The ROI of LED
- Aug 08, 2014
Marnie Abramson, M.B.A., M.S., LEED AP knows a thing or two about owning and operating green buildings that provide a return on investment. Her family owns The Tower Companies where she served for a number of years as a principal and communications director. Based in Rockville, Md., The Tower Companies is a real estate development company known for its socially responsible, environmentally conscious apartment communities. Now Abramson is embracing a new role in the marketplace as principal and founding partner of NextGen Partners LLC, a company “dedicated to advancing market adaptation of ROI driven eco-solutions for real estate and other energy intensive industries through the sourcing and financing of LED products.” Using a four-step process of audit, product selection, install and finance, NextGen guarantees a stress-free transition from traditional lighting to LED. I recently interviewed Abramson about her new venture, the benefits of LED lighting and more.
Tell us what you’re doing now and why you decided to make a career change.
I co-founded a company called NextGen LED with a business partner a little over a year ago. It’s been sort of an extension of my experience with the Tower Companies where I had spent the better part of 10 years doing presentations that had to do with return on rent. I don’t know if you’ve ever seen one of the presentations I’ve done, but basically I went out into the market, and I looked at all the published studies that were out there, and I calculated the benefits on a per-square-foot basis for tenants and residents to move into healthy buildings. People loved the presentations, but nobody ever made the buying decision because of it—for me, that was really frustrating and I think the largest portion of the reason why nobody made a purchase decision based on this was because most of the benefits associated with green buildings are soft benefits. They’re benefits in productivity due to daylighting or because of better air quality inside the buildings, and I wanted something more concrete.
Before I was with Tower, I had spent a couple of years with an investment bank, and I have two finance-related graduate degrees. I fell in love with lighting because it lets me do all the things I love. It lets me create energy efficiency, it lets me reduce carbon emissions, and it lets me reduce operating expenses except it does it on a guaranteed basis. There are only three things that are going to control what somebody pays for their lighting-related electricity. One is the cost of energy, which is largely fixed by your area. I can bid energy for clients, and we do it often, but it’s largely fixed. The second is your hours of use which also is dictated by how you operate your facility and is largely fixed. And the last one is how much power does it take to operate your current lighting program. That’s where I can come in and provide lots of value.
Most multifamily owners are using two to five times more energy than they need to operate their current lighting program while maintaining the lighting levels they currently have. They just don’t know it. And so part of what we do is go in and present that evaluation to them. Oftentimes, particularly in multifamily, what we see consistently are reductions of at least 60 percent and sometimes upwards of 80 percent reductions in lighting related electricity.
Who is your client? Are you talking to property managers or the residential consumer or both?
We do not deal with individual consumers. It’s all on the commercial side, and so we’ll work with property management companies and building ownership groups. We present the value proposition to those folks, and where there’s a master meter facility in the more vintage-style [properties] then we can take a look at retrofitting inside the unit. To the extent that they’re not on the master meter, what we do is control the common area lighting, the outdoor lighting in particular—which can be extremely inefficient—and anything that the landlord or the commercial owner is paying for.
So your ideal client is a REIT with many properties.
Absolutely. To the extent that we can provide value to a client, it’s really a multiplier effect. So we would prefer to do portfolio business, because if we’re able to save you 75 percent of your lighting-related electricity at one location, chances are we’re going to be somewhere in that ballpark for every other location that you’re at. And then you get the added benefits of eliminating toxic mercury from your lighting program and reducing carbon emissions.
So it’s first and foremost a finance business where we’re simply reducing operating expenses, and generating returns on investment that exceed any other investment that they can make in the marketplace. The ROIs on the projects we do are typically 35 percent. Sometimes they’re 70 or 80 percent depending on how inefficient the program is. Last week we did a presentation for somebody where the ROI was 75 percent.
How long does it take for this ROI to be realized or seen?
I’ll walk you through the process. We will meet with a property owner or property management company and talk through our business with them, and they usually identify three or four locations for us to go out and take a look at. We do this at no cost to them.
