Monday, December 20, 2010

Green Building Performance Disappoints During the Recession

Two recent studies on the performance of green buildings versus their non-green peers during this past recession highlight how sensitive building performance is to the overall economy. While the performance of green buildings through the recession will vary by market and property type, both studies identified some unexpected trends here in the U.S. and in the UK.

Investment Property Databank (IPD), a global property information business, publishes a sustainability index for UK commercial property that focuses on a building’s total return (net operating income plus capital appreciation). Last month, IPD published the results of their most recent investigation for properties in the UK covering the period from the first quarter 2008 through the third quarter of this year. According to IPD, properties that met stringent sustainability criteria underperformed their “less sustainable” counterparts by 400 basis points. Over the eleven quarters examined by IPD, “less sustainable” properties delivered a cumulative total return of -10.8%, compared to -14.8% for “more sustainable” properties. Also, capital depreciation (rather than appreciation) among the “more sustainable” properties was -28.0%, compared to -25.2% for “less sustainable” assets. IPD classifies a property as “more sustainable” if it passes either the BREEAM Quality threshold or four of the five remaining sustainability conditions (building accessibility, building quality, energy efficiency, waste generation and water use). IPD’s database of 978 properties is divided according to their adherence to these quantifiable metrics. Notwithstanding, IPD did note the good news that in the third quarter of this year, the capital growth figure for the “more sustainable” properties was 1.2%, compared to 0.9% for their “less sustainable” peers. IPD is tracking this performance because they are finding that a building’s sustainability is being factored into investment and leasing decisions.

Property & Portfolio Research (PPR), a commercial real estate advisory firm, recently identified clear trends for U.S. green office building performance during the recession. At the beginning of the downturn, Class A office buildings with LEED certification (built after 2005) experienced lower vacancies and asking-rent premiums compared to their non-LEED peers. For example, prior to the third quarter of 2008, Class A LEED-certified office buildings, according to PPR, had lower vacancies and asking-rents that were 30% or more higher than Class A non-LEED buildings built in those same years. However, as the country became entrenched in the recession, not unexpectedly vacancies increased and the asking-rent premium shrank significantly. Tenants were no longer fighting for LEED space, rather it was now landlords who were fighting for tenants to fill any available office space. Meanwhile, deliveries for LEED-certified buildings outpaced those of non-LEED buildings. As a result, according to PPR, rents for green office space fell in line with the market average. Notwithstanding, PPR expects that as the economy strengthens, the green building asking-rent premium will reappear and occupancies for LEED space will outdistance non-LEED peers.

In the final analysis, while there may be variability in the performance of green buildings over the economic cycle, there is one thing that remains an absolute certainty. If you focus on the green building component associated with energy efficiency and make your building more energy efficient, you will always realize a return on investment and an increase in net operating income. This is a powerful business driving force that is independent of the economic cycle.

Sunday, October 3, 2010

REITs Embrace Energy Efficiency in Property Portfolios

Real estate investment trusts (REITs) are embracing the principles of energy efficiency in their property portfolios, principally as a way to boost their bottom line. With new construction activity severely depressed due to the poor commercial real estate market and difficult economic times, greater focus has been directed toward renovation of existing buildings. Such renovation often represents an opportunity to improve energy efficiency, improve net operating income and increase building value. Liberty Property Trust, for example, recently rolled out an energy monitoring network to 130 of its properties nationwide after a pilot test demonstrated significant wasted energy. Liberty has embraced sustainability and green building techniques for its portfolio of 750 buildings. Many other REITs are doing similarly, including Simon Property Group, AMB Property, Macerich, ProLogis, Hines REIT, Vornado Realty Trust, HCP, Wells Real Estate Investment Trust, among others. There appears to be little question today that having a green building can be particularly advantageous when there is tight competition for space. For those firms providing energy consulting services, REITs should definitely be on the business development radar screen!

