This can be the case, but there can also be serious financial consequences should they not be managed properly.

Triple net leases differ from traditional leases in that the tenant is generally responsible for all of the operating expenses including repairs, maintenance and life cycle capital expenditure – a new roof, air conditioning system, lifts, and the like.

However, there are risks to be aware of with such property. Triple net lease investments are often single tenanted properties, perhaps with a special purpose or use.

The commercial stability of the tenant is of course fundamental in any investment, but in a triple net lease are they also going to:

• Take a proactive and planned approach to managing the asset?
• Keep on top of property maintenance and life cycle repairs and replacements?
• Fully understand what their obligations are?
• Know how to live up to and manage their end of the bargain?

It is, of course, vitally important that the investment is protected. A property with deferred maintenance and a high level of capital expenditure requirements over five or ten years, will have a lower commercial value compared to the same or similar property with less of an expenditure profile.

For this purpose, astute investors keep an eye on their tenant’s approach to asset management and the way that repairs, maintenance, and replacements are programmed and performed, through annual inspections and audits.

A good approach and regime can be established early in the relationship. The annual review and report can be used as a tool to measure progress, to set future targets and to determine any corrective action.

For more than 30 years Napier & Blakeley has helped both owners and occupiers of commercial property with such matters.

• We perform lease reviews and help the parties understand both lease and statutory obligations and how these can be best met;
• We assess condition and performance of the building elements and forecast the scope and timing of commercially appropriate repairs, maintenance and capital replacements;
• We prepare accurate cost estimates for budgeting purposes and to improve cash flow.  We model the capital allowances and tax depreciation benefits in terms of write-offs from any strip out or demolition and then establish the future benefit that flows from the capital expenditure.

Some recent relevant projects include:

Call us today, if you would like any more information for a specific property or portfolio and one of our experts below will be able to assist you:

SYDNEY
Simon Gould
o.  02 8113 7112
m. 0409 228 552 
e.  sgould@napierblakeley.com

MELBOURNE
Rob Howells
o.  03 9915 6327
m. 0437 649 082
e.  rhowells@napierblakeley.com

BRISBANE
Gavin Peach
o.  07 3815 0449
m. 0412 225 781
e.  gpeach@napierblakeley.com 

PERTH
Graham Rigby
o.  08 9489 4895
m. 0419 847 998
e.  grigby@napierblakeley.com

For 30 years and counting Napier & Blakeley have been providing the following services to the property industry:

• Acquisition & Disposal Technical Due Diligence
• Quantity Surveying
• Capital Expenditure Forecasting
• Make Good Reporting
• Energy Management
• Energy Efficiency
• Development Monitoring
• Property Tax Depreciation

Almost all focus in the report was applied to the option of pursuing renewable energy as a solution to our reliance on carbon based energy. This is fine for the longer term, but it ignores the commercial reality that a step by step approach is required and indeed will occur. 

Plainly, the process of reducing our reliance on fossil fuels must include the reduction in our overall demand for energy. Any decrease in demand for energy will also reduce Peak Demand. 

It is pleasing that the Federal Government’s announcements following the COAG meeting finally seem to be recognising this fact. But they still seem to be tinkering – one minute per hour less air-conditioning, is cute but not as effective as four less hours at the right times. 

Energy Efficiency is a huge key to achieving greenhouse targets. Energy Efficiency improvements in buildings can provide a quick, very predictable – and in some instances guaranteed – energy use saving. 

In the experience of Napier & Blakeley, energy use in an office building can be reduced by 40% – 50% via energy efficiency measures.  Each measure produces a positive return on investment, in many cases far better than the building owners’ so called “core business”. 

For example:

Office buildings are responsible for about 10% (1) of Australia’s greenhouse gas emissions. Thus a best – and plainly unlikely – outcome is that Australia’s collective energy use could be reduced by 5% overnight by the adoption of all energy efficiency improvement options.

 Plainly energy efficiency improvements in buildings should be a no-brainer environmentally and economically. 

But it’s not really happening. 

Whether decision makers can’t grasp the concept of spending money to save money, whether the energy costs are not considered material, whether CSR statements are simply that, statements, or whether there is too much confusion out there, it’s difficult to pin-point the reason why.

I suggest one reason for inaction on energy efficiency improvement is environmental fatigue caused by its constant political treatment and the uncertainties brought about by the myriad references around it.

We have VEET, ESC, M&V, GBCA, NABERS, BEEC, Green Star, Green Star Performance, LCAL, CEFC, Kyoto, Montreal, Copenhagen, signatories, non signatories, sceptics, carbon tax, DRM, Peak Demand, CTS, ETS, MWh, KWh, Energy Efficiency Opportunities Programme, Energy Efficiency Information Grants, Climate Change Commission, BREEAM, LEED, E3, MEPS, GEMS, GBF, EUA, EPC, EEC, Clean Energy Future, to name but a few.

Maybe another hindrance – as it appears from the recent Climate Commission Report – is that there are two camps? The first; the dull yet pragmatic supporters of energy efficiency measures and the other; the elite and well funded supporters of renewable energy?

