Thursday, December 17, 2009

Growing State Budget Deficit Results In Raid On Energy Conservation Program Funds

Ten Northeast and Mid-Atlantic states participate in the Regional Greenhouse Gas Initiative (RGGI) which implemented the first market-based, mandatory cap-and-trade program in the country. Carbon dioxide emission allowance auctions began in September 2008. Since this first auction, more than 140 million allowances have been auctioned off raising almost a half a billion dollars in proceeds for the ten participating states, proceeds that are suppose to support state clean energy agendas. Under the Memorandum of Understanding signed by the 10 RGGI states, the states agreed to use auction proceeds for energy conservation and clean energy programs. New York State, for example, developed a plan to use its share of the proceeds to fund energy efficiency and renewable energy programs to help families, businesses and local governments reduce their energy bills while investing in clean energy technologies that will create jobs and reduce the state's carbon footprint. A number of initiatives to help reduce the disproportionate energy cost burdens on low income families were also included in the program.
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Then came the worst recession since the Great Depression, and even the best laid plans can go astray! New York State found itself with a budget deficit estimated to be close to $3.9 billion. On October 15, 2009, New York State Governor David Patterson proposed using $90 million of the RGGI proceeds (of which New York's total share to-date is $180.7 million) to help close this budget deficit, rather than for energy conservation and clean energy programs as originally planned. Nearly all of the remaining RGGI funds have been committed to other initiatives, effectively zeroing out this pioneering program's budget. The Governor's proposal still needed approval by the State Legislature and many did not expect much support for the proposal, but on December 2, 2009, the State Assembly and Senate passed a deficit reduction program worth $2.7 billion that, unfortunately, included provisions to transfer $90 million in RGGI proceeds to the General Fund. So much for the best laid plans of state politicians!
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It was not long ago when I can remember politicians and environmentalists wanting to get New York State into the RGGI program proclaiming and promising that RGGI proceeds would only be used for energy conservation and clean energy measures. And to anyone who thought that the RGGI cap-and-trade program would increase energy costs, they argued strongly that it would not, and even went so far as to suggest consumers would see a reduction in energy costs because RGGI proceeds would have the net effect of saving money. What a bill of goods we were sold! But there is a lesson to be learned, and that is "what politicians givith, they can just as easily taketh away!" This lesson should not be forgotten by anyone, including those in our industry, who are planning to rely on government incentives and grants to justify their return on investment.
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As the year comes to a close, this will be my last blog of 2009. As such, I want to take this opportunity to thank all of you who routinely emailed me your comments and provided me with suggestions for new blog material. I wish each and every one of you a very happy holiday and a happy and healthy New Year.

Friday, December 11, 2009

Should Commercial Real Estate Energy Consumption Benchmarking Be Re-focused?

The difficulties and complexities associated with benchmarking the energy consumption of commercial buildings are well known. It would appear that until such time as a truly representative (for each property class, type property within each class, and geographically distributed) and statistically supportable building energy consumption database is developed, building energy consumption benchmarking should either not be done or be relegated to comparisons against other similar buildings in an owner's portfolio. Who better than the building owner will know what properties are truly comparable? For example, an experienced owner of a portfolio of hotel properties would easily be able to compare the energy consumption of a candidate hotel to be acquired with the energy consumption of similar hotels in the portfolio. Considerations for this comparison might include the presence on-site of restaurant facilities, retail establishments, conference facilities, a pool, an atrium, the shape of the building envelope (e.g., tall and box-like, short and spreadout, etc.), the age of the building and when the last major renovation occurred.
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For states such as California or cities such as New York to pass legislation that includes labeling the energy consumption of buildings and disclosure to prospective purchasers, tenants or lenders makes sense to facilitate improved energy efficiency; however, these results should not at this time be compared with other buildings, unless of course it can be guaranteed these "other" buildings truly are similar. Unfortunately, today the odds of these "other" buildings truly being similar are very low. Moreover, there is too much at stake in the highly competitive commercial real estate market for seriously deficient analyses to be passed off as "acceptable." This must be resisted at every level. It is only natural that prospective purchasers, tenants and lenders want to know how a building compares with other buildings, and undoubtedly there will be considerable pressure to do benchmarking. However, if you cave into this pressure, there is a very strong possibility that your benchmarking conclusions will be inaccurate and misleading. The importance of true building similarity can not be overstated.
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As indicated in previous blogs, U.S. DOE's Commercial Buildings Energy Consumption Survey (CBECS) database of less than 5,000 buildings is used by Energy Star and many others for benchmarking, despite the fact that it is wholly inadequate in addressing the many significant differences between buildings in the same property class. It clearly is too small a sample to represent the more than 5 million existing buildings in the country today. Interestingly, there is an effort underway in Washington to get DOE to expand the number of buildings included in the survey to at least 15,000-20,000. Even if this was possible to accomplish in 2011, it would still be at least 2013 before the data would become publicly available. The fact is that at this time we simply do not have an adequate database for benchmarking
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So what is the bottom line? The bottom line is that if any benchmarking is done at all today, it should be done by the property owners themselves who are in a much better position to compare the energy consumption in a building being considered for acquisition with truly similar buildings in their portfolio. These individuals typically are experienced in commercial real estate and intimately familiar with the nuances between buildings in the same property class. At the same time, we as an industry must demand a better building energy consumption benchmarking database that truly is statistically representative of the myriad of buildings out there in the commercial real estate market, and vocally reject anything short of this!