Friday, June 18, 2010

ASTM Building Energy Performance Standard To Be Balloted This Summer

For the past two years an ASTM task group consisting of more than 300 property owners and investors, consultants, lenders, attorneys, government officials and academics have been working feverishly to develop a consensus standard for building energy performance assessment (BEPA). The objective of the standard is to standardize the collection and reporting of energy use information associated with a building involved in a commercial real estate transaction.
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With the proliferation of states, cities and local municipalities establishing timeframes for disclosure of building energy use information to prospective purchasers, lenders and others, it is imperative that a consistent, reliable and transparent methodology be available for the industry to use in making this disclosure. The ASTM standard is being developed with precisely this purpose in mind.
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The standard requires collection of data over the last three years, or back to the last major renovation if it occured less than three years ago (but not less than a year ago), with a minimum of 12 month's data needed to conduct the BEPA. Major renovation is defined as expansion or reduction of a building's gross floor area by 10% or more, or if total building energy use is impacted by more than 10%. The standard does determine energy use intensity (referred to as the pro forma energy use intensity) based upon normalized independent variables (such as heating degree days, cooling degree days, occupancy, etc.). However, the standard also determines an upper and lower range for this energy use intensity. The standard does likewise for building energy cost. The end result for a building is an energy use (MMBtu/yr), energy use intensity (kBtu/SF-yr), upper and lower range for energy use and energy use intensity, energy cost ($/yr) and upper and lower range for energy cost.
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It is expected that the standard will facilitate better benchmarking of buildings and complement many of the existing building labeling initiatives that already exist in the marketplace.
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ASTM balloting of the standard will take place over the summer, with the expectation that the standard will be approved and published later this year.

Friday, April 16, 2010

How to Underwrite Sustainable Properties

The second publication in BEPN's Critical Issues Series, Value Beyond Cost Savings: How to Underwrite Sustainable Properties, will be published and available at no cost (thanks to the paper's sponsor the Green Building Finance Consortium) to all BEPN registered subscribers for download on Tuesday, April 20, 2010.

The publication presents the key findings and conclusions regarding the valuation and underwriting of sustainable properties from three years of independent research by the Green Building Finance Consortium. It is designed to assist private investors and their service providers in making better financially-based sustainable property investment decisions. The book addresses sustainable property investment decision-making, measuring and evaluating a property's sustainability, establishing the incremental value of sustainable investments (and introduces a novel sustainable property performance framework that directly supports financial analysis, valuation and underwriting), identifies a six-step process for sustainable property financial analysis (including checklists and tools to assist in this analysis), and outlines a process for conducting underwriting/due diligence on sustainable property investments. The book is supported by ten appendices that provide further elaboration and examples.

BEPN's Critical Issues Series focuses on important business issues related to green buildings and sustainable development that can potentially have significant impact on the commercial real estate industry. To promote discussion, you are encouraged to post on this blog (below) all comments and feedback on the book.

Friday, April 9, 2010

The Formidable Challenge of Building Energy Performance Benchmarking

The first white paper in BEPN's Critical Issues Series, The Formidable Challenge of Building Energy Performance Benchmarking, will be published and available at no cost (thanks to the paper's sponsors, Sustainable Options and Sustainable Real Estate Solutions) to all BEPN registered subscribers for download on Tuesday, April 13, 2010. BEPN's Critical Issues Series focuses on important business issues related to green buildings and sustainable development that can potentially have significant impact on the commercial real estate industry. To promote discussion, you are encouraged to post on this blog (below) all comments and feedback on the paper.

Monday, April 5, 2010

Another State Raids Carbon Auction Funds

New Jersey became the latest state to raid money designed to support clean energy programs. This was first raised as a serious issue in my December 17, 2009 blog when New York did this.
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New Jersey is part of the 10-state Regional Greenhouse Gas Initiative (RGGI) in the Northeast. Money the state receives from the quarterly auction of permits allowing power plants to emit carbon dioxide was supposed to go to programs promoting clean energy and energy efficiency. However, New Jersey's new governor, Chris Christie, recently decided to move $65 million of these funds to its General Fund to help fill a hugh budget deficit. When New York did this late last year, they moved $90 million to its General Fund to help ease the state's deficit.
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With many states in dire financial straits and experiencing significant budget deficits as a result of the recession, it is not surprising that such raiding of these "convenient" funds takes place. It also establishes quite clearly where the priority lies in these states.

Thursday, March 4, 2010

ASTM Building Energy Performance Assessment & Disclosure Standard Begins Balloting Process

The ASTM Building Energy Performance Assessment & Disclosure Standard currently in ballot is the result of a year of intense effort involving thousands of hours on the part of more than 200 volunteer members. The results of this ballot will be discussed in St. Louis on April 22, 2010 at the next ASTM Building Energy Performance Task Group meeting to be held at the Renaissance St. Louis.

Some of the highlights of the standard are noted below.

