lower overall cost of electricity over the next 3 years while enjoying better brighter light if they initiate the purchase.
In PG&E territory, there is interest free financing for energy upgrades that even comes with rebates on certain fixtures. The payments are set up to be less than the energy savings. The only person who can obtain this type of financing must be the account holder on the electricity bill.
When should a landlord to install LED lighting? If the landlord pays the electric bill, today would be a good day to upgrade the lighting. PG&E has great financing, there are savings from day one and you modernize your building in the meantime. If the tenant pays the electric bill, during a new lease negotiation, a landlord is motivated to make this upgrade to the building because it will help attract a new tenant with its better brighter light and lower electricity costs. If it is calculated to save $.015/sf in electricity costs, you can raise the lease payment $.01/sf and still compare well with the surrounding market and have a more valuable building. If the building is already occupied, and the tenant pays the electricity bill, it is hard to see how the investment will pay back the landlord unless tenant loyalty is taken into account and this is hard to quantify. In that case, the sales pressure should be applied to the tenant.
Here is a typical scenario that should scale by the square foot. The numbers are for PG&E territory, which has very high electric rates.
A 140,000 square foot building has a cost $104,000 for an LED upgrade that also has an $8,000 rebate. Every entity type other than C-Corp (which has a tax rate of 21%) has a 35% tax rate, and it can all be depreciated within the first year. Since most landlords are LLCs, let’s assume a 35% tax rate. With a 60 hour average lighting week, it will save $25,000 per year on the PG&E A-10 TOU rate.
So the calculation looks as simple as this:
$104,000-$8,000=$96,000. This is your net cost.
35% x $96,000=$33,600. This is the amount you can deduct off of your tax bill.
$96,000-$33,600=$62,400. This is your actual installed net cost.
$62,400 / $25,000=2.5 years to payback initial investment
2.5=40% ROI (Return on Investment)
$25,000/12months/140,000sf = $.015/sf per month.
This means the lighting will save the electricity bill payer $.015 per square foot per month.
This will give you a rough idea of the amount of money we are talking about with LED lighting. For exact numbers for your application simply call CitiGreen for a very low quote on quality light fixtures installed.
Overall, if the landlord pays the electric bill, those lights covered by that bill should be upgraded to LED right away (for example, all the house lights if the landlord has that electric bill). The rebates are going down for the lights, the interest free financing can go away at any time and these things can happen with the stroke of a pen. The cost of the lights will continue to fall and the electric rates will always climb more than inflation, so the ROI in the future will be better than today, so long as the other incentives are still in place. The reason it is not a good decision to wait is because the ROI is so high that there is no reason to keep up the incentives, so they are going to fall and the market will stabilize like all other markets to a reasonable ROI.
If the landlord does not pay the electric bill, then the best time to upgrade your lighting to LEDs would be at the time a new lease is being negotiated. You can save your tenant some money compared to the market by actually increasing your lease payment enough to pay you back for your investment in a reasonable time while still giving your new or existing tenant better, brighter light and an overall lower cost of occupancy of your building. This will increase tenant loyalty.