LEEDing Through Innovation

Empire State Building Retrofit - Lessons Learned @ ULI

2009-11-09T12:01:00.000-08:00

Among my favorite panels this past week at the ULI Fall Meeting was about the retrofit of the Empire State Building (ESB) in New York. The building’s owner, Tony Malkin, was engaging, upfront, and clearly impressed beyond his own expectations regarding his experience retrofitting this historic landmark property. Tony’s company has enjoyed so much success with the programs they are now running at ESB that he is rolling out similar approaches at other commercial properties that he owns.

Prior to retrofit, ESB spent about $11M annually on energy. Post-retrofit, the building is spending $4.4M less per year, achieving an annual savings of about 40 percent. The team of presenters, which included representatives from NYC Economic Development and Jones Lang LaSalle, documented the nine elements that cumulatively led to this 40 percent savings. A point of emphasis across the board was that no one factor was dominant, or in Tony’s words, there is no silver bullet. I managed to write down eight of the nine elements that got them to 40:

Daylighting – 9%

· Plug Load – 6%

· Windows – 5%

· Chiller Plants – 5%

· Air handling units – 5%

· Energy Management & Tenant Engagement – 3%

· Radiant Barriers – 3%

· Demand-controlled ventilation – 2%

· Something I missed – 2%

Among the many tactics deployed with this integrative strategy was a tenant engagement strategy. Although this element was specifically attributed to three percent of the energy savings, Tony pointed out that more than half of the energy savings is achieved in tenant spaces. Behavior change was a topic raised frequently at the panels throughout the week covering energy efficiency and sustainability issues in real estate. Jonathan Rose also raised it in his panel on regulation.

At ESB, building management is doing an excellent job communicating to tenants exactly how they can easily use and monitor their space to the highest efficiency. This is primarily achieved through the system installed by Johnson Controls, which allows each tenant to log-in and monitor their energy usage in real time. This is the same system that building management and the chief engineer uses. And because more and more spaces are becoming sub-metered, Tony and his team are enabling more and more real-time commissioning. Ever since I saw the Adobe Headquarters in action last year, I have been a big believer in the use of technology and quick to instant feedback mechanisms to enable ultra-efficient building management and use.

It’s great to see something like this deployed in such an old, historic, and recognizable manner, which according to Tony, is also quite straightforward. Tony’s approach was to not just produce the kind of savings (not to mention declining vacancies and new types of tenants he is attracting!), but to generate a model that is replicable, and scalable. He told Ray Quartararo from Jones Lang LaSalle at the outset that if all they accomplished was to sharply reduce the energy consumption in the building, this project will have been a failure. It is this kind of leadership that will get more and more building owners and investors up to speed on how much potential, and how value there is to be unlocked in existing commercial buildings; especially in New York City, given the programs that PlaNYC 2030 will contain.

Tony spoke repeatedly about engaging tenants, and about providing them the incentives to reduce their consumption. One that surprised him was how tenants within the building have become competitive about their energy use. A great feature of the online portal where tenants follow their real-time usage and receive summary reports is a report of their energy use relative to other tenants in the building. Even though there is no binding requirement, tenants are paying attention, and if they rank towards the bottom of their tenant peers at ESB, they try to do better. Nobody wants to be told they are doing something poorly, or that they are losing! This gets right back to addressing tenant behavior. This is an issue that will continue to evolve, and owners and managers who can meet and adapt to this evolution will thrive.

There was, however, one issue that I raised with Tony when I approached him following the panel, and to me, this was my biggest takeaway. I asked him if any of the leases written were “Green Leases,” which have evolved over the past few years as a strategy to address the Split Incentive between tenant and landlord regarding who pays for energy efficiency investments versus who reaps their benefits. Green leases can allow both parties to share the savings, but they can also be viewed as a restriction by tenants (not to mention that brokers are generally uneducated on the subject, and these days, any imposition, in their eyes, reduces the chance that a tenant will sign a lease). Tony is adamantly against Green Leases, for the reasons above, and because they require significant detail, and raise issues of liability that are simply not worth the risk, in his eyes. While I’ve heard this general refrain before, his solution, or alteration, to leasing, is quite innovative.

