Mar 30, 2022
Thinking that you’ve already reached your highest potential income in your property? Think again. Richard highlights the need to consider utility expenses. He has found a creative solution to make it more efficient and have you save thousands of bucks!
Richard Randall is a former real estate professional converted to energy efficiency professional. He is the CEO and Co-Founder at Echelon Energy, which is a technology-enabled service provider that conducts energy audits of commercial facilities, designs and manages custom infrastructure retrofits to reduce utilities consumption, and then actively monitors the utilities consumption after implementation.
[00:01 - 04:15] Opening Segment
- Richard on starting out as an asset manager to getting creative as a problem-solver
- How his experience in real estate propelled him to success
- Saving a million bucks a year and creating $20 million in additional value
[04:16 - 12:46] Saving Thousands of Bucks through Energy-Saving Measures
- The careful planning involved in energy efficiency
- Launching Echelon Energy to help solve the same problem for real estate investors
- Improving your net return on invested capital and acquiring federal tax credits
[12:47 - 16:40] The Power of Creativity in Problem-Solving
- The straightforward process of assessing clients’ properties
- Identifying the competitors in the energy efficiency space
[16:41 - 17:57] Closing Segment
- Reach out to Richard
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- See links below
- Final words
Tweetable Quotes
“There [are] really good incentives for solar and batteries that are connected to solar, you can get federal tax credits.” - Richard Randall
“Let's not burn energy just for burning energy's sake.” - Sam Wilson
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Connect with Richard Randall on Linkedin. Visit Echelon Energy and email him at richard@echelonenergy.com
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Want to read the full show notes of the episode? Check it out below:
Richard Randall 00:00
Have an owner doesn't have the capital to invest will invest our capital and take a piece of the savings over a period of time. And then once that period of time is over, you know, it goes away completely, the owner gets 100% of the savings. It's not a lien or there's no liens. There's no UCC filings. It's not a loan. So there are no savings. We don't make our money back, when we target fairly high returns without investment, because it's a pretty high risk, you know, without the liens and the UCC filings and all that stuff. And we found capital that has appetite for like ESG investments into the built environment.
Intro 00:31
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.
Sam Wilson 00:43
Richard Randall is a former real estate professional converted to energy efficiency professional. Richard, welcome to the show.
Richard Randall 00:50
Thanks for having me. Nice to be here.
Sam Wilson 00:52
Hey, man, the pleasure is mine. Three questions I ask every guest who comes on the show in 90 seconds or less? Can you tell me where did you start? Where are you now? And how did you get there?
Richard Randall 01:00
Yeah, I started out as an asset manager running a large real estate portfolio in Denver. Right now I'm the CEO of Echelon energy, which has 15 employees who've been in business for a couple of years started the company right before COVID. And how I got here was kind of some dumb luck and trying to find opportunity and get creative, and saw an opportunity to basically create a business that helps solve a problem that I had a lot of success solving.
Sam Wilson 01:24
Gotcha. Now that success solving that problem came from your experience in real estate. Is that right? Like you kind of figured out this business from working within real estate. Yeah, exactly.
Richard Randall 01:35
I was running, you know, billion-dollar real estate portfolio that was not hitting underwriting assumptions. We had a large institutional partner that was putting the heat on me to find a way to get back on track, I started to, you know, look at the p&l. There was nothing I could do on the revenue side, really were kind of Max there. And saw utilities, which I had historically thought was an uncontrollable operating expense and was able to work with some engineers kind of on the front end, find ways to reinvest back into our assets to cut our future utility expenses. And very first asset we ever did, we invested $1.6 million of capital, and we saved almost a million dollars a year and utility expense. So you know, at a four or five cap, that's a lot of incremental value creation, and it really got my attention.
Sam Wilson 02:21
Yeah. What was the size of that property? You're spending a million bucks a year and utility?
Richard Randall 02:26
Yeah, it was a 400 unit asset right in downtown Atlanta, built in 2005. Student Housing. So it's 1200 student housing beds, right? It had a over $2 million a year utility bill.
Sam Wilson 02:38
Right, because on a student housing project like that, you're not direct billing utilities to the student, it's all kind of baked into their correct, like a hotel, right? They don't really care how high the heat is the, you know, as long as you're paying the bill. So that is a direct expense to you guys. And so like you said, in a five cap, you save a million bucks a year, you just create a $20 million in additional value. Exactly. Wow, that's pretty impressive. Okay, so that's really cool. What did you do? Like, what are some things you figured out? You said, Hey, here's how we can shave a million bucks a year for utility bill?
