Tuesday, September 23, 2008

New Initiatives Deal with Energy Reduction in Existing Buildings

The commercial real estate industry spends approximately $24 billion annually on energy and contributes approximately 18% of U.S. carbon dioxide emissions. It is also well known that energy represents the single largest controllable operating expense for buildings, typically a third of variable expenses, and this expense continues to increase! No prudent building owner or manager would argue that a re-evaluation of energy use in their buildings is a high priority. Unfortunately, to-date the principal focus has been on new buildings or buildings undergoing significant renovation, not on existing buildings, of which there are orders of magnitude more. Only the United Kingdom has focused on both new and existing premises with expansion this past summer of its energy performance requirements to commercial property over 26,900 square feet when built, sold or rented.

Energy retrofits to existing buildings in the U.S., although a growing priority, have often been complicated by numerous financial and contractual barriers. However, BOMA this past summer unveiled its Energy Performance Contract (EPC) Model. Developed in collaberation with the Clinton Climate Initiative (CCI), the BOMA EPC Model allows building owners to perform major energy retrofits to existing buildings by removing key barriers and providing a turnkey solution. The Model provides a standardized energy performance contract, similar to the American Institute of Architects' construction contract. The key legal and technical provisions in the contract have been vetted by top real estate and energy service companies, along with BOMA legal counsel and numerous experts in the field. The BOMA EPC Model provides a market mechanism that every building, regardless of age, location and type, can use to significantly improve efficiency.

As part of the EPC Model, BOMA and CCI teamed up with USAA Real Estate Company to generate an energy reduction pilot project to test the Model. The pilot project clearly demonstrated the business case, including development of a financial structure to fund the costs. Working with an investment bank, Hannon Armstrong, a financial structure was developed using the assets in the building as collateral, not the building itself, and using the guaranteed energy savings from the project to pay for the loan.

The BOMA EPC Model is a significant industry event. The industry finally has a streamlined, industry-vetted, cost effective and time efficient model contract that can be used to implement major energy retrofit projects in existing buildings.

It is also interesting to note that BOMA also has released a new lease guide, the BOMA Green Lease Guide, for writing "green language" into a commercial real estate lease. Terms of the lease actually incentivize tenants to reduce energy consumption. The Guide offers an alternative to the typical triple net lease, where the landlord pays for capital improvements to reduce energy consumption, but the tenants, who pay the utility bills, reap the benefits of these measures.

While much has been written and done about reducing energy in new buildings, it is clear that the greatest impact will be achieved by reducing energy in existing buildings. Fortunately, this is becoming a much higher priority in the industry.

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