$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.

Why ASHRAE Standard 189.1 matters for green finance and investment

The long awaited ASHRAE Standard 189.1 is finally here.

Why should anyone in real estate finance and investment cheer about that?

Architecture 2030 reports the building sector as being responsible for 50.1% of total annual U.S. energy consumption, 49% of GHG emissions, and 74.5% of annual US electricity consumption.

To combat that, ASHRAE came up with:

the first code-intended commercial green building standard in the United States. It covers key topic areas similar to green building rating systems: site sustainability, water use efficiency, energy efficiency, indoor environmental quality, and the building’s impact on the atmosphere, materials and resources.

Because Standard 189.1 provides the basis for new building codes, which can be adopted to define green buildings, it makes it easier for cities and counties to adopt codes which will a) result in real green buildings(!) and b) help the adopting government to achieve the 2030 Challenge target of 50% reduction in 2005 CO2 emissions by 2050 within its jurisdiction.

This standard, when adopted into code, does a huge service for the finance and investment community as well, because it finally defines a minimal standard of commercial green building quality. By being able to rely on Standard 189.1 within green building codes, a developer or contractor, could have an easier time of constructing green buildings across different markets, because the baseline would be transparent and similar. This assures greater efficiencies during construction, better execution and higher quality assets.

Moreover, when an investor steps up to buy buildings constructed with this standard as the baseline across multiple markets, it will be much easier for them to figure out if they are really buying a green building — mitigating those kinds of worries is something that can give markets momentum.

Add to that the fact that the adopting government entity would be demonstrating clear leadership and accountability for driving energy and GHG emissions reductions from its building sector.

In any event,  it will be interesting to see how cities move to adopt green building codes using Standard 189.1 and the real estate and building community’s actual response.

Check out the site that ASHRAE setup with all the nitty gritty on Standard 189.1. Or just skip ahead and download the factsheet here.

Exciting stuff!

Powerful leasing stats for green buildings — on two continents

Strong evidence continues to build showing that green buildings can deliver better investment value, both now and later.

Moreover, the strength of this assertion is underscored when you see confirmation of leasing performance from unrelated international markets with different green building rating standards.

The below leasing stats are from local brokers and property managers in San Francisco and Paris. We hope that they can give you more ammunition for those green building value conversations you may have with clients and other stakeholders.

San Francisco: LEED vacancy = 9.7% vs non-LEED of 15%

Dave Klein, of NAIBT’S San Francisco office, maintains the RealGreen Index. It tracks the availability of office space in green buildings here in San Francisco, where he’s estimating a 9.6 million sf market of LEED buildings as of 9/09. That green space is overwhelmingly LEED-EB certified.

In our experience with underwriting markets, there is a very different point of view about 9.7% vacant submarket vs a 15% one, even in a historically strong market like San Francisco. That 530bp gap in vacancy shows that the non-LEED buildings will eventually be forced to offer either lower rents and/or larger lease concessions, resulting in lower effective rents to attract tenants.

If those non-LEED Landlords decide to tough it out and not offer greater concessions to compete, they’ll still be paying for that higher vacancy by being the last buildings to fill up, as the local market recovers and the LEED-certified buildings fill up first. It’s really just a question of time, as tenants seem to have already voted with their feet and checkbooks.

On the flip side, calling out these non-LEED buildings like this seems to be a nice circling of a fat EE-retrofit market, in my view.

» Download LEED vs Non-LEED vacancy (NAIBT) (112)

» Download NAIBT Green Index (158)

Paris = Green vs non-green pre-leasing –> 57% vs 11%

Recent story out showing that the French HQE (Haute Qualité Environnementale) green building certification is strongly preferred by tenants in the Ile-de-France submarket of Paris (largely corporate Class A office submarket).