Richard Randall 03:12
Yeah. Yeah. So it really ran the gamut. The high-level things are we did LED lighting, it was a large high-rise asset with lots of five miles, I think three miles a corridor. So lots of lighting, a lot of ah, fat controls, so that that address kind of the electricity usage. So like smart thermostats that basically control where residents can put the setpoints, they have like occupancy sensor rollback, so if people leave for the summer, it knows that someone's not there, and it rolls back, the AC allow the heat to rise and the unit monitors humidity and all those sorts of things. We did a lot with high-efficiency water fixtures, so like showerheads, toilets, aerators, flow management devices, smart irrigation controls, those were kind of like the main ways that we reinvested back into the building. It also had a like 800 space parking deck attached to it, which he did like a big lighting controls project on that use daylight harvesting like if it's a nice sunny day, all of the lights that run the outer ring of the parking deck that was totally open to the exterior would either dim or turn off completely. So did a bunch of different things.
Sam Wilson 04:16
Right? Yeah. And it's small stuff like that. It takes a lot of probably planning on the front end, but obviously, it pays huge dividends on the back end. How did you underwrite that, you know, saying, I mean, how did you take it back to your back to your, you know, institutional partners that Hey, guys, I know, we're already not hitting projections, neither a million and a half bucks. Here's the thing. It's gonna make us money.
Richard Randall 04:36
Yeah, definitely. So it's very difficult, which is why we basically built this business to full turnkey work with owners, but I had to hire energy efficiency consultants that specialize in like ASHRAE level two energy audits, and that's like the gold standard kind of investment-grade energy audit took like four or five months for them to put these projects together. So they run all the calculations do all these things, they come back with their proposal. What's difficult about proposals is the cost is not yet bid out because it was an engineer who put the proposal together. And so you have to go to all these specialty contractors. And they have to bid, you have to figure out exactly what to do, and how you're going to execute the project and hire a construction manager and all these things. And then, you know, they go implement all the, all the retrofits. And then once it's done as an asset manager to figure out how to understand utility bills, which are more complicated than you would think. And so they put the proposal together, which took four or five months, I went to our Investment Committee, they said, Hey, we've never seen anything like this before. You're already not hitting your numbers, we don't think it's going to work, we decline. So I originally got shot down an investment committee, brought it back a few months later, having after having made some other good decisions, and really believed in the program and was willing to kind of put my reputation and job on the line. You don't get to miss on a $1.6 million reinvestment and keep your job usually. Right. So they eventually I think they just got sick of hearing about, you know, hearing me and they said yes, go for it. And we did it. We actually we told them, it would save $400,000 a year, and it outperformed significantly.
Sam Wilson 06:07
Wow. Yeah, obviously significantly. And so from that, I'm sure they were just I mean, chomping at the bit to execute this across your portfolio.
Richard Randall 06:14
Yeah. And so we did. And we saw a similar opportunity, the assets were smaller, you know, that was 40% of our total utility, expand across the portfolio, saw similar opportunities, everyone got really excited. They just launched their ESG, you know, commitment in like 2019. And so this became a case study, they said wrong with it, you know, do it to everything we own. And kind of through that I realized exactly how complicated and time-consuming it was for an asset manager, like a very large investment fund to do all this stuff. And I felt like you could build a business that did it for them the full, like full turnkey, kind of start to finish soup to nuts, projects.
Sam Wilson 06:52
Yeah. And so that's where you are today. And that's why you launched this company, you said, hey, look, I can do this start to finish for people all over the country.
Richard Randall 06:59
Exactly. Yeah. So yeah, we started in 2020. We did like 10 projects in 2020. In 2021. We did like 60 projects in 25 states, and we have 15 employees. And we have like 400 properties in our pipeline right now
Sam Wilson 07:14
Wow. Yeah. I mean, that's for people, especially in multifamily. And especially in commercial real estate right now. They're trying to find any way they can, as you well know, to add $1 to the bottom line one because the cap rates they're trading at, and two, because we're running out of ways to, you know, effectively, you know, implement the value add strategy. So this is a really unique way to go about that. Is there a unit size? Or is there a property type that you really have to be at before this becomes, you know, the payoff is there?