Instead of writing in any requirements to his leases, Tony is introducing “Use it or Lose it” clauses for energy and utilities. The idea is the following: if the standard energy usage for a tenant in the local area is, for example, 6 BTUs per square foot, the landlord will pay for the first 6 BTUs, as agreed upon in the base year allocation, just as most full-service commercial leases are structured. However, over the first 18 months of the lease, whatever the peak load of that tenant turned out to be automatically becomes the new figure off which the base year calculation is made. The landlord benefits because now, with a lower base year written into the lease, legally, and with no change in rent, they can pro forma higher NOI, which amounts to a higher building value. And, when it comes time to renew the lease, the tenant will be able to make the case that because their usage is so low, they should share in that benefit through a rental rate that is adjusted lower. And Tony, who is spending 40 percent less on energy, will be happy to work out a rate that takes this into account. In short, everyone wins, and nobody is restricted. If they really do need those 6 BTUs, then they get to use them. But, it’s turned out that for most tenants, they need only a fraction of their original allocation. The ESB team is creating substantial value just by introducing this “Use it or Lose it” clause. This is absolutely BRILLIANT, and I think this is really the way to go when thinking about how to modify lease language to encourage efficiency.

Waxman-Markey Bill Highlights for Green Building

2009-06-29T09:49:00.000-07:00

Last week, the U.S. House of Representatives passed the Waxman-Markey bill, which sets up a cap and trade market for carbon credits, and also includes a variety of energy efficiency measures which may be the most relevant for the real estate industry.

Thank you to bloggers Shari Shapiro and Chris Cheatham for sifting through the bill and lifting out the important Green Building and Energy Efficiency clauses. To give them their appropriate credit, click here for the full article. After reading the article, I found the following items particularly relevant for real estate:

Section 201 (National Energy Efficiency Building Codes): Sets energy efficiency targets for the national building code: “on the date of enactment of the American Clean Energy and Security Act of 2009, 30 percent reduction in energy use relative to a comparable building constructed in compliance with the baseline code…effective January 1, 2014, for residential buildings, and January 1, 2015, for commercial buildings, 50 percent reduction in energy use relative to the baseline code; and…January 1, 2017, for residential buildings, and January 1, 2018, for commercial buildings, and every 3 years thereafter, respectively, through January 1, 2029, and January 1, 2030, 5 percent additional reduction in energy use relative to the baseline code.” As Shari and Chris point out, this is a significant shift in what has historically been a state and local issue. Definitely stay tuned on this one!

Section 131 & 132: SEED Funds and PACE Bonds: One of the programs that can be funded by these allocation are Property Assessed Clean Energy (PACE) Bonds. PACE bonds involve loans to commercial and residential property owners to finance energy retrofits. Through the interest generated on these bonds, a revolving fund is established to allow for even more retrofits to occur. Already, California and Missouri have announced plans to use funding from the Department of Energy State Energy Program to establish PACE bond programs. Look for more states to jump on the PACE bond bandwagon and use cap-and-trade revenue to fund similar programs.

Section 202: REEP Program: With the American Recovery and Reinvestment Act, the Department of Energy’s State Energy Program received billons of dollars. Under the Waxman-Markey bill, the State Energy Program will again receive billions of dollars for more energy efficiency retrofits. From the Pew Center on Climate Change (PDF):"This section requires the Secretary of Energy to develop a Retrofit for Energy and Environmental Performance (REEP) program to facilitate building retrofit programs for energy efficiency and efficient water use. Funding will be made available through REEP to the State Energy Programs for state and local efforts, including audits, incentives, technical assistance, and training. States are permitted to choose funding mechanisms, with options including credit support, such as interest rate subsidies or credit enhancement, providing initial capital, and allocating funds for utility programs."

The Green Act: On May 7, 2009, Rep. Ed Perlmutter (D-Colorado) introduced H.R. 2336, the Green Resources for Energy Efficient Neighborhoods Act of 2009 (“GREEN ACT”). According to Perlmutter’s office, “The GREEN Act provides incentives to lenders and financial institutions to provide lower interest loans and other benefits to consumers, who build, buy or remodel their homes and businesses to improve their energy efficiency and use of alternative energy.”