Monday, November 9, 2009

More on Building Energy Consumption Benchmarking Limitations

If you are following the myriad of problems associated with benchmarking energy consumption in buildings, you might be interested in reviewing the recently released U.S. Green Building Council - Chicago Chapter's report titled Regional Green Building Case Study Project: A Post-occupancy Study of LEED Projects in Illinois. The report analyzes the post-occupancy performance and costs and benefits of 25 LEED projects in Illinois. One of the report's conclusions and recommendations hits the nail on the head about the limitations associated with building benchmarking today. The report concluded that a "building's best benchmark is its own performance ... since every building is unique in its use, occupancy, operations, maintenance and systems ... other benchmarks, such as comparisons to other buildings (LEED and non-LEED, including CBECS and Energy Star) or any modeled predictions are temporal or limited in use ... more research is needed in the following areas to support building performance initiatives: standardized metrics, data collection protocols ... appropriate benchmarks."
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We must as an industry demand that benchmarking data be statistically relevant and accurate. To rely on data with significant deficiencies just because "it is the best available today" will do more harm than good. To "force" buildings into a specific use category may be tempting, but it will likely only result in questionable conclusions and certainly add to the confusion that already exists in the market today. There is too much at stake to demand any less.
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FYI: A standardized data collection protocol for building energy consumption information is currently being developed by ASTM. If you are interested in participating in this effort, contact me at ajb@bepinfo.com or 800-238-1841.

Tuesday, October 27, 2009

The Challenge of Building Energy Consumption Benchmarking

For a long time now I have been advocating that building energy consumption benchmarking is not realistic without a statistically representative database. The fundamental problem with existing databases used for benchmarking (such as DOE's CBECS database) is that building use categorization is much too general and in each building use category there are an insufficient number of buildings to provide statistically meaningful comparisons. Most researchers understand the need for statistically representative data. Unfortunately, the typical response today for relying of any benchmarking database with known shortcomings is "but it's the best we have." I have always believed that it is better not to benchmark than to benchmark against a database that has not been statistically proven to be representative.
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Let's look at some of the variables that certainly must be factored into any building energy consumption benchmarking analysis. Of course, the more variables there are, the larger the database that must be built to provide meaningful benchmarking data at a reasonable confidence level, and it starts right with building use. To classify building use into the four major uses, i.e., office, retail, industrial and lodging, would be to grossly oversimplify the picture as there are literally dozens of major building use categories. Each one of these major building use categories can then be further subdivided to reflect buildings with common characteristics. For example, take the office building category which is probably the simplist of building use categories to characterize. Office buildings may be constructed tall or wide, with significant square footage or relatively small square footage. There are different classes (at least three). They may be attached to other buildings or stand-alone. Buildings may have been constructed a hundred years ago or more recently (perhaps under tighter energy efficiency building codes). The buildings may be located in a warm climate or a cold climate or anything in-between. Some office buildings include retail. Some office buildings have high energy consumption facilities such as data centers. There may or may not be standby emergency generators that must be tested periodically. And all this is to say nothing about how the building is operated! For example, what are the building's hours of operation? How does the building handle maintainence and repairs? What amount of space is occupied and what amount is vacant? I can go on and on, and this is just for the "simple" office building category. While lodging has just about as many variables as office buildings, these pale against the many more variables associated with retail and industrial use!
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As I said, there literally are dozens of significantly different major building uses. The entire CBECS database (which identifies only 17 different "principal" building uses) includes slightly more than 5,200 buildings to represent the entire country. In view of the wide standard deviation around energy consumption data for each building use, the number of buildings that should be included in the benchmarking database to achieve a 90% or 95% confidence level for each building use category/sub-category is significantly more than currently in the CBECS database.
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What should we as an industry do about this problem? I believe that two things are a must. First, every effort must be made to develop a single building energy consumption database that will include all the major building uses (properly categorized with common characteristics) and be statistically representative for benchmarking purposes. This should be a priority of both DOE (with its CBECS database) and EPA (with its Energy Star database). Second, we must refrain from using any benchmarking database, e.g., CBECS, just because "it is the best that we currently have." By using a benchmarking database that has significant deficiencies, the results can (and will) be questioned and may do more harm than good. We as an industry must come together now on this critically important problem and deal with it once and for all.

