Reframing the Refrigerator
Suppose your goal is to convince a multifamily landlord to improve the energy efficiency of his building by replacing all of his units’ kitchen appliances. You may very well find that he doesn’t give a hoot about appliance efficiency since his tenants are the ones paying the utility bills. This is an all-too-common scenario. Some people call it the “split incentive” problem. Guess what? You have a much greater chance of commanding your prospect’s attention – and prevailing at the end of the day – if you reframe your value proposition with the help of some segment-specific business acumen.
Let’s return to the example of the landlord whose apartment building is filled with old appliances. Your job is to convince him to replace those appliances with ENERGY STAR-labeled ones. What are the benefits of ENERGY STAR appliances? New appliances require less maintenance, which means fewer disruptions for tenants and fewer headaches for the landlord, right? Since they’re new, they’re also more aesthetically pleasing, which should help with tenant retention and attraction, right? And of course, they result in lower utility bills…admittedly a benefit the tenants capture if the building is submetered.
If you present these facts exactly the way I just did to a skeptical landlord, you’ll probably fail to close the sale. Why? The investment of time and money is not worth a few less maintenance calls and an ambiguous increase in tenant attraction or retention. So how do you reframe this scenario to hit the ball out of the park? Take the time to quantify and monetize the benefits of replacing these appliances using terminology that is sure to resonate with the landlord.
I was advising a large public benefits program last year on how they could increase the market penetration of their multifamily direct-install programs. I suggested they determine the approximate difference in utility bills between an apartment outfitted with ENERGY STAR appliances and one that is not. They did the math, and I believe it turned out to be about $40 a month in utility savings for a one-bedroom apartment.
Knowing this information, your pitch to the landlord could go something like this: “What if you invested roughly a thousand dollars to install ENERGY STAR appliances in each of your units, and then you said to every prospective tenant, ‘These newly installed appliances will lower your utility bill by about $40 a month. You may have noticed that our rent is about $20 per month higher than the building across the street; however, with a $40 per month lower utility bill, you’ll wind up keeping an extra twenty in your pocket every month that you can use to buy a six-pack of your favourite craft beer.’” (I was told that beer was the most fungible currency among young renters in that particular town…feel free to modify this pitch to appeal to your local audience.)
The next step is quantifying and monetizing the landlord’s share of the benefits. What does an incremental $20 per month in rent mean to the apartment building’s profitability and value? $20 per month equates to $240 per year. Using the Direct Capitalization Approach to appraisal and a capitalization rate of 10%, that incremental Net Operating Income of $240 per year has the potential to drive $2,400 worth of incremental asset value for the landlord! That’s almost 2.5 times the cost of the new appliances. And at a lower cap rate, the jump in appraised value would be even more pronounced. Keep in mind that the landlord wouldn’t have to sell the building to enjoy the benefits of that appraised value bump…It also increases the amount of equity he could take out when refinancing the building.
And by the way, what if the new appliances did help retain a tenant? The landlord benefits further by avoiding some or all of the following costs of tenant “churn”: the leasing commission; rent lost while seeking a replacement tenant; the cost of cleaning, repainting and potentially re-carpeting the unit as well as the rent foregone while doing so; and finally, rent lost during a “free rent period” if such a perk is customary to induce a tenant to sign.
After presenting such a compelling case, you should have the landlord’s undivided attention. You’ve shown him the true value of the proposed project on the back of a napkin (or beer coaster as the case may be). Moreover, you’ve shown him how to reframe the upgrade for both his current and prospective tenants. His current tenants should willingly accept the installation inconvenience, and his new tenants should gladly accept slightly higher rent, in exchange for lower utility bills and the convenience and aesthetics of brand new ENERGY STAR appliances.