(1) The practice was developed to standardize the process of collecting building energy use data, compiling and analyzing it, and then disclosing it. It is not a benchmarking standard or a building rating/labeling standard. As such, it does not conflict with any building benchmarking or labeling practice currently in the marketplace such as EPA’s ENERGY STAR, ASHRAE’s BuildingEQ, U.S. Green Building Council’s LEED program, CMP’s Green Value Score, among others. Rather, it complements them by standardizing the data collection process.

(2) The industry problem the standard sets out to resolve is to standardize the methodology to facilitate a consistent answer to the following question: What is the building’s energy consumption and cost? Unfortunately, today there is no universally accepted, standardized methodology to answer this question. For example, there is no standard period of time over which historical energy use data must be collected (the standard specifies 3 years, or to the last major renovation if less than 3 years, with a minimum of 1 year). There is also no standardized method to deal with unusual weather conditions that might have existed at the time the historical energy use data was collected, or an abnormally high vacancy rate at the building (which may have existed due to economic conditions), or recent major renovations, etc.

(3) Why is this question being asked more and more in real estate transactions? The answer is that there are both growing regulatory and business driving forces. The regulatory driving forces behind the need to collect building energy performance data and then disclose it include regulations passed in numerous states and municipalities such California (with AB 1103), Denver, CO, West Chester, PA, the District of Columbia, Austin, TX, New York City, Seattle, WA, and many more. The business drivers revolve around the fact that less energy efficient buildings are becoming less competitive in the marketplace with respect to attracting tenants (particularly since tenants typically pay for energy costs under their triple net leases), and less valuable with respect to their sell price in the marketplace (particularly as the “green building” trend continues to grow). Compounding the issue for existing buildings expected to undergo “major renovation” is the myriad of new enhanced building codes directed at energy efficiency. Compliance with some of these new codes will impact the capital needs identified in due diligence by a prospective purchaser.

(4) The methodology in the practice is referred to as a Building Energy Performance Assessment (BEPA). It is designed to standardize the collection of building energy use data and report it. It is anticipated that the BEPA will supplement an ASTM E 2018 Property Condition Assessment or an ASTM E 1527 Phase I used by prospective purchasers and lenders in their due diligence process. The BEPA consists of five components: a site visit, interviews, data collection-compilation, data review-analysis and reporting. Many of these components can be performed at the same time an ASTM E 2018 or ASTM E 1527 is conducted.

(6) The major deliverables in the BEPA include:

- the building’s historical annual energy use intensity for each 12-month period analyzed and over the entire period analyzed;
- the building’s historical annual energy cost for each 12-month period analyzed and over the entire period analyzed;
- the range of energy consumption for the building at the time of the real estate transaction, including a lower limit, the average, and an upper limit;
- the range of energy cost for the building at the time of the real estate transaction, including a lower limit, the average, and an upper limit, using current energy cost data;
- the pro forma building energy consumption (to determine pro forma building energy cost);
- the pro forma building energy cost (for the energy expense line item in the pro forma associated with financing of the building); and
- the building carbon footprint based upon combustion-related greenhouse gases.

(7) The practice standardizes the following important activities:

- how far back historical data needs to be collected;
- the definition of what constitutes a “major renovation;”
- how variables are analyzed to determine what constitutes average, upper limit and lower limit energy consumption conditions;
- the basis for determining pro forma building energy consumption, and therefore pro forma building energy cost; and
- how the information is reported or disclosed.

It is anticipated that there will be at least one more ballot later in the spring, and with a little luck, it may be possible to have a formally published ASTM standard as soon as the middle of the summer.

Wednesday, January 27, 2010

Tackling Global Warming in a More Sensible Manner?

Making rational decisions on global warming has become incredibly difficult. The discussion taking place has been warped by politics and complicated by a polarizing debate between those who believe the problem is real and those who believe it is not. That famous New York Yankee, Yogi Berra, once said, "you can observe a lot by watching." What I am observing is that attempts to cut carbon emissions by the international community as a solution to global warming simply are not working and most likely will not work. Promises in Rio de Janeiro in 1992 to cut carbon emissions went unfulfilled. In Kyoto in 1997, world leaders promised to cut greenhouse gas emissions by 5.2% below 1990 levels by 2010. This target was missed by almost 25%. Many policymakers this past December in Copenhagen were calling for 80% cuts over current levels by 2050. As we all know, this was dropped and Copenhagen ultimately was a dismal failure. Clearly, little progress is being made by the international community in trying to cut carbon emissions to resolve the global warming problem!

