What I Learned at the Competitive Edge Workshop #1

“Teaching is half learning.”

That’s a Japanese proverb, originally from the Chinese Book of Documents.  After teaching the first Competitive Edge workshop last week, we definitely believe that’s true — teaching involves a great deal of learning.

In addition to a personally amazing experience with a fantastic group of high-caliber professionals, we found ourselves reflecting deeply on how much we learned from them.

If you’ve been following previous posts on this blog or getting Pacesetter, Investment Analysis of Green Buildings, sponsored by the US Green Building Council - Northern California Chapter and law firm Hanson Bridgett was held last week, we taught to a nearly sold out room.  On top of that, the course was granted CEU-status by USGBC national, a first for the Northern California Chapter — and for green finance anywhere, to the best of our knowledge.

Here is what we learned from listening to and working with the workshop attendees:

#1: Green finance is important to a much larger group of professionals than you might think.

While we deeply believe that green finance can change the world, we had still oriented much of this course’s material to real estate finance and investment professionals. And, we had a full house of folks from some of investment real estate’s household names, which was flattering.  In addition, however, there were also professionals from the building technology,  construction, corporate real estate, affordable housing and legal sectors. In our conversations, we asked attendees about why they attended the course. The answer we received repeatedly was that professionals were finding it critical to understand the perspective of the property owners that they worked with and they believed that updating their knowledge of financing sustainable properties would be a good way to do that.

Real estate professionals in the room were leading change within their firms or they saw the workshop as a good way to help themselves transition within real estate by upping their knowledge and skill of financing green  real estate.

#2: Attendees most liked learning a simple, cohesive underwriting approach, how to apply LEED to finance decisionmaking, metrics and taking away a rich set of resources

We had definitely focused on creating actionable content, and when we reviewed the feedback, the following  topics were voted as being most significant time and time again:

• the GAPS approach simplified underwriting: We had really focused on reducing the complexity associated with underwriting and received strong, positive feedback on this. The participants gave high marks to our own system for green real estate underwriting, which we use to help decisionmakers quickly to define, evaluate and communicate the value-add of green real estate. It was interesting that folks from many non-finance sectors found this approach quite useful, too, in their structuring of their own work with property owners. (Don’t know about GAPS, yet? You should check it out at the next Competitive Edge, Financial Considerations of Energy Efficiency Retrofits, on 7 April; sign up here.)

• Learning how to connect LEED credits with the project operating cash flow: This particular need, a core requirement of our work here, got high marks as well. Most of the feedback was along the lines of participants feeling much more comfortable in conversations at work and with clients, now that they could point to very concrete areas within the LEED-NC system, which were prioritized according to cash flow impact.
  

• More metrics, please!: Green Journey readers know of our papers and posts about metrics for responsible property investing. This topic came at the end of the day, when people are typically a little tired. However, the participant feedback revealed that the topic of metrics was considered very important, telling us that professionals assign a value to incorporating both double and triple bottom line metrics within their practice.

• In-depth resources for self-study: Getting a packet of distilled, vetted sources of the latest green finance research plus tools and tips for further learning and takeaway was voted as very valuable by the attendees. While we taught course materials from  powerpoint slides and handouts, we had originally thought it would be helpful if people received an extra resource book compiling the research, tools and tips on real estate underwriting and sustainable finance that we’ve come to rely on here. So we prepared an 87-page resource book, to support the underwriting of new green construction, which expanded upon the information being taught in the course. We really focused on the green building, finance data and information that we most like to geek-out on. We were pleasantly surprised at how many attendees stated that this information was very valuable. Just this evening, I received a note from a participant saying, “I wanted to thank you for your great insight and the wealth of information that you shared”.

It was really gratifying to be able to share our knowledge and passion with a sharp group of professionals. Their feedback about the topics and resources that were most valuable to them opened our eyes also . This will definitely help us in the upcoming Competitive Edge events.

P.S. → The next Competitive Edge workshop, Financial Considerations for Existing Building Retrofits, takes place on 7 April 2010. We are excited about the fact that the City of San Francisco and PG&E will also be taking part with great information that will help properties to better finance existing building retrofits. Sign up and join us in an exciting day! Seating is limited and several of Workshop #1 attendees have indicated that they’ll be attending again, so register sooner than later. On top of that, early bird pricing runs through 24 March 2010.

