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When Facility Executives Need HVAC Upgrades
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When Facility Executives Need HVAC Upgrades

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You want to include a major HVAC renovation in the plan for this year. How do you convince an owner to complete a retrofit that the building needs? You need to demonstrate, first, how the upgrade will …

You want to include a major HVAC renovation in the plan for this year. How do you convince an owner to complete a retrofit that the building needs? You need to demonstrate, first, how the upgrade will improve the building and, second, how this increases the value of the building for the owner.
Some managers may think it is simple to convince an owner to spend thousands of dollars on an upgrade. They assume that an owner will want to complete a project so the building remains state-of-the-art. However, most owners — institutions, for example — view the building as an asset similar to stocks or bonds. They need to see the value of the property increase as a result of their cash outlay.
A second reason commonly given by managers to owners is that the office building will operate more efficiently after the retrofit, thus reducing utility costs. However, tenants usually pay their share of the building’s operating costs based on the amount of space they occupy.
Therefore, the tenants, not the owner, will benefit from the reduced utility costs. The owner pays for the renovation at the time the work is done. The cost of the work is then amortized and passed through to the tenants over the lifetime or payback of the project. The owner will spend the money today and only recoup it over time while the tenants will experience the immediate benefit.
This is the challenge faced by a fictional facility manager we’ll call John Philips, who is responsible for the hypothetical Spencer Building. Built 10 years ago, The Spencer Building is a class A office building in a downtown market. Like many buildings in the marketplace, the 240,000 rentable square foot building is 100 percent occupied with no major leases rolling over for seven to 10 years. Philips is aware that the owner’s objective is to hold this building for at least two to five more years. Although only 10 years old, the building’s HVAC system has two problems. First, the energy management system is not state-of-the-art and does not provide the building with efficient operation and sufficient control. Second, the parts of the mechanical equipment are expensive to maintain.
Philips has recommended upgrading the EMS system and installing variable frequency drives (VFV) on major equipment motors. The upgrade of the EMS system will include new power supplies, bases, transducers, wiring and associated relays. The existing temperature sensors will be replaced and new direct digital controllers will be installed for the interior and exterior air handling units, 24 in all. Static pressure controllers, solar load sensors and control relays will also be added to the EMS, giving the operating engineers more control points to ensure tenant comfort levels and increased monitoring capability. All of the new sensors and relays will be linked by a networking cable in a user-friendly package to a desktop computer with a Pentium microprocessor, graphics card, high-speed modem, color monitor and color printer.
VFDs wil

