Nrdc edf lease training w audio

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Transcript of Nrdc edf lease training w audio

Commercial leases that enable greener buildings

UNLOCKING ENERGY EFFICIENCY IN COMMERCIAL BUILDINGSLeasing Strategies Commercial Tenants Can Take to Make Buildings Energy Efficient

#OBJECTIVESTo clearly identify the nature of the split incentive in commercial leasing.To show in economic terms how the split incentive inhibits building retrofits. To explain how to fix the split incentive. To convey the importance of measurement and verification for purposes of fairness and building efficiency.To establish the benefits for tenants of adjusting traditional approaches to capital and operating costs in commercial leasing.

ENERGY EFFICIENCY AND BUILDINGSTHE SPLIT INCENTIVEHOW TO FIX ITWHATS IN IT FOR TENANT AND LANDLORDNEXT STEPS

In dense urban areas, buildings are the principal source of energy use.*2005 Greenhouse Gas Emissions InventoryCO2 Emissions by Sector, New York City 2005

#Commercial buildings emit more than other types.CO2 Emissions from Buildings, New York City 2005

#Electricity and heating fuel represent the bulk of the emissions, and their share is growing.Trends in Source of CO2 Emissions, New York City (millions of metric tons)

#Some emissions come from systems that commercial tenants control, others from systems they do not.

#

Most of the energy use comes from a buildings central systems.CORE BUILDING SYSTEMS TENANT SYSTEMS

Efficient BuildingInefficient Building (30% + greater)ConveyingLighting 23%Plug-ins(computers, appliances, etc) 27%Heating 15%Cooling17%Ventilation13%5%

Core Building50% - 60% 10% dep on tenant coolingTenant Lighting13%Plug-Ins27%

Core Building59% - 69% 10% dep on tenant coolingPlug-Ins21%TenantLighting10%

#8Improving these systems has a direct, measurable $ impact.Green ImprovementsImprovementsthat Save $HVAC retrofitsVFDsDaylightingDigital controlsDemand controlled ventilationVariable Volume Chilled WaterLEED Existing Buildings - Operations and Maintenance Green Globes

#

LEED and other green standards are not a requirement for saving energy and $.Energy Efficient

#Typical buildings are inefficient total energy reductions of 20% - 30% could pay back in 5 years.High efficiency lightingControls, scheduling

CORE BUILDING SYSTEMS

#High efficiency rooftop systemsRetro-commissioning and tuning

Tenant system improvements can increase potential savings to 30% - 40%. TENANT SYSTEMS

#20% - 40% savings! Why arent buildings getting fixed?

#ENERGY EFFICIENCY AND BUILDINGSTHE SPLIT INCENTIVEHOW TO FIX ITWHATS IN IT FOR TENANT AND LANDLORDNEXT STEPS

The most important factor affecting efficiency is who pays for it.Full service grossModified grossNet leaseOwner pays for all core building operating and capital expenses.Owner pays for capital and a pool of operating expenses.

Tenant pays all increases in the pool after the first year of the lease.Tenant pays base rent and all operating costs defined in the lease, and may or may not pay for capital improvements.Owner paysTenant pays

#

In modified gross leases, tenants pay for a pool of core building operations as they exceed Year 1 of the lease.

CORE BUILDING SYSTEMS

#Tenant responsibility for capital expense is usually very limited.

CORE BUILDING SYSTEMSORTypically

#See also pdf 110 of Travelers, in 48517Split incentive affects most NYC buildings.* 2003 leasing activity, Real DealIn NYC, most of the square footage is in a modified gross lease. Generally true, with some variations, in most urban settings.

#18Landlord OperatingCosts (Up to Base Year)Tenant Operating Costs (Above Base Year)ExpensesExpensesWhy? Because it gives cost predictability to landlord and lender, expense review/control to tenant.CORE BUILDING SYSTEMS

#19Landlord OperatingCosts (Up to Base Year)Tenant Operating Costs (Above Base Year)ExpensesBut savings (e.g. from an energy retrofit) go entirely to the tenant.CORE BUILDING SYSTEMS

#20A typical project.ImprovementSavingsCostBldg Control System$270,000$1,000,000Lighting$190,000 $450,000Variable Freq. Drives$90,000$550,000High Efficiency Chiller$450,000$3,000,000$1,000,000$5,000,000Simple Payback5 yearsEnergy Savings30%Carbon Emissions Reductions25%CORE BUILDING SYSTEMS

#Capital sharing restrictions substantially alter the economics and GAAP requires siloing of measures. ImprovementSavingsCostUseful LifeAllocable Recovery (at 7%)Bldg Control System$270,000$1,000,000 10$142,378Lighting$190,000 $450,0007$83,499Variable Freq. Drives$90,000 $550,00012$69,246 High Efficiency Chiller$450,000 $3,000,000 25$257,432 $1,000,000 $5,000,000 $552,554 Adjusted Payback 9 YearsImprovementTotal SavingsTotal CostEnergy Retrofit Package$1,000,000$5,000,000Payback5 yearsCORE BUILDING SYSTEMS

