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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Use these metrics to measure your portfolio’s triple bottom line performance

Get this new research on metrics that helps you measure property triple bottom line performance.

We are pleased to share a new report titled, Metrics for Responsible Property Investing: Developing and Maintaining a High-Performance Portfolio.

You can download the report here.

This research was co-authored by Jean Rogers of Arup, David Wood of the Responsible Property Investing Center and myself. This is a working draft for comment that was presented today (4 November 2009) to a joint session of ULI’s Responsible Property Investing and Sustainable Development Councils.

Why do we need metrics for triple bottom line investing?

Our survey of the industry indicated that the spread of triple bottom line investing was being hampered by the fact that most currently available real estate sustainability reporting came from investors who would green a couple of showcase buildings in their portfolios.  This lack of transparency leaves the broader real estate industry and capital markets with several pressing problems:

• They cannot determine if sustainability performance on the portfolio is improving over time.
• They do not know how the portfolio’s green performance compares with the portfolio’s of other investors.
• There is no way to judge sustainability risks hidden within any portfolio.

Drafting and road-testing proposed metrics with the Bay Area Council and TIAA-CREF

After developing a set of metrics that would represent the ten RPI principles in action, we worked with the Bay Area Council Family of Funds and TIAA-CREF to road test them, to obtain real world feedback from actual investor users.

Bay Area Council Family of Funds tested the metrics on recent acquisitions to see how the metrics might be useful during the property acquisition process.

TIAA-CREF tested the metrics on a portfolio of properties they own, to determine how the metrics could possibly assist them with asset management activities.

Both investors were also at today’s ULI session and provided in depth comments on the use of the metrics and their recommendations.

Key takeaways

Here are a few of our findings based upon investor feedback about their use of the metrics:

• RPI metrics do provide a tangible link to asset and portfolio value by pointing to possible decreases in operating expenses and/or increases in rental revenue.
• The use of RPI metrics can assist with opportunity finding: a key objective of due diligence during  acquisition.
• The use of RPI metrics can help drive social responsibility within the portfolio, instead of just monitoring it after the fact.

We need your help!

This report is currently a working draft for comment. It was submitted to members of the Sustainable Development and Responsible Property Investing Councils for their review and comment. We would also appreciate hearing the comments and questions of real estate investors and practitioners within the Green Journey community.

Let us know your thoughts about these proposed metrics. Also feel free to forward this report to anyone in your network whose practice might benefit from the information.

We look forward to hearing from you and will keep you updated on this effort as it evolves.

You can download the report here.

Related reading:

• We’ve covered the emergence of responsible property investing many times before.
• You can also view a short presentation on the basics of responsible property investing here.

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$1 billion in retrofit financing from Community Preservation Corporation

People always ask ‘where’s the beef’? when it comes to green finance.

Of course, they’re asking who’s making money available to develop or retrofit buildings to sustainable standards.

You should pay attention to the recent announcement from the Community Preservation Corporation (CPC), to bring $1 billion in energy efficiency retrofit financing to multifamily property owners in New York. This should provide a great energy efficiency financing model for others to duplicate.

The newly formed CPC Green Initiative aims to be an industry pacesetter by proving that seemingly disparate public and private entities can foster new and creative green finance solutions. According to Michael Lappin, CPC President:

“We anticipate financing retrofits for up to 15,000 apartments over the next few years. But to change the urban landscape we will also need to adjust the financing landscape.”

This program is notable because it includes participation by the great range of potential sustainable finance partners — an affordable housing lender, a GSE, pension funds, private lenders and utility companies.

Key financing components:

• $150MM in construction funds will be provided by the New York Building Revolving Fund for properties needing extensive renovation. That fund is backed by proceeds from Deutsche Bank, HSBC and other lenders.
• $300MM will come from New York pension funds.
• Freddie Mac will fund permanent loans for buildings not requiring the above construction loans.
• Freddie Mac has also committed to buy $500 million of loans from this program.

By directly incorporating efficiency retrofits into the loan process as well as requiring ongoing monitoring regimes through the loan life-cycle, we feel the CPC and its funding partners are taking the long-term holistic perspective that we believe is essential.

With a sizable partners including Freddie Mac, Deutsche Bank and the NY State Pension Fund, the CPC will need to fill a role that we find essential – being a strategic hub were investors and key stakeholders can find expertise and guidance.

This kind of pooled investment and lending commitment that relies on multiple layers of funding solutions is one that we are seeing on current projects. We think these kinds of well-designed and sufficiently capitalized partnerships will compliment local government funding.

We’re sure that we’ll see more structures like the CPC Green Initiative emerging on the market. Let us know if you are aware of any similar programs for commercial properties in your area.

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Get plugged in:

• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: sx70/DUMBO-Brooklyn.

Key events on energy efficiency finance and triple bottom line investing

Meet us at the the following events. We’ll be presenting about:

- energy efficiency financing

- responsible property investment metrics for high performance portfolios

- taking the green economy to the next level

In the weeks ahead, Lisa Michelle Galley will be featured at a number of key industry conferences. The topics covered by Lisa and other leading voices in the sustainable investment community will highlight the  latest trends and provide a valuable forum to learn about innovative solutions to some of the most pressing challenges facing the green building and finance sectors.