Wednesday, October 7, 2009

How much energy do green buildings really save?

LEED continues to receive considerable attention in the media since it is the country's leading green building certification program. However, questions about the program's true effectiveness are beginning to surface. A recent New York Times article (August 31, 2009, "Some Buildings Not Living Up to Green Label") reported that a LEED-certified Federal Building in downtown Youngstown, Ohio was "hardly a model of energy efficiency." In fact, according to an environmental assessment conducted last year, the building reportedly did not even score high enough to qualify for the Energy Star label. This is not really "news" as the U.S. Green Building Council (USGBC) that administers the LEED program in a study last year of 121 new buildings certified through 2006 itself found that more than half (53%) did not qualify for the Energy Star label and 15% scored below 30, meaning that they used more energy per square foot than at least 70% of comparable buildings. One of the problems appears to be where the LEED points come from. The General Services Administration, which owns the Youngstown building, indicated in the Times article that points were "racked up for things like native landscaping rather than structural energy-saving features." The inferrence clearly is that perhaps the LEED criteria need re-visiting.

Interestingly, the USGBC also found from its own research that a quarter of the new buildings that have been certified do not save as much energy as their designs predicted, probably because the energy models used to predict how much energy a planned building will consume are inexact. Clearly, much still needs to be done to develop a comprehensive database of modelled versus actual building energy use information. Such a database would unquestionably improve building energy performance models.

LEED assigns credits before a building has been operated, but the only real way to know how a building is performing is to collect energy use data over time. Fortunately, as of this year the LEED program will require all newly constructed buildings to provide energy and water bills for the first five years of operation as a condition for certification.

The Canadian National Research Council also recently published an interesting study by Guy Newsham, Sandra Mancini and Benjamin Birt in August (Report NRCC-51142) that added more fuel to the fire. Their analysis of 100 LEED-certified buildings found that while LEED buildings used 18-39% less energy per square foot than their conventional counterparts in the CBECS database, 28-35% of LEED buildings used more energy. In addition, the measured energy performance of LEED buildings had little correlation with the certification level of the building or the number of energy credits achieved by the building at the time of design. This clearly presents a problem for building owners and operators who are not realizing the energy performance they were expecting.

These problems and issues have the potential to raise questions about the credibility of green building rating systems. This would be unfortunate as it could jeopardize the overall societal benefits that still accompany these rating systems. The fundamental problem in my view is that we are not giving sufficient recognition to the fact that there is a large variability between buildings (even between the same types of buildings in the same geographic location) and to do true comparisons at a statistically meaningful confidence level requires a much larger dataset than currently exists. As such, many of the comparisons (particularly against the relatively small CBECS dataset) leave much to be desired, and may in fact do more harm than good as they can be misleading. Unfortunately, the media, as expected, will often pick up the newsworthy conclusions of a just-published study, but fail to note any of the limiting conditions upon which the conclusions were drawn. As such, a top priority of our industry should be to build a much larger and more complete (and transparent) building energy performance dataset against which statistically significant energy consumption benchmarking can be done.

Wednesday, September 23, 2009

Building Energy Efficiency Insights From New Survey

The International Facility Management Association (IFMA) partnering with Johnson Controls conducted an on-line survey in April targeting energy management decision-makers. A total of 422 completed surveys were received from IFMA members (mostly responsible for office space). I found a number of the findings quite interesting.