Is this like an energy audit?
It’s like an energy audit except it’s a lighting-related energy audit. We can also separately do a comprehensive energy analysis of their facility because sometimes if we’re able to find significant inefficiencies on the lighting side, it’s pretty typical we will also identify opportunities in other areas of energy conservation. But usually it’s just a lighting site survey. And so we take an accounting of all their existing lights and how much energy each one of them is using and also how many hours a day each one of those lights is operating. Then we assign an LED counterpart to that light and we basically run an analysis that says if you operate your facility the exact same way, your common areas, hallways are still going to be on 24 hours a day, seven days a week, and we can provide you with a return on investment that says this product is going to cost you X but it’s going to save you Y, and it’s going to save it over eight years. So a client may have a payback of two years on an eight-year lifespan. And that will help dictate the return on investment.
The minute the client switches to LED, they start saving instantly—every time they turn on the switch they’re instantly saving money and so to the extent that you have your lights on all the time, or at least 12 hours a day or more, that’s where we can really save substantial money for clients.
Do you also provide the actual
What we’ve done is build out the supply chain. I know from my time as a developer and a property owner that you don’t want somebody to come in and say, “Hey, I’ve identified this issue for you, now you go fix it.” We do the analysis for free. We don’t charge for that. And then we’ve set up relationships with a handful of manufacturers that provide high-quality LED lighting. This is really important. I spent about six to nine months meeting with different manufacturers, traveling around looking at LED installations, understanding the market and realizing that from a business perspective the product side is a loser because the technology is changing rapidly and no one manufacturer is exceptional at every kind of product available in the market.
If you think about a multifamily location, it could be 15 to 20 different lamps in that facility. You’re not going to find a single manufacturer that’s the best at each one of those lamps. And that’s really the hardest part: to understand which manufacturers are credible, which ones have warranty periods with teeth. But in order to maintain profitable price points for the client we go out and negotiate that directly on their behalf. And instead of going through the retail supply chain or the wholesale supply chain we go directly to the source. And that’s what enables us to get these really high returns of investment and because we qualify as an energy savings company, we are able to set up these manufacturer-direct relationships that provide real value to the client.
Sometimes people say to me, “Marnie this sounds too good to be true. How do I know that I’m really going to save the amount of money you’ve stipulated in your contract?” We’ve also set up a relationship with a large global reinsurance company and they’ve basically gone through our process evaluating the savings and the proposals we’ve put together and they’re now willing to underwrite those savings. So I can guarantee those savings literally with an insurance policy.
Do you think you’re going to be going back to the developer side of things sometime in the future? Are you just taking a break?
It’s a family business, so I’m an owner in the business. I love what I’m doing right now. I do keep on top of projects that are happening both with Tower and in the [multifamily] market. It’s been a huge part of my life, so it never really turns off, and it’s certainly possible that long-term it’s something I could do. But I really feel that I’m making a difference, and that’s what I loved about being at Tower. To the extent that I can keep helping people and keep saving energy for clients, I’m not sure all of the different ways that this business can grow—but I’m excited about discovering it, so who knows where I’ll be in the future.
Is there anything else that you’d like to add?
Pepco Maryland is the only utility company in America that’s offering a small business energy advance. And what we have been able to do at NextGen is to take very large vintage ‘80s, and earlier, garden-style apartments and through each individual utility account we’re able to get that property to qualify as a small business account. What that means is we can get Pepco Maryland to pay 80 percent of the installed cost of a lighting retrofit project. That’s 80 cents on the dollar and the remaining 20 cents the utility will finance for that client on their bill over 24 months at zero percent interest. And so that program was launched in December and that has substantially changed the velocity of business that we are doing here, because it’s allowing people to implement very large-scale lighting retrofit projects not only with no money out of pocket, but at 20 cents on the dollar allowing them to be immediately cash flow positive and start realizing all of their savings year two.