Keep in mind that this is a 2 million sqm submarket — about 21,527,821 sf, meaning no small shakes for the fortunes of those investors. Per GlobeSt:

Around three-quarters of total office space above 5,000 square meters planned for delivery in 2012 and beyond will carry the standard, most of them in the periphery in the south of the French capital. It also concluded that HQE certification is accelerating leasing processes, with 57% of certified space deliverable next year already let, against 11% which is not certified.

In the case of this market, if you are the owner of a non-green building in development here (not even in operation, yet), and your investors see a pre-leasing variance of this magnitude, what kind of conversation are you having with them about creating value with their money?

Not a fun one, I think.

» Read the full story on French green building certification and leasing stats here.

While I realize that the real estate industry requires greater empirical support for the value contribution of environmental certification, these stats already point to huge implications for building owners in each of their submarkets as well as all others where green building penetration is growing. All other things being equal, lower vacancy and/or faster absorption  accrues directly to the bottom line and deliver a great pop to returns.

In my opinion, even though the industry hasn’t reached consensus on a final approach to valuing green buildings, asset underwriting methodology in each of these sub-markets must consider a particular asset’s environmental performance vs that of its peer set, since tenants have demonstrated a clear preference.

More on green lease clauses: Out with the bad, in with the good

Today’s post shares details about that “bad” green lease featured last Friday. Also I’m sharing a few green lease tips from BEPN that talk about ways green lease language can help support value creation in environmentally certified buildings.

The “bad” green clause’s web of risk

Several folks pointed out that LEED-EBOM certification can be achieved without any cooperation from the tenants. Unfortunately, our “uniquely negotiated” lease contained other typical provisions, which, when combined with the green clause in question, made the green business case uncertain, in the eyes of the buyer.

The lease in question was that of a major tenant - and major tenants are often able to negotiate special terms many other areas of the lease, with a deep focus on the expenses that can be passed through via common area maintenance and capital expenditures.

The major tenant lease was no different.  Lease language required the Landlord to obtain the major tenant’s permission in advance of passing through any expenditures, which were outside of a stipulated list. On top of that, the pro rata formula for calculating the tenant’s share of base building common area included an alternative common area square footage.  The formula denominator was a negotiated larger number, so the major tenant would pay less than its full share of common area expenses.

All of the above moves are typical, and limit the major tenant’s exposure to unforeseen or undesirable cost increases over the lease term.  In exchange for this, the Landlord gets a great tenant on a long term, which greatly enhances the building’s image and value.

The limiting of expenses (which is typical) plus the questionable “green” clause, created a situation for the investors where, a) much of the CAM and capital expenditure repayments were “locked in” by the prior owner over a very long time, limiting the new landlord’s flexibility, and  b) if any type of CAM or cap-ex charges were related to “green features” over the major tenant’s lease term, they couldn’t recoup those charges from the major or any other tenant either.

These investors’ business plan is to hold assets for a long term and realize an explicit increase to NOI from operating them as certified green buildings. So they were very focused on lease language not limiting their ability to execute that strategy. Losing part of the CAM recovery via the negotiations might be typical, but being further prevented from recovering costs from any tenant for any sustainable features over a long term put the lease contract into their “risky” column.

BEPN: “Green leases essential for achieving landlord’s environmental goals”

Check out this article from BEPN titled “Green Leases are Coming” (subscription might be required). It lays out a few issues that green leases address, all aimed to make sure that tenants and landlords are aligned with the environmental goals set for a project.

Essentially, the article talks about the kinds of lease provisions that can be negotiated with tenants so that it is easier for the landlord to achieve environmental objectives for a building.

The only part of the article that I would question is the assertion that most leases in the United States are triple net. During my tenure on the San Francisco Mayor’s Task Force, we talked about this point at great length. Large owners and property managers on the task force indicated that most office buildings are leased with gross leases. Of course, retail and industrial properties are nearly always triple net leased.

In any event, the main point here is to make sure you do not exhaust yourself trying to develop or retrofit green, then negotiate the “same old same old” in your leases. If you do, you are passing up a great opportunity to maintain and enhance the value of your environmentally certified building.

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 (112)

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.

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