The feasibility of medical office
building green upgrades from an
Billie Ann Brotman
Department of Economics, Finance and Quantitative Analysis,
Kennesaw State University, Kennesaw, Georgia, USA
Purpose –The purpose of this paper is to exam the financial impact on the owner/lessor who is
considering a partial energy upgrade to an existing medical office building. The owner who leases the
building using a triple net lease does the upgrade prior to leasing the building, with the expectation of
earning higher rents. How much should the owner who leases the property spend for a given rent per
square foot increase?
Design/methodology/approach –The empirical study highlights the impact of key financial
variables on the dependent variable medical office construction spending put in place in the USA. The
independent variables prime interest rate, cost of natural gas per therm and electricity cost per KWH,
resale building prices are significant variables when predicting medical office construction spending.
A case study using a cost-benefit model is developed. It inputs corporate income tax rates, incorporates
a debt service coverage ratio, prime interest rate, analyzes investment tax credit (ITC) and rebate
scenarios and varies the level of rental income and energy savings. The case study results provide
insight into which factors are enabling higher net construction spending when considering a green
energy retrofit project. Both the regression model and the case study model focussed on the owner of a
building who rents medical office space to tenants using a triple net lease. The owner/lessor paradigm
analyzes revenue enhancements, the tax implications of having these savings and benefits associated
with borrowing when financing the green retrofit. The availability of low cost borrowing, increases in
the ITC percent and rebates and increases in rent per square foot have an impact on potential energy
Findings –The empirical model finds the independent variables to be significant. Utility cost, resale
value of office buildings, the prime interest rate, business bankruptcy court filings and unemployment
rate fluctuations adequately explain movements in medical office building spending for the years 2000
through 2015 yielding a R
of 73.8 percent. The feasibility case study indicates that the energy saving
levels and ITCs not income tax rates are the primary drivers for a partial energy retrofit.
Research limitations/implications –Market incentives are a function of the cost of energy. If the
cost of energy drops, then the profit incentive to conserve energy becomes less important. The role of
tax credits, rebates, property tax reductions and government directives, then become primary
incentives for installing energy upgrades. The owner of an empty building assumes all of the operating
costs normally paid by a tenant under a triple net lease. This possibility was not included in the
replacement cost-benefit model used in this paper.
Practical implications –The feasibility of doing an energy upgrade to an existing building requires
that a cost-benefit analysis be undertaken. The independent variables that are significant when doing a
regression model or proxies for these variables are incorporated into a present value model. The results
in Table V can be used as an initial template for determining how much to spend per square foot when
doing an energy upgrade. The square foot amounts can be applied to different size office buildings.
The corporate income tax rate or a personal income tax rate has minimal impact on energy
construction upgrade spending.
Social implications –More energy efficient office buildings reduce the amount of greenhouse
gases released into the atmosphere. Energy efficient buildings also conserve on scarce fuel
reserves. ITCs and rebates limit the role of government in directing decisions to do energy upgrades.
The market mechanism to some degree can help encourage energy conservation through
Journal of Property Investment &
Vol. 34 No. 4, 2016
©Emerald Group Publis hing Limited
Received 17 March 2016
Accepted 20 April 2016
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