Presentation on Energy Efficiency Financing

GSMI -The Sustainable Buildings Series: Retrofits

October 21, 2009; 11:15am – 12pm, Mission Bay Conference Center at UCSF
Lisa will cover the key considerations for different types of energy efficiency financing.  From there she will talk about how owners can more effectively coordinate their energy efficiency financing efforts across their portfolios. Lisa will be co-presenting with Peter Liu of New Resource Bank.

Presentation on Metrics for High-Performance Portfolios

Responsible Property Investing Council: 2009 ULI Fall Meeting
November 04, 2009 – Joint session of RPI and Sustainable Development Councils
Moscone Center South, San Francisco
Along with co-presenters David Wood, of the Responsible Property Investment Center and  Jean Rogers of ARUP, Lisa will offer fresh insights and recommendations developed in a year long study of the development and application of  responsible property investing metrics on institutional real estate portfolios. Lisa and Jean will discuss how the real estate investment ‘system’ has been impacted by sustainability.

Taking the Green Economy to the next level

Sustainable Industries Economic Forum in San Francisco
November 19, 2009; 9:30am -10:15am
St. Regis Hotel, San Francisco
Lisa will join a panel of industry leaders including Paul Hawken, author and CEO of the Pax Engineering Group, to discuss some of the most challenging aspect of successfully implementing triple bottom line solutions and how we can take the green economy forward. The event will offer valuable perspective on growing strategic partnerships as a core aspect of sustainable business.

If you would like to meet us at any of these events, please email us info@galleyecocapital.com

News about future events is available through our website.

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Get plugged in:

• Sign up for our list on our green finance training page, to get info on upcoming workshops, which go deeper into the green business case.
• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: Flikr/manu chao by Michale.

Galley Eco Capital helps Helsinki to reduce carbon emissions

San Francisco-based sustainable finance consultancy Galley Eco Capital was announced as part of a winning team for the redevelopment of the Jatkasaari district in Helsinki, Finland, which will be an urban zone with low or no carbon emissions.

Sitra, the innovation agency of the Finnish government, revealed today that the winning team for their “Low2No” development design competition was made up of Arup, Saurbruch Hutton, Experientia and Galley Eco Capital. The multi-national team was selected out of 74 initial entries, for their “C_life – City as Living Factory of Ecology” project.

Galley Eco Capital  brings their unique perspective as an international sustainable finance consultancy with a focus on creating green and socially responsible finance and investment programs.  Galley Eco Capital’s work complemented the architectural and consumer behavioral aspects of Jatkasaari by contributing new ways for finance to transform both the district and Helsinki market, to positively impact people’s lives.

The competition jury stated that the innovative monetary/economic model presented contributed significantly to the team’s clear top-down as well as a bottom-up strategy for leveraging the Jätkäsaari opportunity, in the spirit of the Low2No challenge.

Sustainable finance for Jatkasaari and Helsinki

While other team members devised the design, energy and consumer behavioral strategies for the project, Galley Eco Capital’s responsibility was to create an economic and funding model, which would support the project by integrating traditional and socially-responsible capital sources and products at a regional market level and set the right incentives to achieve maximum effect in terms of emissions reduction, energy efficiency and resource savings.

Starting with a thorough analysis of Sitra’s environmental and socially-responsible real estate objectives, the Finnish climate change agenda, and Finland’s participation within the global environmental finance markets, Galley Eco Capital developed ways to create a reliable pipeline of green mortgage, environmental, energy and carbon finance capital for Jatkasaari.

These products would all seamlessly connect with the traditional Finnish financial network to form a holistic financial system. Delicate synthesis was also required to create a flexible market structure, which would monetize available sustainability benefits while adequately funding the Jatkasaari project throughout construction and operation.

About Galley Eco Capital

Using their expertise in designing and implementing sustainable finance and investment programs, Galley Eco Capital’s strategies help investors, lenders and regional governments to bridge traditional with green finance and efficiently monetize the available sustainability benefits embedded within their real estate and renewable energy initiatives.

Galley Eco Capital’s unique approach assures more successful solutions through the application of interaction design principles, driven by culturally-aware, user-centric perspectives and underpinned by long years of international real estate and capital markets experience.

The strategies help drive positive change by:

• developing debt and equity financing structures based upon the value-add contributed by sustainability and energy efficiency,
• synthesizing traditional with emerging green financial products into holistic financial solutions,
• sourcing and structuring incentives and government subsidies to offset program costs,
• designing and monitoring sustainable investment performance measurement to assure positive program impact

Over the next 6 years, the Jatkasaari district will be designed, constructed and opened to the public. From there, the sustainable ideals that govern its day-to-day life will act as a model and example for the rest of Helsinki, Finland and the world. Through Galley Eco Capital, San Francisco will be a vital part of this journey.

For more information on the Low2No project, or on Galley Eco Capital, contact Lisa Michelle Galley, Managing Principal, at +1 415 655 6668, or via email at “lisa at galleyecocapital dot com”.

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