(1) The survey confirmed the obvious that energy efficiency was a design priority in new construction and retrofit projects.
(2) Respondents to the survey indicated that "green building" certification was more likely to be a goal for new construction rather than retrofit projects. Notwithstanding, a third of the respondents did indicate that operating a "green building" was extremely important or very important in attracting new talent and retaining current employees.
(3) Saving money was a greater motivation to improve energy efficiency than concern for the environments, certainly understandable in today's challenging economic climate.
(4) The tolerance for payback time on energy efficiency investments for almost half the respondents was that it must be less than 3 years.
(5) The key barriers to investment in energy efficiency projects were the availability of capital and the payback time.
(6) Government and utility incentives were found to be extremely influential in energy efficiency investment decisions.

It was also interesting to learn that while approximately half the respondents do not today require any type of energy-related due diligence prior to leasing or purchasing, 20% did. Energy-related due diligence had rarely been done in the past, but clearly is growing.

Tuesday, June 23, 2009

Building Energy Use Disclosure Impacts Deals

As more and more prospective purchasers of commercial real estate incorporate building energy use into their property due diligence, it is becoming evident that this building characteristic is fast emerging as a legitimate consideration in the acquisition process. After numerous discussions with investors and prospective purchasers, five key reasons appear to be driving this trend.

(1) Less energy efficient buildings are likely to be less competitive in the marketplace and may result in lower rent growth (as compared to what is currently being experienced) or even a rent discount. Below-market rent growth can impact a property's pro forma and valuation, and ultimately may impact the financing.
(2) With the growth in popularity of "green buildings," buildings with relatively poor energy performance will likely be viewed as less valuable. Without investment to make the building more energy efficient, the building can soon become outdated, with the consequent adverse impact on the investment.
(3) Buildings with relatively poor energy performance may experience a reduced prospective tenant pool as tenants under their triple-net leases today are more concerned about energy costs that continue to escalate.
(4) More and more communities are including energy efficiency requirements in their building codes for new building construction and major renovations to existing buildings. More often than not, these requirements will result in higher capital costs. For unwary prospective purchasers intending to eventually make major improvements, this can cause an unexpected increase in capital expenditure.
(5) As more and more building owners choose for a variety of reasons (such as shareholder pressure, tenant pressure, public relations, etc.) to become "carbon neutral," this is becoming a consideration when property is acquired. For example, making a building "carbon neutral" will often necessitate the purchase of carbon offsets (after the building is made as energy efficient as reasonably possible) to offset residual building energy consumption. Such offsets cost money and need to be factored into the deal.

There can be little doubt that a building's energy use can impact a real estate transaction and that energy efficient buildings are fast becoming "politically correct." As such, the time to start investigating your building energy use is now.

Thursday, May 14, 2009

ASTM Forms Building Energy Performance Disclosure Task Group

The ASTM E50 Executive Committee approved the creation of a new Task Group to develop a standard on Energy Performance Disclosure for Buildings Involved in Real Estate Transactions. The European Union’s Energy Performance of Buildings Directive, legislation in California and the District of Columbia, and recently proposed legislation at the federal level (Waxman-Markey Bill) and in a number of other states and cities for building energy use disclosure prompted the request to ASTM for development of the standard. The goal is to standardize the way that building energy use numbers are determined and reported in commercial real estate transactions, with particular focus on how they have been normalized, i.e., over what period of time, the heating and cooling degree days, occupancy, etc. In this way, prospective purchasers of properties will understand the numbers when they are disclosed, either voluntarily or in response to regulatory requirements.

Today, a building’s energy consumption is playing an increasingly important role in real estate transactions. It can impact the transaction because less energy efficient buildings are becoming less competitive in the marketplace and can reduce the prospective tenant pool. To attract tenants may even necessitate reducing rents and impact planned rent growth built into the pro forma provided to the lender. Also, the growing number of cities and municipalities now adopting energy efficiency requirements in their building codes can impact the capital needs of any building involved in a real estate transaction in these locations, and therefore its valuation.

It is anticipated that the standard would be used principally by professionals conducting due diligence for prospective property purchasers and lessees, e.g., an addendum to a property condition assessment. The standard is expected to take into consideration factors such as property and building characteristics, electrical and heating fuel consumption, benchmarking information against peer buildings, the building’s carbon footprint and energy audit history, whether the building has any “green” certification, rating or labeling, applicable energy efficiency codes, and available economic incentives, credits and grants.

The Task Group chair, Anthony Buonicore, P.E., CEO of the Buonicore Group and publisher of the daily newsletter, Building Energy Performance News, is now seeking individuals interested in participating on the Task Group. He can be reached at 800-238-1841 or ajb@bepinfo.com.