Richard Randall 07:47
Yeah. You know, it works from anything all the way down into duplexes, you know, single-family homes, and we're talking to large single-family homeowners about this strategy and ways to deploy it there. So it can go all the way down into like residential, anything that uses utilities, right, our company primarily focuses on large assets, or large owners have lots of assets. And I'll give you an example. An autos, you know, an Autozone store is a very small building, but there's 8000 of them. So that's like a really interesting opportunity. And you can cut utility expenses by millions of dollars a year across the portfolio. Or you can go after big assets like 400 unit apartment buildings, I would say, the asset size unless it's an owner of like, a ton of small sites, typically, it's like 100 units and above on the multi-side, on the office side, it's like 30,000 square feet or higher. On the hotel side, it's like 100 keys or more. And on the retail side, you know, it's probably like anything that's like a power center above. That makes sense. Mm hmm.
Sam Wilson 08:53
Yeah, that's interesting. Is there one in particular that you guys have decided to focus in on?
Richard Randall 08:59
Yet most of our work has been in the multifamily space in niche multifamily. So affordable housing, senior housing, student housing, market, re workforce, things that people live in is like 80% of the business that we've done kind of inception today. Hospitality is like 10% hospitality is great, but we started the business right before COVID. And so hospitality owners were not in a position to reinvest back into our assets. And you know, they said, Hey, this is awesome, but like, I'm just trying to make sure I don't default on my own here. So call me in a couple years and you know, once COVID is blown over and we're able to kind of get our heads back above water. Same with with Office, it was a tough time, but it works great in office, commercial assets, retail and industrial, it's not as good for because a lot of time it's straight, triple net. And so all the savings go to the tenant which are still good if you can get lower triple nets or cams, you can push base rents higher, but it takes longer as the leases roll and whatnot. And, you know, a lot of your big corporate tenants too, they might really see a lot value in an owner coming to them and saying, I'm going to make this parking lot all LED lighting, it's going to improve the lighting and reduce your utility bill, you guys can take credit for that. And like the corporate governance like sustainability strategy stuff, I'm going to reduce your irrigation expenses. And we're going to make it as energy efficient as possible for you to be a tenant in this power center or something like that. I think there's value there.
Sam Wilson 10:21
Yeah, absolutely. And I guess I would wonder, anything where the utilities are direct billed to the tenant, I would assume is a harder sell to the owners of the property. Right?
Richard Randall 10:34
Yeah, that's what we're thinking about in the single-family rental strategy right now. So we have a client that owns like, 4000 homes. But in that market, when a tenant moves in, they put all the bills in their name, right? So they don't even know what the utility expenses are to live in this house. And you know, this quarter, but one of 4000, but they're really trying to get creative and figure out well, how can they differentiate themselves from other houses that are available? And how can they turn this into a profit center? And so like, one of the things we're exploring is, well, what if they became the utility? What if they put solar on all the rooftops? What if they took all the meters back in their name, and they took the risk on energy usage instead, on average, to live in a house of 4000 square feet and Denver your pay 300 a month in utilities, you just pay us 300 a month, we make this thing hyper efficient, and it's cost us 100. And so you can make a $200 per unit per home per month spread on the utility usage.
Sam Wilson 11:28
Right, certainly an advanced strategy across that many homes. And that'd be a really interesting deployment there. Talk to me about taxes, there's got to be some great tax savings, tax rebates. I mean, yeah, this–
Richard Randall 11:43
Totally. So they're really good utility incentives available in most markets, I'll use that project in Atlanta, I think we got like $150,000 worth of incentives from the utility company, which really improves your net return on invested capital, kind of once the project's done, you can, you know, obviously, when you're capitalizing things, you can take accelerated depreciation on these things. And so it helps with like taxable income, certainly. And then the final thing is, there's really good incentives for solar and batteries that are connected to solar, you can get federal tax credits. And I think right now, they're like 26%. So say, you're a real estate investor, and you do a million-dollar solar installation and a property and you know, it's very likely that that asset is in a loss position. So it doesn't necessarily help for you to have this big tax credit. So you have taxable income from something else, a business, you run W-2 income, you're a lawyer or whatever, you can take that solar tax credit, apply it to other income, in ways that you can take kind of passive real estate income and bring it into other things, right? You’re active.
Sam Wilson 12:47
Right, timeline, we'll talk about timeline to implement this. I mean, there's got to be a lot of studies and things that I mean, in order for you guys to figure out if there's even an opportunity. Yeah, I'm on a particular project. What's that look like?
