Financial considerations of LED lighting and installations

1. Jeffrey N. Codd, LC
Don McDougall
Jeffrey N. Codd, LC
Don McDougall

2. Identify and explain the following relative to an LED project
 Importance of Non-financial factors to financial decision makers
 Difference between the COST of LED vs the PRICE of LED
 Key financial metrics and cash flow projections
 The change in Market Value of a property created by an LED upgrade
Recommend additional streams of financial benefit to improve returns

3. aka Why should the CFO care?aka Why should the CFO care?

4. Limitations of Traditional Financial Measures
Tell part of the story
• Fail to capture
• Qualitative
• Performance
• Hard to measure

5. Non-traditional Considerations
• Nuisance Factors
• Intensity & Beam
• Color Quality & Stability
• Warranty
• Are LEDs ready yet?
• Mock Ups
• Cost of waiting

6. Nuisance Factors
• How much would it be worth
for your Building Engineer to
focus on more meaningful
activities?
• Dark spots between
replacements
• Mis-aiming during
replacement
->Integrity of design
Image: thechronicleherald.ca
Long Life of LED systems minimizes the following
• Would your conversion rate
increase if all your lamps are lit
and store personnel are selling /
merchandising?

7. Beam & Intensity
Single vs Multi OpticBeam Quality &
Intensity
DOE June 2012

8. Color Quality
CFL adoption as proxy for LEDs
• Not just about payback
CRI, Full Spectrum, R9
• Sales impact of poorly lit merchandise
• Office / industrial / warehouse
productivity impact
• Hospitality guest experience
• More accurate health evaluation
Graph: US DOE Energy Star Market Profile| March 2009

9. Color Stability
Impact:
• Guest experience impaired
• Poorly lit merchandise
-> reduced sales
• Worker productivity decrease
-> production costs / quality issues rise
Managing the risk, IF color is critical
• L70 is NOT the benchmark
• Shorten required payback period
Image: Scott Rosenfeld, Smithsonian American Art Museum
US DOE Market Introduction Workshop – Managing Risks |
Color Shift – by Michael Royer

10. Warranty
Limitations of Traditional
Warranty
Performance Warranty
• Lumen Depreciation
• Color Shift

11. Are LEDs Ready Yet?
It Depends…application based response is needed
• Not always 1 for 1
• Sometimes better than 1 for 1
• Narrow beam challenges
Prescriptive Incentives
• New construction
• Retrofit
• Area lighting

12. Mock ups
Invaluable to establish the following:
• Application specific performance
• Models and cut sheets don’t tell the full story
• Minor tweaks
• Lensing, aiming
• Major changes
• Compatibility (dimming, video conferencing, equipment, etc)

13. Cost of Waiting
Simply taking no action can be
extremely costly
• Do Nothing Total
Operating costs include
• Lighting Energy
• HVAC Energy
• Replacement Lamps / Ballasts
• Replacement Labor
50PAR30 for 12PAR30 LED

14. Depreciation 101
$30,000 Car
Market Value over 5 years
Image: Edmunds.com
IRS Rules vary

15. Summary
1. Translate Lighting Quality
into dollar impacts
2. Demonstrate how lighting
improves…
• Guest Experience, Patient
Stay, Productivity, Sales
• Cash Flows
• Market Value

16. FINANCIAL FACTORS & MARKET
VALUE

17. LEDs are a capital improvement
That increase the value of a property

18. Specific to New York

19. New York continued

20. New York continued
New York has both a demand and supply problem.
• As we move towards increasing our use of green
energy…
• things will just get worse.

21. COST of LED vs the PRICE of LED
What something costs (in total costs and benefits) is not the
price you pay for it.
• The chart below will show the 1st year benefits of LED
conversion for an auto service bay.
• The savings from the energy are only 50% of the
total savings.
• If you’re not calculating the total savings you
don’t know the true cost.

22. Who you talk to changes the focus
• Facility Managers look at their budget
• Care about their budget
• CFOs look at the total bottom line
• Care about taxes, depreciation total cost

23. Key financial metrics
• Energy Savings
• The difference between the old lighting system and the new lighting system
• HVAC Savings
• Up to 35% of the new LED’s energy savings
• Maintenance Savings
• Material - Longer life means fewer replacement bulbs and ballasts
• Labor – Longer life mean lower labor costs
• Tax Benefits
• 1245/1250 – Design for 1245 category assets
• Abandonment – The net book value of the assets you remove.
• Sorry no EPAct 
• Rebates – Easy to identify
• Increase in property market value

24. MAINTENANCE

25. Maintenance Savings - More than you think
What does it cost to replace a light fixture at a Casino?
• $5,000
• The cost of the retrofit is far more than just the cost of the
bulbs, there are issues related to business interruption and
production that directly effect the cost.
• Consider lamps in a Fed-Ex maintenance hanger, you have to
stop operations and move the planes out to change the
bulbs/fixtures.
• The cost here even with group re-lamping can be a surprise.
• One of our clients uses union labor at $120 an hour, replacing a single
fluorescent bulb is $70.00

26. Casino
You have to close off the aisles and interrupt the gaming
• People stop and watch.
• The cost of fixture replacement came directly from the Casino
owner.
They track the income from each slot
and gaming table by the minute.
• Add up all of their costs
• Average cost was just over $5,000 per
change over.
• The big saving in LED comes not from the
energy but from maintenance save.