Friday, April 24, 2009

Significant Debate Over NAIOP Building Energy Savings Study

In December 2008, ConSol (an energy modeling firm), working under contract to NAIOP (the Commercial Real Estate Development Association), released it study, Achieving 30% and 50% over ASHRAE 90.1-2004 in a Low-Rise Office Building. Much controversy followed over the conclusions reached in this study. Rather than take a position, permit me to present the facts as I see them and you can draw your own conclusion.
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ConSol responded to an RFP from NAIOP asking for an analysis of a recently constructed low-rise office building, and the practicality of building it 30% and 50% above the ASHRAE 90.1-2004 Energy Standard in three locations: Newport Beach, CA, Baltimore, MD and Chicago, IL. For its analysis, ConSol used EnergyPlus v2.2, the U.S. Department of Energy's building energy simulation program for modeling building heating, cooling, lighting, ventilation and other energy uses. The methodology was based on a modified version of ASHRAE 90.1-2004 Appendix G. Modifications included the exception of non-regulated loads, baseline glazing and energy savings, not energy cost, as the metric. It was deemed appropriate to focus solely on regulated loads as only they could be affected by jurisdictional energy codes. Baseline glazing was set at 50% to most accurately maintain architectural similarity to the actual building as constructed. The baseline building was a recently completed Class A, low-rise, office building with 95,000 square feet in 4 stories (each of average height at 14 feet) having an HVAC system that consisted of VAV with terminal reheat and a gas fired boiler.
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While there are 7 climate zones in the U.S., the simulation building locations included in ConSol's scope of work were in only three climate zones: 3, 4 and 5. ASHRAE's 90.1 standard has separate requirements (for insulation, glazing, HVAC and lighting) associated with each climate zone, and these were used in the ConSol simulation.
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The energy efficiency measures above ASHRAE 90.1 that ConSol assessed included: better roof and wall insulation, varying levels of exterior window glazing, reduced air infiltration (via the installation of an air barrier), reduced lighting power densities and higher efficiency HVAC equipment. Cost information was obtained using the RSMeans Green Building Cost Estimating Database, published data and personal correspondence with equipment manufacturers. State average utility (electricity and natural gas) prices were used as compiled by the Energy Information Administration (retrieved in December 2008). The payback period in years was determined by simply dividing the marginal cost of the energy conservation measures above ASHRAE 90.1 by the annual utility savings. Peak kilowatt savings were not included in the analysis.
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ConSol determined that the Newport Beach model building achieved 15.8% energy savings over ASHRAE 90.1 at a marginal cost of $169,900 corresponding to a 12.2 year payback. The Baltimore model building achieved 21.5% energy savings at a marginal cost of $165,150 corresponding to an 11 year payback, and the Chicago model building, a 23% energy savings at a marginal cost of $188,500 corresponding to an 8.8 year payback. The conclusion was that achieving 30% - 50% energy savings in a newly-constructed, low-rise, Class A, office building over ASHRAE 90.1-2004 would be difficult to achieve.
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A number of issues have been raised to question the validity of this study and its conclusions. These include:
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(1) Actual utility rate schedules were not used in the analysis and pricing associated with peak demand periods was therefore not factored in (and it should have been since buildings normally operate during periods of peak energy demand). This would have significantly increased the energy savings.
(2) Utility rate increases were not factored into the analysis. This would have further increased the energy savings.
(3) Financial incentives and rebates were not factored into the analysis, which would have reduced marginal costs for the energy saving measures above ASHRAE 90.1-2004.
(4) The same building model was used for all three climate zones, rather than fitting the design to the location. For example, it would have been appropriate to use operable windows for ventilation in the Newport Beach model. Also, window design alternatives that could take advantage of natural light for daylight and sunlight for heating were not considered.
(5) The study only considered a limited number of energy saving measures (above ASHRAE 90.1-2004). For example, use of an energy management control system (with occupancy sensors to turn off lights, etc.) was not considered, and it would be today. Rather than merely "bolting-on" energy efficiency measures, today such measures would likely be considered as part of an integrated building design. (ConSol did indicate that certain energy efficiency measures, such as evaporative cooling technologies and light emitting diode (LED) lighting systems, were not included in the study due to lack of modeling capability, insufficient data or that they were outside the project scope.)
(6) The study failed to consider, even conceptually, other factors that may be associated with energy efficient buildings, including the possibility of these buildings commanding higher rents and experiencing higher occupancy. These dollars could also be used to offset the marginal costs for energy saving measures above ASHRAE 90.1-2004.
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Clearly, a strong case can be made that the NAIOP/ConSol study has a number of significant limitations and should not be generalized. What do you think?