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  • 1. When Facility Executives Need HVACUpgradesYou want to include a major HVAC renovation in the plan for this year. How do you convincean owner to complete a retrofit that the building needs? You need to demonstrate, first, how theupgrade will improve the building and, second, how this increases the value of the building forthe owner.Some managers may think it is simple to convince an owner to spend thousands of dollars on anupgrade. They assume that an owner will want to complete a project so the building remainsstate-of-the-art. However, most owners — institutions, for example — view the building as anasset similar to stocks or bonds. They need to see the value of the property increase as a result oftheir cash outlay.A second reason commonly given by managers to owners is that the office building will operatemore efficiently after the retrofit, thus reducing utility costs. However, tenants usually pay theirshare of the building’s operating costs based on the amount of space they occupy.Therefore, the tenants, not the owner, will benefit from the reduced utility costs. The owner paysfor the renovation at the time the work is done. The cost of the work is then amortized andpassed through to the tenants over the lifetime or payback of the project. The owner will spendthe money today and only recoup it over time while the tenants will experience the immediatebenefit.This is the challenge faced by a fictional facility manager we’ll call John Philips, who isresponsible for the hypothetical Spencer Building. Built 10 years ago, The Spencer Building is aclass A office building in a downtown market. Like many buildings in the marketplace, the240,000 rentable square foot building is 100 percent occupied with no major leases rolling over
  • 2. for seven to 10 years. Philips is aware that the owner’s objective is to hold this building for atleast two to five more years. Although only 10 years old, the building’s HVAC system has twoproblems. First, the energy management system is not state-of-the-art and does not provide thebuilding with efficient operation and sufficient control. Second, the parts of the mechanicalequipment are expensive to maintain.Philips has recommended upgrading the EMS system and installing variable frequency drives(VFV) on major equipment motors. The upgrade of the EMS system will include new powersupplies, bases, transducers, wiring and associated relays. The existing temperature sensors willbe replaced and new direct digital controllers will be installed for the interior and exterior airhandling units, 24 in all. Static pressure controllers, solar load sensors and control relays willalso be added to the EMS, giving the operating engineers more control points to ensure tenantcomfort levels and increased monitoring capability. All of the new sensors and relays will belinked by a networking cable in a user-friendly package to a desktop computer with a Pentiummicroprocessor, graphics card, high-speed modem, color monitor and color printer.VFDs will be installed on all motors and pumps. VFDs provide a staged start-up of equipment,preventing “spikes,” or sharp increases in electric demand. Motor speed can also be controlled bya VFD to operate more efficiently when equipment is at part load. Other advantages to VFDs areincreased equipment life, decreased maintenance costs and automatic restart of equipment afterpower failures.The system upgrade was bid to five companies with the recommended vendor bidding on thiswork for $326,978. The vendor has also given the option of a lease of this system at $422,100 at11 percent for 60 months. This cost includes energy accounting, bill auditing and benchmarkingreports for the first year.The economic analysis that follows is based on the upgrade package just described; however, asimilar approach can be taken with any HVAC system upgrade.Owner’s PlansBecause the building may be for sale in the next two to five years, Philips knows the owners willwant an increase in value at time of sale and a quick return on investment. To prove the increasein value, Philips will rely on the income-capitalization method of appraisal. The income-capitalization method is based on the net operating income (NOI) — the result of subtracting theoperating expenses from rents received. If rents go up or expenses go down, NOI increases;higher NOI means higher value.What’s more, an HVAC retrofit may make a building more appealing to tenants than otherbuildings in the area, thus increasing rents. Further, a retrofit project usually decreases utilitycosts.The income-capitalization method divides the income by a cap rate, defined by marketconditions, to find value. Based on the NOI for the building and a cap rate of 9 percent, thecurrent value of The Spencer Building is $50,666,666.
  • 3. At the Spencer Building, occupancy is already 100 percent with no major leases expiring untilthe year 2015. Therefore, the upgrade will not attract new tenants so no increases in rent as aresult of the project are expected.However, if the building had vacant space and was located in a competitive market, it might havean edge in leasing over buildings with higher utility costs. A tenant pays operating expenses overa base year. A base year may be set at $10 per square foot. The tenant pays all operatingexpenses in excess of $10 per square foot; the owner bears the cost up to that amount. If theoperating costs are $14 per square foot, the tenant is paying $4 per square foot. If the retrofitreduces costs by $0.50 per square foot, the tenants’ costs fall to $3.50 per square foot. Theowner’s costs are not reduced. The benefit to the owner is that the tenant may be happy with thereduced costs and be more inclined to renew the lease.Cutting CostsThe retrofit at the Spencer Building will reduce costs in several ways. The EMS will improvestaging of equipment during start-up and shutdown schedules and increase detail of temperaturesensing and automatic adjustment. The VFDs will reduce utility costs by operating at only thespeed required to satisfy the comfort load; the current system provides constant volume andconstant speed flow. Based on a review of the equipment and historical electrical data, energysavings are estimated at: • EMS base system utility savings: $96,154 • VFD installation utility savings: $40,872 • Total estimated annual utility savings: $137,026 • Savings per square foot: $2.570The system costs $326,978. As outlined above, the annual utility savings are $137,026, creatinga payback period of 2.39 years. Annual utility savings will increase NOI by $137,026. This, inturn, produces an increase in value based on the income-cap method of $1,522,511. The newvalue of the building is $52,189,177.Range of BenefitsPhilips can present this project to the owner by citing the benefits of the upgrade. The physicalimprovements include: • Improved system control through installation of state-of-the-art equipment • Cost savings due to VFDs and improved response to temperature • Ease of operation by use of “point and click” methods • Reduction of engineering staff time required to program the system and to check concerns through the system rather than a physical site inspection • Reduced maintenance costMore important are these financial benefits: • A payback period of less than 2.5 years • An increase in value in excess of $1.5 million dollars
  • 4. • Lower operating expenses for tenantsTo win approval for capital projects, a facility manager must have two things: knowledge of theowner’s objectives and the ability to prove the improvements meet those goals. After thisupgrade, the Spencer Building will have a state-of-the-art HVAC system and be worth more thanbefore the renovation. This combination will make the building more attractive to potentialpurchasers. Based on the numerous benefits, the owner would probably approve this upgrade atthe Spencer Building.