I don’t for a moment suggest that we don’t pursue the development, or to not adopt, renewable energy options.

 Renewable energy can have less certainty and has far longer payback periods.

We see inexpert community groups pursuing the development of localised wind farms – although sometimes not too close to their own homes – perhaps for the benefit of being part of a community, rather than for economic or even environmental drivers, especially when considered against the energy efficiency improvement opportunities that no doubt lie dormant throughout their region.

Similarly, we see the power companies building renewable supplies, but some or perhaps all of this activity has been forced upon them by government regulation.

On the matter of the power companies, many query their push for their customers to use less power.

It is the reduction in PEAK DEMAND that the power companies pursue. A pursuit that we should all support.

Peak Demand relates to the eight or ten hours in the two or three hottest days of the year, when everyone cranks up their cooling. This tiny percentage of annual demand, requires 10%-20% of the power companies’ infrastructure.

Thus billions of dollars are invested for our collective comfort for a few short hours. Analysts suggest that the premium we all pay for this luxury is about 400 times the standard rate per MWh – although this is averaged across each one of our electricity accounts.

Perhaps Development Approvals should require a high rise to incorporate its own capacity to service its Peak Demand?

The introduction of ‘Time-of-Use’ metering would enable (i) the power companies to apply a more realistic price to these peak periods and (ii) consumers to reduce their energy consumption during these periods (in response to the high prices charged).

Over time, the requirement to carry under-utilised infrastructure will subside, enabling the gradual withdrawal of the requirement to subsidise the peak users and thus reduction in all others’ energy bills.

There does not appear to be the political will to allow the introduction of enabling metering in some of our States.

Coupled with statutory pricing mechanisms, we face the risk of more (short to medium term) superfluous infrastructure costs being passed on to us all.

There have been various Government programmes and grant moneys made available for energy efficiency improvements to existing buildings. However, they represent a bag mixed with expediency, cynicism and political targets, for example:

Green Building Fund, $120M directly supported energy efficiency in buildings, but went primarily to those at the front of the curve, who perhaps could afford to do the works themselves.

Low Carbon Communities, $330M seems to be a welfare handout disguised as environmentally driven grants.

$1B tax breaks for energy efficiency works. This large number was waved under our noses for some time and then claimed back by the Treasurer to balance his books. But the break was almost certain to NOT induce change in behaviour. The conditions and the time lags involved would have neutered its capacity to procreate.

It’s a similar story relating to the renewables sector but on a much grander – or perhaps cynical – scale, for example:

Carbon Tax; given the removal of much of the pain – via tax cuts and subsidies – required to induce change, this appears to be a redistribution of wealth disguised as environmentally driven ambition.

Clean Energy Finance Corporation; has been billed as $10B for driving the renewables sector. There is some talk of part of the finance to be speared into energy efficiency, but I am nor aware of any confirmation on this front.

Perhaps we should forget the acronyms and start from ground up now, to address Peak Demand by improving energy efficiency and give ourselves a better platform to consider the longer term options before us.

By Peter Frith, Joint Managing Director, Napier & Blakeley, Energy Efficiency Advocates.*
Published on the Property Review Website 13.12.12

Sources:  (1) Australian Government – Department of Climate Change and Energy Efficiency

For some time, their rhetoric had been; “we have a $billion contribution to energy efficiency”. Whilst the promised accelerated depreciation for green retrofits may not have changed behaviour to a great degree – given the up to 3 year wait required toreap the benefit – this about-face is significant as it displays a lack of real commitment to the carbon reduction agenda.

Energy efficiency improvements to the existing building stock is the single most cost effective and fastest way to reduce our collective carbon footprint.

Napier & Blakeley have established a specialised unit, called NB Verdigris, to project manage and procure funding for the sustainable retrofit of existing buildings. We are not aware of any of our clients deferring the commencement of their projects to obtain the benefit of this phantom tax break.

The problem is that some projects may have been delayed, exacerbating the general construction slow down.

Will the Government attempt in another way to make good its promise to act as a catalyst in improving energy efficiency in the existing building stock?

View the Property Council of Australia’s summary of the Budget highlights.

For any assistance with your assets energy efficiency modelling, potential, costs and retrofit planning and management, please contact Peter Frith.

Contact

Transaction & Asset Advisory
Rob Howells – 03 9915 6300 – rhowells@napierblakeley.com
Alastair Walker – 02 9299 1899 – awalker@napierblakeley.com

Sustainable Property Solutions
Peter Frith – 03 9915 6300 – pfrith@napierblakeley.com

Development Advisory & Quantity Surveying
Craig Smith – 03 9915 6300 – csmith@napierblakeley.com
Peter Hammond – 02 9299 1899 – phammond@napierblakeley.com
Paul Cosker – 07 3221 8255 – pcosker@napierblakeley.com

Property Depreciation & Insurance
John Mathew – 03 9915 6300 – jmathew@napierblakeley.com
Paul Mazoletti – 07 3221 8255 – pmazoletti@napierblakeley.com