How to Overcome Split Incentives to Close More Efficiency Projects

For years sales organizations have faced a huge obstacle when trying to close efficiency projects when tenants are under triple net leases in a commercial property. In fact, some sales teams avoid the problem altogether – they’ve simply heard NO too often. However, the world has changed and the timing is perfect for a dramatically different approach to overcome this challenge.

 

Why Split Incentives Kill Efficiency Projects

In triple net leases, tenants pay the cost of utilities as well as maintenance/repairs – but owners pay for change-outs. Therefore, owners are loathed to invest capital if tenants receive all of the benefits from the reduction in operating expenses. Thus, their incentives are split when it comes to efficiency projects.

This article explains a sales strategy to overcome the challenge posed by split incentives which we refer to as Value Based Selling. It’s designed to capture the attention of your customer’s CFO (or owner), which is well more than half the battle in getting funding approval.

Since this article is a little long, a summary is provided. However, the Value Based Selling approach further below best illustrates the point of the article.

 

The Art and Science of Selling to CFOs

The following reflects my perspective, which is somewhat unique having sat on both sides of the CFO’s desk. I’ve sold to CFOs – financing solutions and bundled energy services. However, I’ve also been sold to as a CFO. Successfully selling to a CFO is a bit of an Art and a Science:

The Art: understanding 1) their mindset and 2) what drives investment decisions, and

The Science: specific selling techniques that grab their attention when presenting efficiency projects for approval.

 

The Art

1) Understanding their Mindset

Understanding the mindset of the CFO is critical especially in today’s commercial real estate market. In fact, it’s hard to imagine a time when owners placed a higher value on your services.

As a result, they should clearly see the link between your services and their ability to maintain/increase rental income.

When you think about how the pandemic has caused owners of commercial real estate to scramble to retain/add tenants in today’s market, the following becomes quite clear:

  • tenants demand comfortable working condition and pristine IAQ,
  • your services play a critical role in keeping tenants happy,
  • happy tenants = rental income, therefore
  • your services help maintain/increase rental income.

Given the understanding of their mindset today, it’s time to move to the second part of the Art of the sale.

2) How CFOs Make Investment Decisions

The role of a CFO has evolved over the years to where they are much more involved in strategic matters. Therefore, investments providing “strategic benefits” can be approved even with lower rates of return.

However, investments which look like “the standard cost of doing business” are typically subject to strict rate of return guidelines. This is often why efficiency projects get rejected – their strategic benefits are not presented properly.

As a result, the CFO opts for yet another repair. No doubt, everyone who sells efficiency solutions has ended up on the wrong side of this decision.

When presenting to a CFO, grab their attention by showing the strategic benefits of your project. If investing in your project looks like the “cost of doing business” you have to dig your way out of a hole.

So, how do you make your project look strategic? This is where the Science comes into play.

 

The Science – Valued Based Selling

As previously mentioned, the foundation of this approach is to link the benefits of your project to rental income. It’s a substantial departure from the traditional approach of emphasizing reductions in operating costs, which is ineffective when tackling split incentives.

Separating yourself from the competition often requires you to dare to be different!

When showing the benefits of your solution, frame it as a strategic investment by emphasizing the following:

  • it helps maintain rental income as tenants consider renewing their leasesand
  • it helps increase rental income in two ways by:

1) creating a working environment that is more attractive to prospective tenants, and

2) enabling a higher rental rate due to the reduction in operating expenses.

The CFO better sees the big picture, but to hold their attention you need to quantify the potential benefits.

 

Show the Numbers

First, let’s create some perspective in what you’re trying to accomplish. Your goal is to raise the CFO’s interest to a level that causes them to run their own model. Let’s look at an example assuming an upgrade of your customer’s HVAC system is needed for two reasons:

1)    tenant demand for comfortable workspace, and

2)    the need for increased filtration provided by MERV 13 filters – can cause problems when used in antiquated HVAC systems.

The example below is from EnFlux’s Project Benefits Summary (PBS), which was designed to show project benefits in a format desired by CFOs. The PBS conservatively assumes the only benefit from the project is that vacant space is more easily filled. Potential benefits from tenant retention and increased rental rates are excluded.

Generating a PBS is simple. Start out at the Input page by filling in the inputs in the Triple Net Lease column. Your contact at the company should be able to provide what you need for the Potential Increase in Rental Income. However, you would fill in the Increase in Rentals and Lease Term when creating your scenario.

This is the output in a format designed for CFOs and is perfect to share in a meeting.

Share this output page with the CFO which was designed in the format they prefer. Simply walk them through the non-financial benefits and then discuss the numbers.

Under these assumptions, the increase in rental income more than covers the cost of the project. As mentioned previously, this reinforces the link between your services and the generation of rental income.

 

Putting Myself into the Shoes of the CFO

If I were the CFO, I would have my team run the numbers and let’s assume we like the deal. However, we have no capital available to pay for the project but another service provider mentioned something about financing. The cost may be higher than I wish but that pales in comparison if the HVAC upgrade helps us fill vacant space.

I wonder why financing wasn’t mentioned in this meeting….

If you’re the sales professional who just finished making this great presentation, don’t let this happen to you!

 That’s the subject for another article – How to Introduce Financing

 

Conclusion – see Summary above.

Please feel free to comment or ask questions. The views of others are always appreciated.

Questions? Feel free to reach out to Larry Derrett, founder, and CEO of EnFlux Building Solutions.

Cell: 713.714.0575

E-mail: lderrett@enfluxbuildingsolutions.com

About the author: Larry Derrett is the founder and CEO of EnFlux Building Solutions which provides an ongoing program to help service based contractors and ESCOs overcome the challenge of selling to CFOs. Having sat on both sides of the desk as a banker and CFO, he brings a unique perspective to why businesses often fail to invest in efficiency projects.