NOI Drivers

Today, we’re going to discuss the metric that you should focus on when presenting an expense-reducing capital project to a landlord.

For most landlords, one of largest controllable operating expenses is the utility bill. Payroll for the chief engineer, porter, doorman, and so forth may make up a portion of the landlord’s controllable operating expenses; however, these costs generally pale in comparison to the utility costs.

Your task is to convince the landlord that a reduction in operating expenses for his or her building through energy savings will result in an overall increase in his or her Net Operating Income (NOI). NOI is the mother’s milk of real estate investors. It’s why they get up and put their pants and dresses on in the morning.

In a case like this, there are three drivers of higher Net Operating Income:

Higher rent
Lower vacancy/less tenant churn/better tenant retention or attraction
Lower landlord share of operating expenses

If you want to sell energy efficiency effectively in the commercial real estate environment, you have to explore these drivers, determine which ones might have the greatest positive effect on your prospect’s NOI, and then make a credible connection between your offering and the driver you’re aiming to improve.

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