HVS assesses sustainability risks

A valid business case exists for numerous types of sustainability investments, according to a recent report by Kevin Goldstein, vice president of HVS Sustainability, but hotel owners and operators must be diligent about several key areas of risk relating to utility efficiency:

1. Investment risk

When it comes to building equipment upgrades, HVS suggests owners and operators ask the following prior to moving forward: Have I done everything possible to optimize the ROI from this project?

A strategy should be in place to secure the lowest possible installed cost, Goldstein reported, often via an open bid scenario that is based on a common definition of the proposed improvements. Owners and operators should also remember to differentiate between the gross cost and net cost of a project.

2. Operational risk

The probability that an equipment retrofit project may not perform according to its specifications or may have unanticipated externalities associated with ongoing hotel operations.can usually be minimized by conducting proper due diligence on the manufacturer and equipment, as well as visiting properties (or speaking with personnel at other properties) where the technology has already been installed, according to Goldstein.

3. Technology risk

A hotel owner or operator will most likely have two main questions relating to a new or emerging technology: Does it work, and does it make sense to wait as the technology evolves?

According to HVS, the first step in the due diligence should be to speak with owners or operators with the technology already in place at their properties or to schedule an in-person tour to discuss the system’s performance and cost-effectiveness.

If a hotelier is being asked to take on some level of technology risk, the vendor should be accommodating this risk in the form of a discount on the equipment and/or service, Goldstein reported.

4. Construction risk

The more obvious impacts to ongoing hotel operations can be controlled via careful construction scheduling and sequencing, as well as selecting contractors who are familiar with the challenges of working in a hospitality environment.

Owners and operators also can consider engaging a specialized construction manager or owner’s representative to serve as a liaison between the property operations team, the contracting team and ownership, Goldstein noted.

5. Utility price risk

Goldstein identified a range of sources that can be used to gauge high-level trends in commodity rates; in the United States, these include various reports and market indices published by governmental agencies (U.S. Energy Information Administration), private consultancies and others.

HVS also recommends applying a sensitivity analysis based on varying commodity rates to enable owners to ascertain a range of returns under best-case, worst-case and middle-of-the-road scenarios. The commodity rates used in the sensitivity analysis can be adjusted based on both national-scale projections and historic local tariff patterns.

6. Project financing risk

A typical alternative financing structure, a power purchase agreement (PPA), would typically involve third-party ownership and installation of a more efficient energy plant system – along with a corresponding agreement to sell energy to the hotel owner. Goldstein noted it is essential to understand which party is assuming the commodity price risk and performance risk associated with the installation — both of which may be negotiable as part of the contract structuring.

Relating to turn-key agreements where a third party will finance or own the building equipment, HVS recommends hotel owners conduct their own due diligence regarding the actual costs of construction, available incentives to offset the capital cost and levels of savings generated through the project.

To read Goldstein’s full report, click here.