The full impact of this bill, or any final version of climate legislation that is signed into law is undoubtedly going to have a profound impact on the real estate industry. These items are a sliver of the legislation that will / would be relevant. I encourage everyone to do their own digging because turning hundreds and hundreds of pages of legalese into concise, actionable, and searchable databases for us to act with good information is going to be the biggest challenge in making sure that our energy efficiency investments pay back in the shortest time possible. The greater the payback that early actors can demonstrate, the more appealing it will be for the masses, which is something we all should strive for!

Green Building Finance & Investment Forum - Part 1: Pension Funds Perspectives

2009-03-14T14:45:00.000-07:00

I was privilaged to attend the Green Building Finance & Investment Forum West on March 3rd & 4th at the Hyatt in San Francisco. The lead sponsor, Lisa Galley, of Galley Eco Capital, once again went above and beyond my expectations in planning the most interesting and beneficial conference I have ever attended. Not to disparage the other green building conferences out there, because they all play an important role, but... this was the first time I have heard a critical mass of real estate owners, operators, investors, and lenders, all talking shop in actual real estate language. Also, the breadth and depth of the keynote speakers, panelists, and attendees was outstanding. I had the chance to interact with some quite heavy hitters with whom I look forward to remaining in contact throughout my professional career.

Over the next few weeks, I will release a series of blog entries summarizing the 30+ pages of notes I took at the conference.

Here is my first entry, summarizing the viewpoints shared in the first panel, titled Pension Funds Perspectives. The panel was moderated by Leanne Tobias, of Malachite LLC, based in suburban DC. Panelists included Liz Diamond from AFL-CIO Housing Investment Trust, Lyz Ferguson from the Bay Area Family of Funds, Preston Sargent from Kennedy Associates, and Cherie Santos-Wuest, from TIAA-CREF.

When asked if this was the time to be considering green building considering the economic environment, Santos-Wuest answered without hesitation that green building is even more relevant as a result of the downturn. In her view, there is no justification for constructing a new building that is anything less than LEED-Gold. She also mentioned that green strategies do well to prepare for the regulatory future, which is now in some jurisdictions already, including San Francisco, Boston, and the District of Columbia.

Sargent attributed the swing to pressure from their investors, such as CalPERS, the largest public pension fund in the world, and also one of the most progressive. According to Sargent, institutional players would not be demanding green buildings unless they see a bottom line benefit, as many now clearly do.

One challenge that real estate investment managers are facing is rebalancing, which occurs when pension funds whose mandates set limits on the real estate share of total assets suffer larger losses in other investments and therefore must dispose of some of their real estate assets in order to restore required ratios. This is also known as the denominator effect. An additional challenge relating to falling asset values is that it is difficult to value investments in today's maketplace because there are so few sales, especially of green buildings.

Diamond identified non-traditional investors, such as foundations and public-private partnerships (PPPs), and other mission-based investors as potential sources of capital in such a challenging environment. Sargent identified Kennedy's experience with PPPs, including the Port of Portland, one of the largest LEED-certified industrial buildings.

Panelists also mentioned the benefits they see in owning green buildings. This is nothing new to those of us who have been following the movement for some time, but it was good to hear those with skin in the game identify these factors as well. They include: tenants stay longer, and have a higher probability of renewal (underwritten to 85-90%), tenants come sooner (given the choice, tenants prefer green spaces first), and they do not want to build into obselecense.

9 of 10 would pay more for Green Space

2009-02-05T00:14:00.000-08:00

In a UK Survey, nearly nine in ten commercial tenants say they would pay more to secure a sustainable building. Read the full article here.

Underwriting Standards for Sustainable Investments

2008-12-20T15:20:00.000-08:00

Pioneered by the Capital Markets Partnership and the U.S. Conference of Mayors, the standards are available for purchase here.

For background on the participants, click here.