Thursday, April 2, 2009

National Building Energy Performance Disclosure?

Recent action in the House of Representatives made some significant strides in advancing proposals for energy efficiency policy. Representatives Henry Waxman (D-CA) and Ed Markey (D-MA) released a their bill, called the American Clean Energy and Security Act, containing climate change legislation and a variety of energy efficiency provisions, but most notably for the commercial real estate industry:

(1) A new Retrofit for Energy and Environmental Performance (REEP) program to promote comprehensive efficiency retrofits to commercial buildings (and also to homes), reducing energy consumption by an average of 20% or more.

(2) A provision directing that building codes be strengthened to reduce energy use in new buildings by 30% starting in 2010 and 50% starting in 2016.

(3) A provision establishing a building labeling program so that owners and prospective purchasers and tenants can compare energy use of a particular building to similar buildings in their local area.

With building energy performance disclosure already underway in California (required under AB 1103), and Ohio, Minnesota, Denver and New York City considering similar measures, the "train clearly has left the station." You have to be blind not to see the handwriting on the wall! There can be no question now that energy efficient buildings will have a competitive advantage in the commercial real estate market.

Four T's for Quick Energy Savings in Existing Buildings

In my experience with existing buildings, if you follow the four T’s for saving energy: Tune it up, Turn it down, Turn it off and Track it, you should be able to reduce energy consumption by at least 10-15% without significant cost.

Tune it up would include optimizing your ventilation rates (you want to condition the least amount of outside air necessary to maintain proper air quality inside your building) and your conditioned air distribution system, calibrating your thermostats and sensors (because inaccuracies can cost energy), and performing periodic maintenance of all building systems including regular boiler tune-ups and filter changes, cleaning heating and condenser coils, and window and light fixtures.

Turn it down would include night setbacks to ensure lighting and HVAC shutdown during unoccupied periods, and reducing heating and cooling temperature controls (for example heating to 68-70 degrees F, and cooling to 74-76 degrees F).

Turn it off would include shutting down office equipment when not in use (e.g., computers, printers, monitors, coffee makers should all be turned off overnight and on weekends). Occupancy sensors, time clocks and automatic controls can easily accomplish this.

And finally, Track it would involve monitoring and recording daily energy use by category, comparing it to regional or national energy use benchmarks for similar buildings, and finally, making sure that an energy conservation ethic is maintained over time.

If you follow these simple four T's, you will get the greatest bang for your buck. All of these steps can be done relatively quickly and have an excellent ROI.

Tuesday, March 10, 2009

Making an Office Building Carbon Neutral

The question of making a building carbon neutral is coming up more and more frequently today, particularly since CB Richard Ellis committed to be carbon neutral by 2010. CBRE joins HSBC, Barclays Bank, the World Bank, salesforce.com, Nike and many other well known names that have made a committment to having carbon neutral facilities.

But what does being carbon neutral for a building really mean? Well, the precise answer is “it depends on who you ask.” Simply, a building that is carbon neutral has no “net” carbon dioxide (CO2) emissions to the atmosphere. (N. B. While it is common to focus on CO2 emissions since they are the major component of greenhouse gas emissions, other greenhouse gas emissions (such as methane and nitrous oxide) are also included, but typically are wrapped into the CO2 number by referring to CO2 or CO2 equivalent emissions.)
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Having no net CO2 emissions to the atmosphere does not necessarily mean that the building itself does not emit any CO2 to the atmosphere. In fact, a building can release CO2 into the atmosphere and still be carbon neutral, but the building’s emissions must be balanced (or offset) by a CO2 reduction elsewhere on the planet. How are these offsets generated? Well, offsets are typically generated by carbon reduction projects financed by industries governed under cap-and-trade limits or by entrepreneurial carbon offset providers. Offset projects might include for example, installation of renewable energy facilities – particularly solar and wind, the collection of methane (a powerful greenhouse gas) generated by farm animals or landfills, or even reforestation such as currently taking place in Central America, Brazil, Indonesia and parts of Africa.

The first step for a building to become carbon neutral is to identify the building’s carbon footprint, or where CO2 is being emitted as a result of building operations, e.g., from the electricity consumed by building operations (assuming of course the local utility uses fossil fuels to generate electricity), or from fossil fuel combustion at the building itself, for example, burning fuel oil or natural gas for space heating.

