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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Compare retrofit financing options with this resource

(This post is part 1 of a 2 part post on retrofit financing mechanisms.)

These slides are for a talk I gave at GSMI’s recent conference on sustainable retrofits (if you have trouble seeing the slides, you can download the presentation here). I put it together to help anyone walk through a quick comparison of a mid-sized investor’s financing options for her portfolio of properties. Several members of the audience emailed me later saying that they thought the information was helpful, so I decided to share it with the Green Journey community as well.

The presentation takes you through the side by side comparison of tax-lien financing, energy performance contracting and on-bill financing, to answer the question “which is the best deal?” All of those three are also compared to self-financing and using conventional bank debt.

Takeaways

• Small energy saving improvements at the property level can significantly impact the portfolio’s financial and environmental performance: The study portfolio consists of small, owner-occupied retail buildings with similar layouts and building mechanical equipment. While the portfolio is relatively large in terms of number of properties (62), the total portfolio square footage is less than 220,000 square feet. For this portfolio, small measures at each property can add $155,000 in annual portfolio cash flow, and increase portfolio value by nearly $2M. The estimated annual reduction in GHG emissions (1,719 tons of CO2) from these energy efficiency measures is equivalent to removing 314 passenger vehicles from the road, or providing the total energy use for 156 homes.

• Emerging financing mechanisms such as tax-lien and on-bill financing can significantly ease the pain of upfront retrofit costs. It became clear that these two emerging funding mechanisms were the most advantageous for this portfolio because the owner would be able to pay for energy efficiency measures with very little or no up-front capital from the property owner.

• Energy performance contracting is best for public buildings: While ESCO financing can be a relevant source of capital for financing/leasing costly building system equipment, ESCOs are not the best funding source for financing comprehensive energy efficiency retrofits for small and medium size structures. Energy performance contracting (EPC), a financing technique that uses cost savings from reduced energy consumption to repay the cost of installing energy conservation measures in a building, is currently best suited for Federal and MUSH (municipal, university, school, and hospital) buildings.

How tax-lien and on-bill financing work

While both tax-lien and on-bill financing are still not as widespread, there are a  number of pilot programs across the country. With the government’s increase in funding for energy efficiency, we expect both forms of finance to become more widely available for property owners.

The American Public Power Association lays out a good definition for both these mechanisms:

On-Bill Financing: “a mechanism whereby the utility finances energy efficiency upgrades and the property owner pays off the costs overtime through a charge on their monthly utility bill. If the program is designed properly, the monthly loan payment is usually equal to or less than the cost savings, and so the property owner should not see their monthly utility bill increase.  Tariff‐based on‐bill financing, one variation, allows the loan to stay “with the meter.” In the event that the property is sold, the repayment obligation transfers to the new property owner/new beneficiary of the upgrades. This model allows for a longer payment term and can decrease monthly payments. Renters may also be able to participate in tariff based financing because they only pay for the measures, while they benefit from them.” San Diego Gas & Electric offers on-bill financing.

Tax-Lien Financing,  which is the funding mechanism used by Energy Efficiency Financing Districts, (otherwise referred to as Municipal Energy Financing, Property Assessed Clean Energy (PACE), Sustainable Finance Districts, and a host of other terms), is  a mechanism that allows property owners seeking to make major energy efficiency investments to opt‐in to a special tax or assessment district (or local improvement district). Property owners borrow money to finance energy efficiency improvements and/or renewable energy equipment, and repay overtime through a line item on their property tax bill.

The loan repayment obligation is attached to the property, not the individual, and if the property is sold before the end of the repayment period, the remaining obligation transfers to the new owner. Authorization from the municipal and/or state legislature may be required to enable special tax assessments for tax-lien financing.

The Sonoma County Energy Independence Program and the Berkeley FIRST Solar Financing Program are examples of tax-lien financing.

In our next post, we’ll talk about the comparative advantages of each as well as some tips on best practices for organizing energy efficiency financing for your portfolio.

Stay tuned for Part 2!

Read more on this topic

• Climate Benefit Districts, powered by green finance
• Sonoma County Funds first AB811 Loan
• $100 Million Energy Efficiency & Water Conservation Loan Program for Sonoma County

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Heard at ULI Developing Green: Transwestern’s Green Retrofit Program

Long time no post, I know.

After many weeks on planes, trains, kayaks, bicycles and of course, automobiles — my long road trip ended at the Urban Land Institute’s Developing Green Conference in Beverly Hills.

There, I presented on financing energy efficiency and heard from some of the leading professionals in green building investing today.

Some of you were following me on Twitter that day and this post expands on those tweets.

Transwestern Talks Green Retrofits

Transwestern Exec’s Allan Skadowski and Scott Tausk talked the way we like at conferences (straight) and often don’t get enough of, no matter how much we pay.  They spoke about Transwestern’s development of its existing building retrofit capabilities including successes and lessons learned.

There was no powerpoint, no slick corporate infomercial, giving their talk the authentic vibe we crave over here on the Green Journey.