Carbon Credits for Green Buildings

2008-12-20T14:22:00.001-08:00

This white paper by Donald Simon from the law fim Wendel, Rosen, Black & Dean provides a fantastic overview of the value green buildings can have in a state / country with a cap & trade system for CO2 emissions.

Mr. Simon has been awarded the "Green Building Super-Hero" award by the Northern California chapter of the US Green Building Council, and introduced Al Gore at West Coast Green earlier this year. He is also an expert on the evolving practice of Green Leasing.

Click here for the paper

CA Moves Toward Cap and Trade

2008-12-20T14:19:00.000-08:00

One component of the CA plan to reduce CO2 emissions is energy efficiency in buildings. Look for incentives to increase building efficiency in the near term.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/12/12/MNO514MCTB.DTL

For an understanding of how a cap and trade system would benefit owners of green buildings, see my post immediately following this one

Green Building Pays Back

2008-11-30T01:41:00.000-08:00

Yet another report in the steady stream... this one takes a straightforward approach to the present value of energy savings ($7-14 per sq. ft.) vs. incremental cost ($3-$8 psf)...

In addition, it also takes a crack at quantifying public benefits such as health benefits and increased transportation savings.

Click here for the full report from Good Energies.

Need to reduce energy in buildings by 1.6% annually

2008-11-30T01:22:00.000-08:00

According to the "Green Building Impact Report," the carbon "footprint" of U.S. commercial buildings will need to decline steadily each year by roughly 1.6% — a total of 14% improvement between 2000 and 2008 — to reach a goal of 80% reduction by 2050. The good news is that LEED buildings are ahead of this goal in terms of their own performance. The bad news is that the entire building sector must be hitting these reduction targets.

View the full report here.

Green Building Insurance Risks

2008-11-28T20:50:00.000-08:00

Yet another nuance of Green Building...

http://nreionline.com/brokernews/greenbuildingnews/are-you-covered/

Global Energy Efficiency Studies

2008-11-28T19:56:00.000-08:00

This post courtesy of information from the blog Our Green Journey by Lisa Galley.

The IEA recently calculated that 25% of final global energy use could be eliminated through energy efficiency in existing buildings!

Following up on that, the World Business Council for Sustainable Development (WBCSD) recently studied 1 trillion sq ft of data to estimate what might be accomplished by reducing energy demand and CO2 by jumping over three barriers: organizational, financial, and behavioral. The study is long, but quite revealing.

New High-Efficiency Window Prototype Result of DOE Partnership

2008-11-21T11:04:00.000-08:00

A bit futuristic, but quite interesting... and I happen to be working on a market study for these windows right now!

http://www.energy.gov/news/4501.htm

State Senator Steinberg - SB 375

2008-11-11T23:59:00.001-08:00

Senator Steinberg should be commended for pushing this bill through the CA State Senate. SB 375 will expedite planning and review processes for projects that reduce Vehicle Miles Travelled. The bill itself is more complex, and if you're interested in learning more, read below.

This short video shows him speaking at the Capitol.

TITLE - Californian Senator Darryl Steinberg (28 Oct 2008) – hosted by

California Center for Environmental Law and Public Policy

Talk described the passage of the Senate Bill 375 for transport and

land use planning. The bill aims to reduce greenhouse gas emissions

from transportation by reducing vehicles miles travelled. Address

urban sprawl and control development in ways to minimize commuting

distances and vehicle km by better aligning the location of housing

and workplaces. Passage of the bill occurred when municipalities,

developers, environmentalists and state government we able to reach a

consensus – “everyone gave up a little and gave a lot”.

By 2011, all major transport funds for capex projects will need to be

approved under SB 375.

In the past there have been major coordinated planning obstacles in

California as vested interests and different levels of government have

squabbled over control and fought for their slice of the development

pie, even if this increased environmental impact.

The main enabling event that allowed the planning bill to pass was the

earlier passage of the greenhouse gas reduction bill AB32. California

is now legally bound to meet very aggressive carbon reduction targets

by 2020. This was a major intervening event that gained support for

aligning interests.