27. Airplane Hanger
You cannot change lights while the hanger is filled with planes

28. DEPRECIATION

29. 1245 vs. 1250
All lighting falls into two categories for the IRS. Short lived and
Long lived.
• Long lived assets (1250) have a life of 39.5 years.
• Short lived assets have a life of 5 or 15 years.
• Additionally the short lived assets can depreciate under MACRS, and so
you get most of the depreciation expense in the first few years.
• Consider a $100,000 retrofit where you can move $40,000 from long
lived to short.
• The effect would be to give your client $20,000 in cash back.
• Before rebates or tax advantages a real reduction in cost of $20,000 net after tax.
• For certain type clients this can be substantial savings.

30. Every $1 in depreciation = $0.50 after tax
Consider it this way:
$1 a year for 39 years
Year 1 $1.00
Year 2 $1.00
Year 3 $1.00
...
Year 39 $1.00
V.S.
Year 1 $20.00
Year 2 $10.00
Year 3 $5.00
Year 4 $3.00
Year 5 $2.00

31. Sometimes cove lighting can be significant

32. Abandonment
• Look up at the lights in the ceiling.
• The primary lighting has a life of 39.5 years. (It is 1250)
• When you remove that lighting you can take as an expense the
remaining book value of those lights.

33. REBATES

34. Rebates – all in one source!

35. By Utility

36. Listed in detail

37. CALCULATING THE TOTAL
SAVINGS

38. Key key financial metrics
Start with the cash flow!

39. First Year Savings
1 Mile of Cove Lighting
First year benefits
Energy HVAC Maintenance Depreciation Edison

40. Additional streams of financial benefit
Improve the return of LED projects
• Leasing
• No monies out of pocket
• Cash Flow Positive day one!
• Set up for both on and off balance sheet projects
• LED projects are NOT maintenance of a property
• They are a capital expenditure.
• The value of the property will increase

41. CASE EXAMPLES

42. LEDs are a capital improvement
That increase the value of a property

43. 1 linear mile of LED Cove Lighting
This is for a mall (heavy use of cove lighting)
• 10% reduction in fixtures, 50% reduction in energy
• DLC has no listing for Cove, so only a $0.06 per KWH rebate. (Almost
killed this project!)
• $300,000 in Cost
• $9,000 in rebates
• $23,000 per year reduction in energy cost
• $12,000 a year in maintenance savings.
• $6,000 in HVAC saving
• Tax deduction – (5 years $25,000 a year Net After Tax)
• With a 60 month lease
• CASH FLOW POSATIVE DAY ONE, NO MONIES OUT OF POCKET.
• $400,000 increase in market value.

44. Key key financial metrics
Start with the cash flow!

45. Who looks at this project sees it differently
Facilities Director
• We only have $20,000
budgeted, this project will
never happen
• My staff currently runs $4K a
month over time, the extra
time would be nice.
• We just don’t have the
money
From the Accountants
• We recognize the benefits of
the deprecation expense
• The HVAC is 20 years old and
the lower draw will be
helpful.
• We like the cash flow
positive aspect of this
deal, as it has no cost out of
pocket to us.

46. With Leasing
Total Annual Payment Depreciation Edison Total Annual
Saving for financing + Expenses Rebate Benefit
$ 38,142 $ (58,320) $ 23,328 $ 9,149 $ 12,299
$ 40,714 $ (58,320) $ 23,328 $ - $ 5,722
$ 43,472 $ (58,320) $ 23,328 $ - $ 8,480
$ 46,430 $ (58,320) $ 23,328 $ - $ 11,438
$ 49,605 $ (58,320) $ 23,328 $ - $ 14,613
$ 53,012 $ - $ - $ - $ 53,012
$ 56,668 $ - $ - $ - $ 56,668
$ 60,595 $ - $ - $ - $ 60,595
$ 64,810 $ - $ - $ - $ 64,810
$ 69,338 $ - $ - $ - $ 69,338
$ 522,786 $ (291,600) $ 116,640 $ 9,149 $ 356,975

47. Warehouse Project
Cost $50,000
• Reduced the fixture count by 25% by using LEDs
• Their lighting specialist recommended a product with an L95 of
80,000 hours, this allowed fewer fixture.
• Cut energy costs by 65%
• The LEDS saved 50% per fixture
• Lower unit count saved the rest
• ROI under 18 month.

48. Office Building Project
60,000 sq/ft common area
• $120,000 cost to retrofit
• 20% reduction in fixture
counts
• They MADE MONEY The 1st
year.
• $820,000 INCREASE in
market value
$120,000 Project Cost
- $60,000 Energy Save
- $40,000 Rebates
- $ 5,000 Maintenance
Save
- $20,000 HVAC Save
($ 5,000) Negative
Expense = SAVE

49. Office Building Project (cont)
Owner operator is a large Real Estate management company.
• They used a five year lease to avoid having to write a check
for the project.
• They own over 120 properties, the ability to increase the
market value of all of them with out any out-of-pocket
expenses is appealing and means an increase in market value
of $98 million if they do all their properties.

50. Market Value
When the cost to operate a property decreases the market
value of the property INCREASES!
• You get between 6 and 9 times the annual cash flow as an
increase in the market value of the property.

51. Some common features
LED retrofits do not have to be a 1 to 1 replacement.
• Often you can reduce the number of fixtures dramatically.
Parking garages and warehouses will often see a 30% reduction
in fixture count.
• The total cost of an LED retrofit or of new construction can be
significantly less than anticipated when ALL the savings are
considered.
• You need to present ALL the saving to someone who cares
about all the savings.

52. Your Speakers
• Don McDougall
• General Manager
• SSCS
• donm@sscsllc.com
• 213.280.2266 Direct
• Jeffrey N. Codd, LC
• Senior Vice President
• Wiedenbach Brown
• jeff.codd@wblight.com
• 914.846.1459 Direct