Unfortunately, identifying a building’s carbon footprint is not as easy as it sounds. It is complicated by the fact that a building’s carbon emissions can be direct or indirect. Direct carbon emissions (such as electricity and fossil fuel consumption) are directly associated with building operations. Indirect carbon emissions, however, are not, and may, for example, take into consideration carbon emissions resulting from employee or tenant automobile travel to and from work, and even employee business travel. So the first step has to be to decide which carbon sources (direct and/or indirect) are to be included in determining the building’s carbon footprint.

It should be evident that even before determining a building’s carbon footprint, it certainly makes sense to get all building operations as energy efficient as possible to result in the smallest carbon footprint. This will save money because to become carbon neutral, it is highly likely that offsets will have to be purchased to offset the building's carbon footprint, and these offsets could in the U.S. at today’s pricing cost anywhere from $8-17 per metric ton of CO2 offset. To provide perspective, if you have just a single coffee pot in your office and it operates all day for a year, the electricity it consumes will be equivalent to almost half a metric ton of CO2 that will need to be offset!

So it should be evident that making a building carbon neutral may not be as simple as it sounds, and will most likely cost money (to improve building energy efficiency and purchase offsets). But more and more companies today are committing to be carbon neutral and more and more tenants are indicating a preference to move into carbon neutral space. There is no question, this is the direction we are heading and is something all of us in the commercial real estate industry will soon be facing!

Monday, February 9, 2009

"Green" Leases Growing

As we all know, during the last 30-plus years, there has been a steady shift in the marketplace from the all-inclusive gross lease to the net lease. Gross leases, although they commonly contained rent escalation clauses, for example, to cover inflation, are not very protective when building operating costs, such as energy costs or property taxes, increase faster than the inflation rate. The advantage of the net lease is that it effectively transfers all risks for building operating costs to the tenants. So it is easy to understand why the majority of the leases today are net leases.

The downside of the net lease, however, is that the landlord gets none of the benefits from reducing operating costs, since this has no impact on the building’s NOI, and as we all know, it is the NOI that impacts the building’s value. Net leases also create an unnecessary hurdle for green buildings, particularly with respect to investment for energy savings projects.

The complicating issue is who pays for an energy savings project and who benefits. In the ideal case, he who pays should benefit. Under the triple net lease, the tenant pays rent plus a pro-rated share of taxes, utilities, maintenance and insurance. Since electricity cost is a pass-through directly to tenants, there’s little financial incentive for building owners to invest in technologies to reduce electricity costs. In fact, until tenants complain about high energy costs and threaten to move to more energy efficient space, building owners do not have much incentive to act. This makes little sense in today’s world.

Also interesting today is that there is little incentive for tenants to implement energy conservation measures. In most existing commercial buildings, a single meter measures the power fed to the entire building and the building pays for it at a bulk rate. The electricity cost is then included in the monthly maintenance or common charges, in the same proportion that other costs are allocated, typically on the basis of a tenant's square footage. Hence, tenants don’t pay for the electricity they use individually. And it is not unusual to find that some tenants can be subsidizing other tenants who are wasting electricity. This way of doing business provides no great incentive for the tenant to reduce energy consumption. Clearly, this also does not make sense.

The fundamental problem is getting the benefits of an energy savings investment into the hands of those who paid for it, or the benefits of energy conservation measures into the hands of those who implemented them. This is where the “green” lease comes into play. In a “green” lease, both the tenants and landlord can benefit.

While green leases are relatively new on the landscape, they generally are a form of modified gross lease. Yes, so it entails going back to gross leases. The “green lease” or modified gross lease, with the appropriate language, transfers the fiscal responsibility for controlling operating costs back to the landlords, who are far more qualified to control operating costs than the tenants. The leases allow the landlord to reasonably amortize the cost of energy savings projects that will reduce operating costs and treat that amortization as an operating cost – as long as the amortization does not exceed the savings. To account for after-hours use or prevent excess energy consumption by any tenant, the lease provides for the sub-metering of each tenant’s energy use. Green leases may also address a building-wide recycling program and sustainable product purchase requirements.

Because of the many complexities of preparing a “green lease,” last year BOMA released its Green Lease Guide, for writing "green language" into a commercial real estate lease. Terms of the lease incentivize tenants to reduce energy consumption, water use, produce less waste, recycle as much as possible, and choose environmentally-friendly products, furnishings and office equipment. The language included in the document gives owners the right as standard procedure to pass thru to tenants any capital costs that result in lower total operating costs. The lease guide can be purchased on BOMA’s web site, at http://shop.boma.org.

