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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I am thrilled to be participating in the upcoming Sustainable Industries Economic Forum here in San Francisco!

Are you coming?

I will be part of a premiere panel including Paul Hawken and Phillip Michael Williams. We will discuss triple-bottom line investing in these challenging economic times.

Special request –> send me your burning questions and perspectives on the state of green finance and sustainability, and I’ll cover them at the Forum.

The current situation is a perfect storm that feeds off economic worry and unprecedented opportunity within green building and energy efficiency. That leaves lots of folks wondering, “what’s it going to take?” to move sustainability forward.

Send me a note or write a comment on this post about your thoughts, and I’ll try to work your perspective into the mix.  I look forward to the dialogue.

Event Details

November 19, 2009

St. Regis Hotel, San Francisco

8am - 11:30am

You can sign up for the event here

Please join us for what is sure to be an enlightening and insightful event as we look to foster creative solutions for our evolving markets.

Related reading:

• SI article featuring Lisa Michelle Galley

Things you might want to know:

• Do you like this post? We’d love to hear your comments and suggestions.
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• Sometimes you can see what we’re doing on Twitter.
• Photo credit: Two Unions on istockphoto
  

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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One stack of articles will quote investors talking up their green building programs.

In an equally thick stack of quotes, they complain about green building or energy efficiency costs.

In Germany, however, investors are more outspoken — favoring increased green and energy efficiency screening and investment criteria.

According to Germany’s Handelsblatt, European real estate investors are quoted as increasing their screening procedures and criteria for green buildings and energy efficiency. Per the Handelsblatt (our translation):

German open-end real estate funds are increasingly applying social and environmental criteria to their investment decision making. These criteria are also playing a growing role in portfolio management procedures.

Five funds are quoted as discussing their use of green and energy efficient criteria within their investment decision making: Pramerica, UBS, Union Investment Real Estate, Axa Real Estate and Commerz Real.

What are the funds reported activities?

• Union Real Estate utilizes a sustainability screen at acquisition. Existing buildings which do not meet their minimum energy efficiency criteria are rejected.
• UBS uses different checklists for suppliers, tenants, project acquisition, leases and building performance to monitor and enforce sustainability standards.
• Pramerica Real Estate’s investment policy within its TMW World Funds has been adjusted so that sustainability screening is conducted for all new investments as well as on the existing portfolio. Due to the fact that there really aren’t enough green buildings in existence for investment, they also check non-green investments at acquisition to make sure that they can be greened once they are in ownership.
• Axa Real Estate had its own sustainability ratings system developed and is currently testing its portfolio.
• Commerz Real reports that sustainability criteria has an increasing influence on investment decisions, since they notice that more tenants desire renting within green buildings.

While you might encounter US investors without a firm sustainability policy, it appears that if you wish to do business with German investors, you had better have your (or their) green investment checklist ready.

This is particularly interesting because several of these funds have had successful capital raises. With US real estate (and the dollar) getting cheaper, it will be interesting to see what happens when these foreign investors start looking to the US for good deals — with their sustainability criteria in hand.

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Prevalence of on-bill financing: Roughly 10 states offer on-bill financing programs. A number of  gas and electric utilities currently offer (or have conducted pilot testing of) on-bill financing programs, which are oftentimes referred to as meter loans or TIPs (”Tariff Improvement Programs”). When structured and funded correctly, and with the appropriate marketing, these programs have been successful. Take a look at San Diego Gas & Electric’s website detailing their program for an example of how this works.

Emerging tax-lien financing market: So far, only a handful of municipalities and counties have executed tax-lien programs (The City of Berkeley, Sonoma County, and City of Palm Desert have operational programs). Despite the model’s infancy, more than 15 states have amended state laws to allow for local improvement districts, paving the way for local government to enact tax-lien programs.

When thinking about which mechanism works best for your circumstances, its better to frame the analysis in terms of trade-offs involved. In other words, nothing’s perfect, but in the right circumstances, each option can be more than good enough. So let’s focus on the comparative advantages of each.

Tax-Lien Advantages

• Longer loan terms: The typical loan payback period for tax-lien loans is 20 years, minimizing the annual principal costs. This helps to keep these programs competitive with on-bill financing, which can feature an interest rate as low as 0%, but typically require loan repayment in 2-5 years.

• Wide range of acceptable investment: Tax-lien programs can focus on both renewable energy and energy efficiency, giving property owners greater flexibility in how they deploy capital. Current on-bill programs largely limit the use of capital to energy efficiency measures, and typically for measures that are covered under incentive programs offered by the utility provider.

• Broader financial network: There is strong interest from the private market to provide capital (via the purchase of municipal bonds, which are used to fund these loan programs) and program administration support for municipalities and counties looking to implement tax lien programs. This lowers the implementation cost for local government, increasing the likelihood of widespread adoption. On-bill programs may require expensive upgrades to the utility’s billing system, precluding utility providers from offering on-bill programs (and opting to contribute dollars to other energy efficiency programs).

On-Bill Advantages

• Available to both property owners and tenants in leased space. On-bill programs typically fund on a per-meter basis, which means that each tenant with an individual meter is eligible for on-bill. Low-to-no cost financing is attractive to tenants, who can execute energy efficiency improvements and benefit from a lower utility bill while they are in the space; if structured correctly, the monthly loan payment is less than the energy savings.  If the on-bill financing is structured under a tariff agreement, the improvements are based “on the meter”, and the financial obligation stays with the meter. Therefore, repayment obligation transfers to the new beneficiary of the upgrades. On-bill financing is a work-around to the principal-agent issues in the tenant-landlord relationship; those that pay the utility bill are now incentivized to improve their energy-efficiency.

• Program coupling. On-bill financing is combined with other energy efficiency programs offered by the utility provider, such as upgrade incentives, which reduce the cost of equipment upgrades/system improvements. Additionally, many utility providers offer no-cost design and engineering assistance to help their customers maximize the performance of their energy efficiency measures. These services both reduce the improvement costs, make the whole process much easier and ensure maximum energy savings for customers.

• Reduces barriers to high impact improvements. On-bill is designed to reduce implementation costs for the borrower. No-cost financing means that capital constrained building owners and tenants can execute upgrades that have maximum impact upon energy performance. This is especially relevant for low-income households, who can now undertake energy efficiency measures in their homes which reduce their utility costs.

While the widespread availability of these programs is still limited, portfolio owners should track their development and consider them as a financing option for sustainable retrofits.

Coordinating Your Approach to Energy Efficiency Financing

As you consider how the newer options can work for you, keep the following tips in mind for y our overall program initiatives:

• Determine your portfolio retrofit strategy. Are you undertaking a wholesale repositioning of your assets, or simply ensuring long-term competitiveness via gradual improvement, or a little bit of both? In making this determination, it helps to consider both the market and regulatory risks of your assets within the areas they are located. Separate your portfolio properties into “buckets” by these criteria.

• Evaluate local financing options. Even if your portfolio covers a national or regional geographic area, it pays to evaluate the state, local, and utility provider incentives for sustainable retrofits. The availability of certain incentive and financing programs may impact which properties, and which specific upgrades, get prioritized.

• Examine your existing leases, and adapt all future leases. Do you know what retrofit costs, if any, you can pass on to your tenants? Make sure you understand how both your and your tenant’s bottom line will be impacted by performance improvements. Structure all future leases to allow for appropriate cost pass-throughs for measures that will significantly and positively impact your tenants total cost of occupancy.