$20.5 million from DOE helps communities turn trash into cash

The Department of Energy has just announced funding $20.5 million for several community-scale renewable energy projects.

UC Davis & West Village

One of the recipients is West Village, next to UC Davis, which generated a bit of criticism among Green Journey readers the last time we covered them. In partnership with UC Davis, they’ve now received $2.5 million in funding for a waste-to-renewable energy (WTRE) system. The DOE provides an explanation of how the new system should work:

The system would generate power from a renewable biogas-fed fuel cell.  The organic waste will enter a digester to produce biogas from organic wastes. The biogas will power a 300-kW fuel cell, which will work in combination with an advanced battery system to provide power to the campus’

Montpelier, VT

A second community level energy system of interest is the funding of $8 million to the City of Montpelier, Vermont, for a combined heat and power district heating system that will burn sustainably-sourced wood chips and provide 1.8 million KWh to the grid.

The CHP system will be sized to provide heating to the Vermont Capitol Complex, city owned schools, the City Hall Complex, and up to 156 buildings in the community’s designated downtown district for a total of 176 buildings and 1.8 million square feet served.

We follow these announcements with lots of interest, since we work with partners to identify the best combination of financing streams for achieving community-level sustainability.

As we continue to study eco-districts and similar low-carbon neighborhoods in various stages of design and planning around the world, district-level renewable energy infrastructure  — particularly waste-to-renewable-energy comes up time and time again within the case studies of the more successful communities.

A more in depth discussion of the ’success factors’ within green communities will definitely make for an exciting post in the near future as we consolidate our findings.

Video explains value of district energy

Some of these technical terms might be outside of the typical real estate finance and investment discussion, so I found a 40 second video that explains how district energy saves buildings money. Email subscribers should click on this link to go to the video.

Task force to Mayor Newsom: “Your 7 keys to existing building efficiency in San Francisco.”

How can green finance help increase existing commercial building efficiency?

As a member of the Mayor’s Task Force on Existing Building Efficiency, I had the pleasure of attending Mayor Gavin Newsom’s Friday announcement of his introducing new legislation, aimed at improving the energy efficiency of existing buildings in San Francisco.

The contemplated legislation is the product of a task force of 19 key stakeholders convened by the Mayor.  I was happy and proud to contribute to the financing aspects of this work and you can download the entire report here:  Report of Mayor's Task Force on Existing Buildings (110)

Goal: Cut energy use by 50% from existing buildings by 2030

The back story on San Francisco’s sustainability challenges reveals high stakes:

The operation, construction, and demolition of buildings accounts for almost half of San Francisco’s greenhouse gas emissions. Commercial, industrial, and municipal buildings account for 63% of building-sector emissions.

The City has established high standards of environmental performance for new construction. However, at the historic rate of 0.8% new buildings per year, it could take more than sixty years to ‘green’ even half of San Francisco.

As a result, the task force recommended that San Francisco move to help cut energy use by 50 percent, or 2.5% p.a. by 2030, from existing commercial buildings.

7 big ways San Francisco can achieve energy reduction goals via existing commercial buildings

The Task Force distilled its research down to seven big ideas that would help the City achieve the above GHG reduction targets by 2030.

1. Identify cost-effective savings in every commercial building: Require buildings to conduct an energy audit every 5 years.
2. Disclose energy performance information: Require building owners and managers to share energy data with the City.
3. Resolve split incentives: Provide a green lease toolkit and make submetering a policy priority.
4. Make incentives easy: Develop a web-based tool that finds all incentives and financing options for building owners in one place.
5. Educate, train, mentor and market existing building efficiency: Promote programs, facilitate mentorship and partner with institutions.
6. Lead by example in public facilities: Benchmark and disclose energy performance in public facilities.
7. Provide financing: Launch the San Francisco Sustainable Financing program and require that funding from that program prioritize efficiency before renewables.

Green finance focus - comprehensive incentives and smarter EE financing terms

Green finance mechanisms, the area I collaborated within, focused on recommendations #4 and #7.

