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Can Cash-Strapped Schools Teach Commercial Buildings a Lesson About Funding Capital Improvements?

Among the more distinct impacts of the global coronavirus pandemic is the dramatic effect it’s had upon how we engage with the spaces in which we work, play, and inhabit. From hospitals to prisons, grocery stores and restaurants, airports and public facilities, it’s likely that the urgent need to practice social distancing and self-quarantine in order to slow the rate of new infections, or “flatten the curve,” has forever changed not only the way we interact with our built environment, but how we make it work better for us.

This fundamental rethink is top of mind for commercial real estate investors, developers, and managers nationwide, who today are facing a mounting imperative to design, construct, manage, and renovate facilities in a way that measurably and visibly improves occupant experience. Yet, under today’s special circumstances, obliging this imperative is proving increasingly difficult.

And while there are numerous factors at play (identifying best practices, procuring the necessary resources, preserving facilities’ intended functionality, etc.) perhaps the most influential is time. This is because COVID-19 presents a much more immediate hazard to the public’s engagement with the built environment than does climate change, for example. Yet, even with consensus building around the need to modify or otherwise improve our building assets as quickly as it is, there remains a worrying lack of official guidance, let alone mandatory rules and regulations regarding safely reopening facilities.

As one can imagine, this scenario leaves a lot to be desired. Firms across the country have had to devise their own return-to-work protocols, which range from indefinite remote work options to staggered reopenings and everything else in-between. As a result, commercial property professionals are essentially left to their own devices, forced to determine which strategy, if any, their respective return-to-work plans should emulate.

Take for example our nation’s schools, where a largely similar dynamic is playing out. With the fall semester rapidly approaching and many school districts considering reopening or not, the issue of safely reopening our places of learning is of paramount concern for our policymakers, school administrators and, surely, the millions of parents, teachers, students, and faculty across the country. 

Fortunately, policymakers, school administrators, and plant managers are hard at work. From Congressional hearings on the matter down to the broader public dialogue, numerous stakeholders have uncovered some promising best practices, many of which concern upgrading sanitation, hygiene, and other related operational procedures. Beyond that, school plant managers nationwide are exploring upgrades to existing hardware, such as heating, ventilation, and air conditioning (HVAC) assets and systems, as well as installations of leading-edge technologies like germicidal far-UVC light fixtures

This case hardly seems unique at first glance. As in the commercial sector, guidance has for the most part been absent, save for the occasional exception. And the apparent need to return to “business as usual” in light of remote learning’s shortcomings is hardly dissimilar from, say, a commercial property manager’s desire to implement transmission risk-mitigating upgrades in order to both retain and, importantly, attract new tenants.

Nevertheless, there are a few aspects about the case of schools that are especially noteworthy for observers across the commercial real estate sector. The most obvious is the level of public scrutiny our myriad reopenings will undoubtedly attract. After all, part of the impetus behind putting kids back in the classroom has been the realization that schools are, without question, “one of the most important drivers in human capital investment,” and that their prolonged closure is effectively restricting the potential of the future American economy. Accordingly, it’s safe to assume that school administrators are taking every necessary precaution in reopening.

The differentiating aspect that perhaps is most relevant for commercial property professionals is the unique financial scenario that many of our learning institutions find themselves in, and the steps they’re taking to deal with it. Indeed, before the novel coronavirus ever reached American shores, more than half of public school districts nationwide were dealing with a significant deferred maintenance problem and were in desperate need of updates or replacements of multiple building systems or features in their schools. And of that backlog, approximately 36,000 of the country’s 100,000 K-12 facilities had inadequate HVAC assets and systems. These deficiencies are associated with health hazards of their own that, left unattended, may intensify the risks that COVID-19 poses to community health and student safety in these schools. 

And as if that were not enough, the impact that economic lockdowns have had upon state and local tax revenues and, in turn, school budgets, only intensifies the financial burden associated with both reopening schools and addressing the deferred maintenance backlog with limited federal support.

This brings us to our main point, which is the practicality of leveraging energy service performance contracting (ESPC) to deliver these necessary building performance enhancements in an easy, timely, and cost-effective manner. Leveraging this financing mechanism to engage an energy service company (ESCO) is a time-tested method, budget-neutral method that cash-strapped institutions like schools can use to procure technically complex energy efficiency and infrastructure improvement services without incurring significant costs, financial or otherwise. 

Certified energy service companies are contracted via performance contracts which bundle the customer organization’s energy efficiency upgrades with the modification or installation of energy-intensive equipment. This is meant to reduce transmission risk, like air purification systems, without compromising energy cost savings. In other words, successfully integrating COVID-related facility renovations with energy efficiency upgrades to maximize energy cost savings is within the contractor’s best interest.For school administrators and plant managers, the advantages that ESPCs offer are clear. Chief among them is their enabling schools to effectively stretch the value of any federal stimulus dollars received. The advantages that performance contracts affords commercial real estate owners and operators are much the same. Organization’s whose top lines are harmed by COVID-19 would do well to seek proven methods of shoring up their bottom lines with improved infrastructure and energy-use management. What has grown increasingly clear in light of America’s gradual, piecemeal reopening is that the United States, to date the country worst affected by COVID-19, is on a path towards a new, unprecedented era rather than a return to pre-pandemic normalcy. For the commercial real estate sector, success hinges on adaptation. Buildings are not inherently good at adapting so we must adapt the way we run, service and finance them instead. 

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