Note that I’ve done my very best to make the short snippets below reflect the speakers statements as closely as possible.

• Why are they going green? They made it clear that their goals are to be perceived by peers as proactive – not being a leader in going green. They were also reacting to tenant concerns in market.
  Not wanting to spend too much money – keeping it a low cost program. Transwestern operates a value-add fund. The average hold period is 4-5 years for assets. They have about 65 buildings in their portfolio. Decisions made on the basis of marketing and long-term cost control.
• What do their investors think about greening buildings? Some of their investors don’t care; some investors have it as a factor (but don’t want to pay much for it); a few care heavily about presence of green initiatives on properties.
• Like certification? Thumbs up on LEED EB 2009; LEED online version 3 is much more robust. They are now big fans of volume certification – earn points on your existing buildings as you go instead of waiting for a building to achieve all its points before submittal for LEED certification.
• What was their process to study retrofitting and certification within their portfolio? They chose 25 bldgs to move through certification. They are still currently pursuing 18 buildings. Eight or nine going through the process.
• How much do they pay for certification? “We’re paying $0.17-$0.18/sf to get buildings certified.” Interesting is that they point out that their certification costs have gone down quite a bit as they’ve gained more experience with LEED-EB. Also stated that most of the buildings they certify already are within an easier range of certification — focus on low-hanging fruit. They admitted that they are not taking any “dogs” through the LEED-EB process now; they estimated it’d cost ~$2.00/sf to certify buildings with very low EnergyStar scores like 40.
• Results from their program? They’ve done a scrub on the utility costs of the buildings they’ve certified realizing a 2% savings in utility costs which include substantial utility rate increases. Occupancy on their certified buildings is up 20%.
• Any differences in the cost/value of LEED certification? They had all bldgs evaluated at the start of their program on the basis of the cost to achieve LEED-Silver/Gold /Platinum status.  They found no cost difference between certified and Silver levels. However, Gold cost much more than Silver.
• On the value of retrocommissioning: this is a ‘must’ in their view. They now advise their owners that retrocommissioning results in unlocking serious energy expense savings and that it shouldn’t be left out of any retrofitting initiative.
• How do they know their green retrofit efforts have been successful? Transwestern  has no firm measurement system in place.  However, they say they are seeing lots of positive anecdotal evidence within their operations supporting certification. They indicated that there are definitely leases that have been done due to properties being Certified or Silver. They specifically cited a property in Houston, where a prospective tenant required them to put their promise to get LEED-Silver on a building in the lease agreement (my note: lawyers in the audience were scribbling furiously at this point).
• Has anyone paid them more on the sale of a retrofitted building? Not exactly. “However, the presence of a bidder who expresses interests in the property because its green helped to drive up the price at the end of the day”.
• What increased rents have you experienced? None. Market conditions today are too unstable to look at certification as a premium bringer. Certification value comes more from being focused on operating expenses.
• Green Lease Language in play? No.
• Payback example? They said that they do not focus on paybacks as a decision-making tool (my note: compare this with notes above about only certifying buildings which can be done for very low costs - i.e. short payback). However, they did offer their experience of chiller replacements having a payback in 6-7 years. They also stressed that in areas with high utility rates, like Houston, California and the Northeast, the payback looks great. Other areas with lower utility rates (Midwest) will show longer paybacks for now. As cap-and-trade legislation rolls out in some form, they expect that increased electricity rates will make the payback analysis even better even in currently lower cost utility areas.
• Are you doing any separate analysis and monitoring of the carbon footprint of your portfolio? This was my question. The answer they gave was telling: “We try to get LEED-Silver certification. Whatever that translates to in carbon emissions is what it is.”

Transwestern is, IMHO, at the upper tier of the commercial real estate industry when it comes to greening their existing buildings, when measured on the basis of having gotten a program off the ground and learning how to implement LEED and EnergyStar to their and their properties’ benefit.

They deserve props for their initiative and accomplishing much more than most other real estate platforms in our industry (at this moment in time). Yet, by their own admission, they don’t want to be known as leaders, just “proactive” — so I can’t archive this story under “industry pacesetters“, alongside other groups who both demonstrate competence and broader community stewardship greening their portfolios. Too bad that they equate leadership with “spending too much money”.

What do you think? Am I (un-)fair in my assessment?

Join Us at the Green Building Finance and Investment Forum West

Have you heard about the upcoming Green Building Finance & Investment Forum?  We’re posting the fast facts here for those readers who have been asking via blog comments and direct emails to us about the details.

What: Green Building Finance & Investment Forum - West

When: 2-4 March 2009 (Monday through Wednesday)

Where: Hyatt Regency, San Francisco

Why We Recommend This Conference

Produced by Infocast, and sponsored by Galley Eco Capital, this conference is for commercial real estate professionals focused on the investment and finance side of sustainable and triple bottom line real estate — green real estate investors, developers and their capital sources.