#A building with 5 tenants, all modified gross leases with base years. TenantsSquareFeetLease TypeLease End DateCapital Expenditure Sharing A200,000Modified Gross1/1/2013Useful LifeB200,000Modified Gross1/1/2015NoneC200,000Modified Gross1/1/2017Useful LifeD200,000Modified Gross1/1/2019NoneE200,000Modified Gross1/1/2021Useful LifeCORE BUILDING SYSTEMS

#23A building with 5 tenants, all modified gross leases with base years. TenantsSquareFeetLease TypeLease End DateCapital Expenditure Sharing A200,000Modified Gross1/1/2013Useful LifeB200,000Modified Gross1/1/2015NoneC200,000Modified Gross1/1/2017Useful LifeD200,000Modified Gross1/1/2019NoneE200,000Modified Gross1/1/2021Useful LifeWhat can the landlord bill this tenant for the $5 M retrofit? Where do the savings go when the tenants lease is over? CORE BUILDING SYSTEMS

#24A building with 5 tenants, all modified gross leases with base years. TenantsSquareFeetLease TypeLease End DateCapital Expenditure Sharing A200,000Modified Gross1/1/2013Useful LifeB200,000Modified Gross1/1/2015NoneC200,000Modified Gross1/1/2017Useful LifeD200,000Modified Gross1/1/2019NoneE200,000Modified Gross1/1/2021Useful LifeWhat about this tenant? CORE BUILDING SYSTEMS

#25Tenant12345678910A$ 110,511 $ 110,511 $ 110,511 $ 225,102 $ 231,855 $ 238,810 $ 245,975 $ 253,354 $ 260,955 $ 268,783 B $ - $ - $ - $ - $ - $ 238,810 $ 245,975 $ 253,354 $ 260,955 $ 268,783 C $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 253,354 $ 260,955 $ 268,783 D $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 268,783 E $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 $ 110,511 Total $ 331,532 $ 331,532 $ 331,532 $ 446,123 $ 452,876 $ 698,643 $ 712,971 $ 870,573 $ 893,375 $ 1,185,644 Recovery7%13%20%29%38%52%66%84%101%125%As leases turn over, the landlord recovers the savings, but still the recovery takes 9 years. CORE BUILDING SYSTEMS

#So what? Its the landlords building. The landlord should fix it, right?

#

Yes. But the old systems still work , you cant see them, and I can expense the rising cost to you.

Besides, to lease my building I need to spend on this...

#In other words.

The landlord drives one of theseand you pay for the gas.But what motivation is there for a landlord to buy one? CORE BUILDING SYSTEMSOne of these will do the job just fine.

#Sustainability InvestmentEnergy Savings Net Operating Income to Pay for Capital CostThis cost allocation problem is called the split incentive. CORE BUILDING SYSTEMS

#

#Cost allocation for tenant systems is independent of lease type, and usually carried by the tenant.TENANT SYSTEMS

Plug-insData CentersLightingSometimes ACTenant Systems

#Under Electric Rent Inclusion, there is no connection between actual tenant usage and tenant electric bills.

Tenant Electric ChargeTENANT SYSTEMS

#A Thought ExerciseWHO PAYS, WHO BENEFITS

#An exercise: who pays, who benefits.SubmeterImprovementCapital CostSavingsHigh Efficiency BoilerVentilation FansTenant LightingLandlordLandlordLandlordLandlordTenantTenantCORE BUILDING SYSTEMS TENANT SYSTEMSFull Service Gross Lease

#An exercise: who pays, who benefits.ImprovementCapital CostSavingsHigh Efficiency BoilerVentilation FansTenant LightingLandlordLandlordLandlordLandlordTenantLandlordElectric Rent InclusionMISMATCHSubmeterCORE BUILDING SYSTEMS TENANT SYSTEMSFull Service Gross Lease

#An exercise: who pays, who benefits.ImprovementCapital CostSavingsHigh Efficiency BoilerVentilation FansTenant LightingLandlordTenantLandlordTenantTenantTenantModified Gross LeaseFull Service Gross LeaseMISMATCHMISMATCHSubmeterCORE BUILDING SYSTEMS TENANT SYSTEMS

#An exercise: who pays, who benefits.ImprovementCapital CostSavingsHigh Efficiency BoilerVentilation FansTenant LightingLandlordTenantLandlordTenantTenantLandlordElectric Rent InclusionSubmeterMISMATCHMISMATCHMISMATCHModified Gross LeaseCORE BUILDING SYSTEMS TENANT SYSTEMS

#An exercise: who pays, who benefits.ImprovementCapital CostSavingsHigh Efficiency BoilerVentilation FansTenant LightingLandlord*TenantLandlord*TenantTenantTenantModified Gross LeaseNet LeaseSubmeterCORE BUILDING SYSTEMS TENANT SYSTEMS* Landlord may be able to share capital cost with tenant depends on degree of net

#ENERGY EFFICIENCY AND BUILDINGSTHE SPLIT INCENTIVEHOW TO FIX ITWHATS IN IT FOR TENANT AND LANDLORDNEXT STEPS

The simplest solution to the split incentive a full service gross lease.CORE BUILDING SYSTEMS

#42If modified gross with a base year is unavoidable, lease must adjust capital recovery.CORE BUILDING SYSTEMS

#And consider adding an expense stop to isolate energy use from other operating.

compels more careful measurement savings not subsumed by rise in other operating costsincentive for landlord to save to get below base