Monday, January 19, 2009

Building Energy Consumption Disclosure on the Way

I am sure you are all aware that the nation’s first green building code was adopted last summer by California, a move that I believe sets an important precedent for similar codes being considered elsewhere. It will require a 15% cut in energy consumption in all new construction and a 20% improvement in water efficiency when it becomes mandatory in 2010. If you are breathing a sigh of relief that this does not impact your existing building, California has also done something else that will impact you.

It happened in California on January 1, 2009. A law that passed in 2007, AB 1103, became effective. This law is specifically directed at energy use in existing commercial buildings. It promotes energy conservation by requiring electric and gas utilities to maintain records of the energy consumption data of all non-residential buildings in the state to which they provide service, in a format compatible for uploading to U.S. EPA's Energy Star Portfolio Manager. This will allow commercial building owners to see how they stack up against their peers in terms of energy consumption. I believe this definitely is a harbor of things to come elsewhere in the country.
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But the real impact on existing property owners will come in 2010. As of January 1, 2010, the law also requires building owners or operators to disclose the building's Energy Star energy performance rating for the most recent 12-month period to a prospective purchaser, lender or leasee. This means that a year from now, anyone looking to buy, finance or lease a building in California will be entitled to obtain the building’s energy performance data and compare it to other similar buildings. There is no question in my mind that this will eventually result in a rental discount and a loss of competitiveness in the marketplace for less efficient buildings. So if you have a building in California, you have a year to prepare for this new reality!
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Interestingly, this has already happened in the UK where existing commercial properties (down to approximately 26,000 square feet) must have energy performance certificates prepared when a building is being built, sold or rented. These energy performance certificates indicate the energy efficiency rating of the building and provide potential buyers and tenants with a way to compare buildings they may wish to purchase or rent. Sound familiar!
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A prudent property owner or manager, no matter where your property is located, should prepare for this new reality now.

Wednesday, January 7, 2009

DOE's Latest Building Energy Savings Contracts

The federal government, with upwards of half a million buildings owned or leased, is the largest single user of energy in the country. Less than three weeks ago, the Department of Energy (DOE) announced the award of 16 Indefinite Delivery Indefinite Quantity (IDIQ) energy savings performance contracts (ESPCs), each worth up to $5 billion! The contracts were awarded to the following energy service companies (ESCOs):

- Ameresco, Inc. (Framingham, MA)
- Chevron Energy Solutions (Eagan, MN)
- Clark Realty Builders (Arlington, VA)
- Consolidated Edison Solutions (White Plains, NY)
- Constellation Energy Projects & Services Group (Baltimore, MD)
- FPL Energy Service (North Palm Beach, FL)
- Honeywell International (Golden Valley, MN)
- Johnson Controls Government Sysytems (Milwaukee, WI)
- Lockheed Martin Services (Cherry Hill, NJ)
- McKinstry Essention (Seattle, WA)
- NORESCO (Westborough, MA)
- Pepco Energy Services (Arlington, VA)
- Siemens Government Services (Reston, VA)
- TAC Energy Solutions (Seattle, WA)
- The Benham Companies (Oklahoma City, OK)
- Trane U.S. (McEwen, TN)

Federal agencies are able to access these contracts and use them for energy savings projects at facilities both nationally and internationally. Congress authorized ESPCs to encourage federal agencies to become more energy-efficient and reduce their energy costs. The program's attraction is that projects can be accomplished without upfront capital costs and without special Congressional appropriations to pay for the improvements. The agreement is between a federal agency and an ESCO. Projects can be initiated by the ESCO or the federal agency. Every project requires a detailed energy survey. The ESCO then is responsible for designing and constructing the project, and arranging for its financing (typically from a third party). The ESCO purchases and installs the necessary equipment, such as new energy-efficient windows, automated controls, energy-efficient lighting, and updated heating, ventilation, and air conditioning equipment. In exchange for not having to pay for the equipment, the federal agency promises to pay the company a share of the savings resulting from the energy efficiency improvements until the project is paid for. Contract terms up to 25 years are allowed. After the contract ends, all additional cost savings accrue to the federal agency.

If you can provide energy auditing services or have equipment or systems that can save energy or use renewable energy sources, business sense dictates that you make the ESCOs aware of your products and services. The opportunity is significant.

If you are a building owner or manager or consultant, it would be prudent to keep abreast of ESCO projects. Numerous case studies already exist and have been summarized on DOE's web site: www1.eere.energy.gov/femp/financing/superespcs_casestudies.html. More detailed information on each project can be obtained from DOE.