It has been estimated by economists at the Economic and Social Research Institute in Ireland that using carbon cuts to limit the increase in global temperature could reduce world GDP by almost 12.9% in 2100 and cost as much as $40 trillion annually. At the same time, the majority of economic models suggest that unconstrained global warming could cost rich nations approximately 2% of GDP and poor countries about 5% by 2100. It is not difficult to see that the equation is not balanced! Even if all industrialized nations could somehow succeed in meeting the drastic carbon emission cuts, it would come at a hugh sacrifice to prosperity. It would seem the solution appears to be far more costly than the problem. Or put in another way, perhaps the cure could actually be more painful than the illness!

The question that needs to be asked is whether there may be another, more sensible way to respond to climate change. Dr. Bjorn Lomborg, Director of the Copenhagen Consensus Center in Denmark, believes there is and what he is saying deserves consideration in my view. First, let me say that Dr. Lomborg believes global warming is a serious, man-made problem. However, before staggering sums are spent that will in his view do little to address the problem, he believes we should consider alternatives that could cost far less and achieve far more. Perhaps at the risk of over-simplification, I will attempt to paraphrase in more detail what Dr. Lomborg believes. It is my understanding he believes: (1) it is not necessary to drastically and at significant cost cut carbon emissions to achieve no more than a 2 degrees Celsius global temperature increase by 2100 - moreover, he does not even believe it is possible; (2) we should continue doing what can reasonably be done using much less expensive policies to reduce carbon emissions such as improving energy efficiency and switching to renewable energy sources; (3) we should directly address today the potential problems that may in the future be created by global warming; and (4) we need to dramatically increase funding for non-carbon energy R&D through international agreement and eventually the results of this research will allow us to shift away from carbon-heavy energy much faster.

One of the points I find most interesting is (3) above - addressing the potential impacts of global warming today as opposed to trying to prevent it in the future! Dr. Lomborg, for example, points to the possible extinction of the polar bear due to melting of the ice caps. His studies suggest that implementation of the Kyoto Protocol could save a few bears a year in the future; however, if the global community decides to stop hunting the bears (or limit the hunting), nearly 300 could be saved now. Furthermore, models suggest that global warming could put 3% more of the earth's population, principally in third world countries, at risk of catching malaria, for example, by the end of the century. When Dr. Lomborg looks at how much money would need to be spent by developed countries to save these lives in the distant future, he believes it will be much more effective and make much more economic sense to combat malaria, malnutrician, or communicable diseases today. For $3 billion today - 2% of the annual cost of the Kyoto Protocol - we could invest in mosquito nets and medicine and cut malaria by half within one decade. Dr. Lomborg also believes that tackling hunger through climate change policy is amazingly inefficient. On one hand, for $180 billion each year, Kyoto Protocol carbon emission cuts could reduce the number of hungry people globally by 2 million by the end of the century. However, according to Dr. Lomborg, $10 billion spent today on direct malnutrician-reduction could save 200 million people now! He uses the example that it is amoral to build a dam to avoid flooding in 100 years when people living there are starving today! Certainly, by helping communities become stronger today, they will be better able to prepare for global warming tomorrow. One interesting last point worth noting is that in Dr. Lomborg's view, the benefits of moderate fossil fuel use at this time vastly outweigh the costs. Fossil fuels provide low cost light, heat, food, communication and travel. For example, carbon has powered substantial growth in China and India, allowing millions to escape poverty.

The bottom line is that with limited resources, perhaps we need to ask ourselves whether carbon cuts should be our top priority. Perhaps we might want to re-think the best approach to dealing with global warming and try to use more common sense. Perhaps we should not rush to solve the problem, particularly since the solution comes at extraordinary cost and risk and significant impact on world prosperity. Let us not forget too that there are still many reputable scientists who do not believe that reducing man-made greenhouse gases will really have any impact as the real culprit is mother nature. Perhaps it does make sense to address today the potential future impacts of global warming, while more effective approaches are supported or developed which should ultimately resolve the issue anyway. Let us not forget what Yogi Berra also said, "you've got to be very careful if you don't know where you're going, because you might not get there."