Senator Steinberg is very interested in green job creation, but we do

not seem to be entirely clear about what this means yet. He is

generally supportive of high speed rail, and sees this as a catalyst

for new industry and jobs, while environmentally favorable. He sees

the environmental targets in AB 32 also related to the agenda of

improved education and social justice

Shai Agassi - Project Better Place

2008-11-11T23:11:00.000-08:00

This is possibly the best and most thought-provoking speech I've ever seen. Shai Agassi discusses his personal story and the evolution of Project Better Place

http://webcast.berkeley.edu/event_details.php?seriesid=f2949e45-1545-444f-b6aa-f03349e1966a&p=1&ipp=15&category=

U.S. Legislation Regulating Carbon: Cap and Trade or Tax?

2008-11-10T18:52:00.001-08:00

The economist's take on the issue is in favor of a tax over a cap-and-trade system is given in the article below. Former Haas Dean Tom Campbell also agrees. His point is that the incentive to innovate never stops, and attempting to measure 1990 or some past year's levels is both impossible and arbitrary. I agree.

http://www.economist.com/opinion/displaystory.cfm?story_id=12562343

Al Gore Editorial in NY Times

2008-11-10T00:00:00.000-08:00

Al Gore presents five key strategies to fight global warming NOW, and as always, some compelling anectodes... note the discussion of energy efficiency in buildings... LEED-EB to the rescue!

http://www.nytimes.com/2008/11/09/opinion/09gore.html?_r=1&sq=gore&st=cse&scp=2&pagewanted=all

AirAdvice Technology

2008-11-01T11:07:00.001-07:00

I found this on Building Energy Performance News. Really interesting technology. They've developed a system to measure energy peformance and translate it into estimates of financial savings, impact on LEED status, and more. Read on...

http://www.marketwatch.com/news/story/AirAdvice-Upgrades-Energy-Assessment-Software/story.aspx?guid={FD134878-BF9A-48D3-8835-FD1CD39DA468}

And on their website, they discuss their LEED consulting:

http://www.airadvice.com/residential/partners-leed.php

RREEF Releases Green Building Investment Report

2008-10-30T19:54:00.001-07:00

Lots of great data and takeaways from this report. It is quite lengthy, but general themes include:

Key Overall Findings
Trends by Region and Country
A Discussion of Capital Markets
Implications for Investors

I highly encourage you to read at least the executive summary. Thanks to Lisa Galley for pointing me to this article.

https://www.rreef.com/GLO_en/bin/SO_64_Global_Greening_Trends.pdf

Google shows off 'extraordinary' building plans

2008-10-29T02:39:00.000-07:00

Among article highlights:

Google plans to build the "greenest building ever" in Mountain View @ 310,000 sq. ft
Google's VP of Real Estate, Dave Radcliffe, says project is currently on hold because it does not currently make financial sense.
But, Yvonne Farrell, a LEED-certified architect on Mountain Views' Environmental Sustainability Task Force, says it should cost Google no more than any other of its Class A buildings, and that in the long run (10 to 20 years), it should cost less.
Editor's note: while this may be true, the value of money today could be more expensive than the time value of money saved further down the road. I'd like to see some hard numbers, although I don't I'll get my hands on their pro forma! :)

Full article at: http://www.paloaltoonline.com/news/show_story.php?id=9809

How Oil Prices Literally Drive the Mortgage Crisis

2008-10-22T22:47:00.000-07:00

This article / blog post appeared on Our Green Journey, a blog by Lisa Galley, founder of Galley Eco-Capital. I think I forwarded it to a million and one people a few weeks ago, so it deserves a place here

http://www.galleyecocapital.com/2008/10/how-oil-prices-literally-drive-the-mortgage-crisis/

First Article: Thomas Friedman

2008-10-22T11:38:00.000-07:00

The first article is by Thomas Friedman, New York Times Columnist, and author of The World Is Flat. He will make many more appearances in this blog!

Title: Bailout and (Green) Buildup

Link: http://www.nytimes.com/2008/10/22/opinion/22friedman.html?hp

A Summary: As gas prices decline, so does America's incentive to go green. What should we do about it? Friedman explores realistic steps the next president and congress can take.

Enjoy,

Ari