Task force members reported seeing incentives either being ignored or misunderstood by property owners,  depressing the acceptance and prevalence of retrofits. Those problems were exacerbated by the fact that appraisers, contractors, lenders and others were equally unaware of the positive impacts that incentives could have on improving the economics of any commercial building retrofit program.

Based upon our own experience with assisting property owners in comprehensively sourcing incentives, I felt strongly that San Francisco should integrate a sourcing tool that would make it easier for property owners to quickly obtain comprehensive information on retrofit incentive options that were available to them.

We also made underwriting recommendations to the planned San Francisco Sustainable Financing program, to help it avoid problems that we’ve noticed in the loan programs of some of the other energy efficiency financing districts that are up and running.

Essentially, solar installers have a larger marketing force on the ground than energy efficiency retrofitters. As PACE loan programs are being rolled out across the country, we are getting reports of the unfortunate situation where the loans are going primarily for renewable energy, with energy efficiency funding running a distant second.  This results in the problem of solar panels supplying energy to “dirty” buildings. The regions in question are faced with achieving less of an impact from existing buildings to their climate action goals.

The financing recommendation to the City was that their own program include a provision to prioritize the funding of energy efficiency measures first, then renewable energy second. In our opinion, this requirement will would go a long way in making sure that the loans actually achieve the kind of impact expected by this financing mechanism.

I believe that even greater assurance of positive impacts from energy efficiency financing could be achieved by any program by further prioritizing energy efficiency measures according to the ‘loading order’ suggested by McKinsey in their recent studies. That level of detail was beyond the scope of our financing group’s work within this particular task force, but you’ll hear about it in upcoming posts.

At this point, it is gratifying to see that Mayor Newsom is moving forward with legislative action based upon a collaboration with key real estate industry stakeholders.

The task force has given him a lot to work with, assuring that San Francisco stands out as a leader in achieving real transformation through increasing the energy efficiency of existing buildings.

Mandatory NY green retrofits R.I.P, but does it really matter?

Blowback from NY building owners forces Bloomberg to drop mandatory retrofit proposals.

But, does this really matter for green building?

Mayor Bloomberg had to scale back his announced plans to require New York building owners to obtain energy audits and, based upon the results, require the owners to perform the upgrades suggested in those reports.

(Note: This particular item has been sent to me from several sources, so I’m compiling and can’t link back to any specific source).

Fact pattern:

• Mayor’s plan would have affected some 22,000 buildings in the city; reportedly creating 19,000 construction jobs
• Above statistic vigorously disputed –> “I’d be shocked if 5,000 of those jobs were created” from Louis Coletti, president and chief executive of the Building Trades Employers’ Association
• Funding the bills that would have created the program really stirred the pot –NY only has $16 million stimulus funding for loans to building owners for this type of work, but the estimated total investment required for the retrofits was calculated to be nearly $2.5 billion

So now the debate rages over what this all might mean for green building. Is the Bloomberg retreat damaging for the advancement of green building?

In general no, but it did highlight the plight of an often overlooked group of property owners.

New York’s pullback from requiring the retrofitting of existing buildings doesn’t mean much, in the sense that so much industry level data and momentum has been generated about the positive economics associated with the energy efficiency of buildings, that larger, quality landlords will retrofit it anyway (albeit according to their own schedules). They’ll do it because they fear devaluation of their assets within the global investor circles they travel.

More importantly, they are more likely to be capitalized in a way that allows them to implement retrofits along a decent timeline. I’m saying here that real estate cycles will force them to pony up the cash just to “keep up with the Jones” and maintain property values as real estate markets recover and investors expect rents and values to grow.

Mid-sized landlords have a different reality. Many cities are just now waking up to this. Their smaller property sizes and smaller portfolio’s make them more cash constrained. The industry owes it to these landlords to come up with existing building retrofit solutions that fit their wallets. Many mid-sized landlords own buildings larger than Bloomberg’s suggested 50,000 square foot threshold, but the costs and fees associated with implementing the retrofit are still expensive for them.  They would have been very hurt by this legislation.