The particular value of this meeting comes from the amount of attention paid to authenticity and high quality, pragmatic info: all the speakers are on the ground pacesetters who are actively advocating for green real estate and doing deals in the space. The audience is well-informed and outspoken in their comments and critiques.  We work very hard to structure a program that delivers lots of specific drill-down as well as quality networking.

For a primer on the type on content that you can expect from this forum, check out our detailed summaries of this past September’s Green Building Finance and Investment Forum East, held in New York.

Galley Eco Capital is sponsoring this forum for the third time.  We do it because we greatly enjoy the relationships and business that has come from the community of professionals that repeatedly visit this forum.  They are sharp, positive and keep us all on our toes.

In addition to keynotes by Sam Adams, Mayor of Portland and Dave Williams, CEO of ShoreBank Pacific,  our own Lisa Michelle Galley will chair the meeting and will also present during the workshop titled Designing, Developing and Financing Bright Green Communities.

Other forum topics include:

• Financing Energy Efficiency Retrofits
• Portfolio Owners & Pension Fund Perspectives
• Triple Bottom Line  & Green Real Estate Investment Funds
• Brewery Blocks: A Case Study in Maximizing Investment Value
• Green Leases

Please contact us if you would like to to meet with us during this event.

We look forward to seeing you there.

Your 2009 Career Insurance Policy: Get LEED Accredited

Happy New Year!

The team at Galley Eco Capital enjoyed a restful holiday and are happy to reconnect with you on the 2009 Green Journey.

Hint: A recent study says that nearly 85% of real estate executives are working on greening their portfolios.

Are you prepared?

I’ve spoken with finance and investment professionals who say that they are not convinced that project LEED certification issues really relate to their work.  (Author’s epiphany: They never seem to subscribe to Our Green Journey, either.)

Being at the top of our game in this business is all about knowing how to judge property values and where they’re headed. And you can’t tell where values are headed these days without establishing the positive connections between integrated design, or green retrofitting, and asset value.

I think pragmatism should guide your thinking on this one. So many investors have announced that they are working on greening their existing building portfolios, you don’t want to run the risk of having obsolete skills. Finally, the USGBC is transitioning to LEED 3.0 soon, so you may want to get accredited anyway, particularly if you’d already started studying for the LEED-NC 2.2 exam and had gotten sidetracked before.

Do the LEED Hustle: Updates and Exam Prep Opportunities here in the San Francisco Bay Area

So here’s a public service announcement from my local Northern California USGBC Chapter:

Registration for the current LEED AP exams closes March 31st!

LEED Exam prep classes here in the Bay Area sell out in minutes. So some energetic hustle is required if you’re serious about getting accredited. Upcoming course choices with links are posted below.

Everyone else –> contact your local USGBC chapter about exam prep classes, get accredited and be the lion in your job market, not the gazelle.

LEED New Construction (NC) v2.2 Exam Preparation Workshops:

This full-day LEED NCv2.2 Exam Training Workshop will be offered in Silicon Valley and Sacramento and is designed to prepare you pass the test with confidence - the first time.  This is the “old” New Construction exam that will be offered until around May of 2009.  The “new” exam will come out sometime around summer of 2009.

January 23rd
8:30 AM - 4:30 PM
Milpitas

Click here for more information/registration.

February 11th
8:30 AM - 4:30 PM
Sacramento

Click here for more information/registration.

LEED Project Management Workshop:

January 30th
8:30 AM - 4:30 PM
San Francisco

Click here for more information/registration.

LEED for Commercial Interiors Exam Prep Workshop:

February 2nd
8:30 AM - 4:30 PM
San Francisco

Click here for more information/registration.

Green Building Operations and Maintenance Workshop;  The LEED Implementation Process:

This is the new 2009 version that will be part of the support for the new LEED EB exam that is due out around spring 2009.

February 6th
8:30 AM - 4:30 PM
San Jose

Click here for more information/registration.

Informative events about the LEED v3.0 transition:

LEED 2009: Looking Ahead:

The U.S. Green Building Council Silicon Valley Branch is presenting a look ahead at the changes to LEED Accreditation.

In this session you’ll get answers to your questions, like:
* Why is the LEED AP exam system changing?
* What are the differences between the new LEED Credentialing system and the
current LEED AP examination system?
* What is the timeline for introducing the new system?
* When can I expect the exam to change?
* When the new system emerges what does it mean for current and future LEED AP’s?

January 13th
5:30 PM - 8:30 PM
San Jose

Click here for more information/registration.

LEED Update: New Testing and Rating Systems:

For those of you who could not make it to Boston for GreenBuild, now is your chance to catch up on what is in store for LEED in 2009 and beyond.  LEED Version 3 takes effect in 2009 and will bring about the most significant changes to the LEED program in years.

Additionally, the LEED AP testing program will be overhauled in 2009.  The new credentialing program will feature LEED Associates, LEED Accredited Professionals and LEED Fellows - each with their own testing and maintenance requirements.  Join us on Jan 14th and be among the first to learn how these important changes to LEED will impact your projects and teams.

January 14th
5:30 PM - 7:00 PM
San Francisco
Click here for more information/registration.

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