Richard Randall 12:58
Yeah, our process is fairly straightforward. We start with an initial analysis that's free to our clients. And with some basic information about the asset, we can tell you what we think the opportunity set is going to be. So those would be things like the T 12, operating statements so we can get the historical utility expenses. And then details about the property. Is it 100 unit multifamily asset in Memphis, Tennessee that was built in 1966. It hasn't been renovated? Yes, no, like some very basic questions. From there, we plug it into our model, so we can model what the usage is. And we'll come back to an owner and we'll say, We think you can invest $100,000 back into your asset across these eight energy conservation measures, you're going to get this $30,000 a year in savings, and there's $10,000 in utility rebates are available. We're like 80% accurate with that initial analysis, and a lot of requests. That's awesome. Like, what's next. So we have to do a site visit, we have to confirm all these things, we have to like really detailed bid the project. And so we'll do a site visit for that we charge a deposit towards the future project. So we don't charge a fee. It's a deposit that basically if nothing happens, becomes a fee, but we like to use it against the future work because we do all the work turnkey, and what we're really after is projects, not fees. So we'll go on site, we'll do the audit, we'll get utility 12 months worth of actual utility bills will build the energy bottle in two to three weeks later, we'll come back with like the actual investment-grade energy efficiency audit that's ready to be executed. When our clients say yes, 100 unit multifamily asset in Memphis, Tennessee, it's typically four to six weeks before on-site kind of swinging hammers. And it takes us like a week and a half to two weeks to do all the retrofits. And then we do 12 months worth of cost avoidance reporting on the back end to show you how well it performed and give you the data. We also I don't think I mentioned this will performance contract. So if an owner doesn't have the capital to invest will invest our capital and take a piece of the savings over a period of time. And then once that period of time is over, you know, it goes away completely. The owner gets 100% of the savings. It's not a lien, or there's no liens. There's no UCC filings. It's not a loan. So if there are no savings, we don't make our money back, we target fairly high returns without investment, because it's a pretty high risk, you know, without the liens, and the UCC filings and all that stuff. And we found capital that has appetite for like ESG investments into the built environment.
Sam Wilson 15:17
Man, that is absolutely intriguing. I love just the creativity behind this. And, you know, the, and also just, I mean, let's not burn energy just for burning energy sake, like didn't make any sense at all. So I mean, you're, you're both not burning energy just to burn it. And you're also saving, you know, investors all pile of money. And I also like the creative way, you're financing those out, I think that's super intriguing. What are some, or who are some direct competitors, maybe, to what it is that you're doing right now and other people in the space is a challenging environment right now to be doing what you're doing?
Richard Randall 15:50
Yeah, so direct competitors, we don't really have any direct competitors that do the full chain. But we do have kind of tangential competitors. So like the energy efficiency engineers that sell audits, that's a tangential competitor, the specialty contractors in technology providers sometimes will try to sell directly to owners, that's a tangential competitor. And then there are like data collection and aggregation platforms, which would be like also attend general competitor, I don't know of anyone group that's trying to roll up the full strategy for owners, which is his former owners, we think that's very important. Because if you're a busy real estate investor, you don't have like a big team. And you can't work with like eight different companies, you kind of want one group to handle your property taxes, your utilities, your property management, you know, your investor reporting like you don't want to deal with eight companies if you don't have to.
Sam Wilson 16:41
Right. That's absolutely right. I love it. It's my question not who was I wouldn't actually asked me to give the Who was your competitor, but like, what type of competitors out there exist, but I haven't heard of this before. So that's absolutely fantastic. I really enjoyed this. Richard, thank you for taking the time to come on today. If our listeners want to get in touch with you learn more about what you guys do and take advantage of your services. What is the best way to do that?
Richard Randall 17:02
Yeah, so our website is www dot echelon. energy.com EC h e l o n energy.com. You can email me at Richard at Echelon energy.com Or my cell phone’s 303-653-5820. And that'll go directly to me, my partner and I still do most of the business development. And our team executes on all the engineering and construction management,
Sam Wilson 17:26
Man, I love that. Richard, thank you again for your time today. I do appreciate it.
Richard Randall 17:30
Yeah. Thanks so much, Sam.
Sam Wilson 17:31
Hey, thanks for listening to the How to Scale Commercial Real EstatePodcast if you can do me a favor and subscribe and leave us a review on Apple podcasts, Spotify, Google podcasts, whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show it helps us both attract new listeners as well as rank higher on those directories so appreciate you listening thanks so much and hope to catch you on the next episode.