The lesson I see in this is about how much of successful green building and energy efficiency retrofits (and their finance!) is about growing  partnerships within markets over time. Exuberant public officials who only propose requirements, but haven’t created the deep, lasting partnerships with the real estate community necessary to support these kinds of efforts find themselves in Bloomberg’s situation — announcing pullbacks even as experts have clearly demonstrated the excellent economics that building owners can enjoy if they retrofitted their assets.

More clearly for me, is that other cities should take a closer look at making sure that their engagement of real estate owners is differentiated between larger and smaller property owners. Larger owners often deal with different kinds of shareholders and the size of their assets gives them more cash flow on hand to consider retrofits.  Plus they are getting pressured by even larger shareholders.

Smaller property owners need special attention, and services tailored to their specific needs. They are much more cash constrained. Yes, in California and some parts of the Northeast, PACE loans are helpful for these types of building owners, but PACE is still a new phenomenon and not available everywhere.

In the meantime, let’s hope that officials in other towns are involved in more relationship building within their own markets, so that they are able to come up with green building plans that make better sense and therefore, might be more palatable to the local real estate community.

Be a tenant and investment hero with these Empire State Building retrofit tips

Heard at ULI Fall 2009 session: “Green Retrofits: What is making this the wave of the future?”

I went in to this session thinking that I’d already heard all there was to know on the well-publicized Empire State Building (ESB) retrofit. I’m pleased to report that my assumption turned out to be wrong … this session was a thriller; a high-protein download with lots of how-to’s that practitioners can use to be a tenant hero and  improve value with a comprehensive energy efficiency retrofit strategy. A thorough reporting of all the great tips would be too long for this post, but I think you’ll be able to put these highlights to good use:

The Set-up: A Great Business Case

Anthony Malkin, of Malkin Holdings spoke on behalf of the ESB ownership. The other speakers were representatives of New York City, the Rocky Mountain Institute and Johnson Controls.

The Empire State Building was already going through a $550 million repositioning, managed by Jones Lang LaSalle, before the ownership began to consider an energy efficiency retrofit. Since capital was already available for retrofit, no outside financing was needed to pay for the retrofit investment.

The team reported that the retrofit added nearly $13 million in upfront costs, with calculated savings worth $4 million per annum, so, the overall retrofit metrics are great, with the team reporting strong economics:

• Building annual energy costs were $11 million p.a., or 88 kBtu/sf/yr.
• 38% annual reduction in energy usage is projected; almost double the industry average.
• 3.1 year payback vs average 10-20 years.

Top Energy Tip: Reduce Load and Use

The evaluation of an aging chiller showed that the retrofit team can’t only focus on ‘easy’ measures such as changing light bulbs to achieve energy savings. The better business case comes from investing opportunities to reduce the building’s energy load, in addition to use. In the case of the ESB,  $40mm was slated for new chillers in a cooling plant, but load reduction measures elsewhere eliminated need for new chillers (!)  Result: Existing chillers were retrofitted for $5mm.

Tenant Relations Hat-trick

Investment real estate is only as valuable as the bundle of leases that generate rental income. So, many owners are motivated to green and/or retrofit their buildings when they know that it will help them to keep existing and/or attract new tenants. The trick is to get tenants on board with doing their share to keep energy costs down. When discussing retrofit costs/benefits with tenants, the ESB team focuses on the three drivers of tenant occupancy costs: payroll, utilities and rent.

In the case of the ESB, tenant buy-in on retrofit measures was crucial, since analysis revealed that more than half of the energy conservation measures would take place in the tenant’s space.  The team discussed three interconnected programs they use to assist tenants with reducing energy within their suites. The bonus they discovered is that word of these programs has attracted the attention of brokers and prospective tenants that typically would not include the ESB within their search for new space, so now the building has become competitive with a larger universe of possible tenants than prior to the retrofit.

Here are the three key tenant-related programs:

1. Pre-built space: Vacant suites were pre-fitted to turn-key status for prospective tenants, containing many features which would aid tenants with maintaining energy reduction upon move-in.
2. Tenant design guidelines: For tenants that build out their own suites, the landlord’s design guidelines incorporate energy efficiency measures
3. Tenant energy management program:  The ESB team developed a special energy management guide to help tenants understand how they use energy; they also give the tenants reports about their energy usage within their space, telling them how their energy use compares with the building average.

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