LED Retrofit and EMS Upgrade Against a Three-Year Payback Hurdle
You manage a 420,000 sq ft, three-building office portfolio. Electricity use is 4.2 million kWh per year at an average $0.11/kWh. The lighting load is 1.8 million kWh per year. An LED retrofit costs $620,000 and is projected to cut lighting energy by 45%; it also reduces lighting maintenance by $12,000 per year. A building automation and EMS upgrade costs $180,000 and is projected to cut total electricity by 8%. The utility offers a rebate of $0.03/kWh of first-year verified savings, capped at $60,000. Leases recover 70% of electricity through CAM charges on a gross-up basis, so savings are largely passed to tenants unless the lease is modified. The CFO’s capital hurdle is a three-year simple payback. The capital budget is $500,000.
1. Calculate the first-year savings, net capital cost, and simple payback for each project. Show your work.
Read the worked answer
LED retrofit: 1,800,000 kWh × 45% = 810,000 kWh saved. Energy savings = 810,000 × $0.11 = $89,100. Add $12,000 maintenance = $101,100 total annual savings. Rebate = 810,000 × $0.03 = $24,300, below the $60,000 cap. Net capital = $620,000 − $24,300 = $595,700. Simple payback = $595,700 ÷ $101,100 = 5.89 years.
EMS: 4,200,000 kWh × 8% = 336,000 kWh saved. Energy savings = 336,000 × $0.11 = $36,960. Rebate = 336,000 × $0.03 = $10,080. Net capital = $180,000 − $10,080 = $169,920. Simple payback = $169,920 ÷ $36,960 = 4.60 years.
Owner’s retained share after 70% CAM recovery: the owner keeps 30% of energy savings. LED: 30% × $89,100 = $26,730, plus $12,000 maintenance = $38,730; payback = $595,700 ÷ $38,730 = 15.4 years. EMS: 30% × $36,960 = $11,088; payback = $169,920 ÷ $11,088 = 15.3 years.
The full-cost figures are 5.89 and 4.60 years, so neither meets the three-year hurdle. The owner-share figures are far worse, which is the central business issue.
2. Neither project meets the three-year hurdle on a full-cost basis. What do you recommend and why? Address lease recovery, phasing, and risk.
Read the worked answer
I would not simply reject both projects. The EMS is the better first move: lower capital, a 4.6-year full-cost payback, and operational benefits such as fault detection, scheduling, and better data for future projects. It also preserves most of the $500,000 capital budget.
I would recommend EMS first, paired with targeted LED work in owner-controlled areas, tenant turnover spaces, and zones with high maintenance cost. A full-building LED retrofit at a 5.9-year full-cost payback is defensible on lifecycle grounds but not against the CFO’s stated hurdle, and the owner-share payback of 15.4 years makes it a poor financial case under the current leases.
The lease structure is the real constraint. If 70% of savings pass to tenants, the owner is financing a tenant benefit. I would propose a green lease clause, a utility allowance, or a shared-savings arrangement at renewal, and I would calculate the portfolio payback under that structure. I would also verify savings through measurement and verification rather than relying on engineering estimates.
Risk: rebate eligibility, actual hours of operation, tenant load growth, and installation disruption. Phasing reduces both capital risk and execution risk.
3. How would you present the business case to the CFO in one page? What metrics and caveats?
Read the worked answer
The one-pager should open with the decision requested, not with engineering detail. I would use a small table with four columns: project, net capital after rebate, full-cost simple payback, and owner-retained payback after CAM recovery. The figures are LED $595,700 / 5.89 years / 15.4 years; EMS $169,920 / 4.60 years / 15.3 years; combined $765,620 / 5.55 years / about 15.4 years.
I would state clearly that neither meets the three-year hurdle on a full-cost basis, and that the owner-share payback is driven by the lease recovery clause. Then I would recommend the EMS plus targeted lighting, with a request to revisit the lease structure at renewal. I would include non-energy benefits separately: maintenance reduction, comfort, fault detection, and capital planning data, without using them to disguise the payback.
Caveats: savings are projections, not guarantees; the rebate is subject to utility verification; installation will cause some tenant disruption; and the analysis assumes current tariffs and occupancy. I would propose a measurement and verification plan and a post-installation review at 12 months. The CFO should see the owner-share number prominently, because that is the cash flow that actually reaches the portfolio.