Monday, January 25, 2010

Energy Solution Gains More Credibility

The proposed energy solution discussed in my January 13, 2010 blog is gaining more credibility. Witness the course Progress Energy (formed in 2000 by Carolina Power & Light and Florida Progress) is taking. Late last year, the company announced it would close 11 coal-fired plants by 2017, representing 30% of its coal-powered electrical generation in North Carolina. The company also announced plans to spend $900 million to build a natural gas-fueled generation facility rather than spend $330 million cleaning up emissions from a 397 MW coal generating plant. In the next two years, Progress Energy is also looking to spend somewhere in the range of $1.4 - 2.1 billion for initial work to build two nuclear generating units in North Carolina and another two in Florida, enabling it to shut down even more coal-fired units. The company is clearly focusing now on shifting to nuclear and natural gas-fired plants.
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AEP, one of the largest electric utilities in the country which generates about 75% of its electricity from coal, is also making changes to reduce its dependency on coal. AEP owns 5,000 MW of coal plants that are 40 years old and older, plants that would be too costly to retrofit to meet carbon capture requirements. By approximately 2013, AEP expects to add 4,790 MW of natural gas generation and 2,200 MW of wind capacity. AEP management has indicated that they will not propose another coal-fired plant until a commercially viable answer exists for carbon capturing and storage.
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In the near-term, the energy solution staring us in the face to reduce greenhouse gas emissions is moving heavily into natural gas for power generation, while at the same time aggressively promoting energy conservation and efficiency and the use of renewable forms of energy such as wind and solar. In this same period to further reduce greenhouse gas emissions and our dependency on foreign oil, motor vehicles need to become much more energy efficient and a significant shift to alternative vehicle power systems such as hybrid electric or natural gas must take place. It all seems so obvious!

Wednesday, January 13, 2010

Is an energy solution for the country staring us right in the face?

This past year, based upon the latest estimation on the amount of recoverable natural gas in shale formations, natural gas reserves have jumped significantly to more than 2,000 trillion cubic feet. To put this in perspective, this amount of natural gas would be able to fuel five hundred 1,000 MW power plants for their entire 50 year lifetime! The advantages associated with natural gas fuel usage in power plants are many. First, the cost of these power plants is less than half that of coal-fired plants. Second, they can be built much quicker. Third, and most important in this time of concern about greenhouse gases and climate change, they would emit almost half the greenhouse gases for the same amount of power generation.
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In my opinion, the energy solution is staring us right in the face. Clearly, U.S. energy policy first and foremost should seek to maximize energy conservation and efficiency efforts wherever it makes economic sense to do so. Americans clearly waste far too much energy and this must cease. Second, the U.S. must reduce its reliance on foreign oil imports, particularly from countries that have the capability to hold the country hostage. The U.S. today imports about 10 million barrels per day, of which approximately 30% comes from the Persian Gulf region and Venezuela. Much of this oil is used to fuel the nation's 250 million cars, trucks and buses. Third, greenhouse gas emissions need to be reduced to the maximum extent reasonably possible. As part of the global community, the U.S. has a responsibility to take a leadership role in responding to climate change and the international efforts directed at reducing carbon emissions.
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These three goals could be achieved using a rather obvious three-pronged strategy. First, and most important, would be for government regulators to vigorously promote energy conservation and energy efficiency. Fortunately, this is already underway. The second prong would involve the aggressive transition to a nuclear energy-based economy for base-load power generation using advanced technology that would minimize the amount of nuclear waste generated. Unfortunately, this would take considerable time, estimated at upwards of 40 to 50 years. Therefore, we would need to do something in the transition. This is where the third prong comes into play. In the transition, it would make sense to require all new and replacement power plants to be combined-cycle natural gas-fired plants. Some utilities have already committed to this path. Florida Power and Light (FPL), for example, has already converted its older oil-fired power plants, such as the Fort Meyers and Sanford plants, to more efficient natural gas combined-cycle technology. Three new power plants, West County Units 1, 2 and 3 in Palm Beach County will also use this technology. In the transition to nuclear, we would also want to expand at coal-fired power plants the role of peaking units, most of which are fired by natural gas. It has been estimated that these units could meet as much as 40% of the country's electricity need if they were used to replace coal-fired baseload capacity. It also would make sense in the transition to encourage and expand the use of natural gas and electric powered vehicles. Already, a number of states and government agencies are promoting their use, as are a number of utilities such as AT&T, which actually has the largest fleet in the country running on compressed natural gas. Finally, the use of renewable energy sources such as wind and solar should also be promoted and encouraged in the transition (as they currently are today); however, these are not expected to be significant contributors to the energy solution, and their economic viability without government incentives is already being questioned. The advantage of this three-pronged strategy is that the by-product would be greatly reduced greenhouse gas emissions.
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Alas, and unfortunately there are a number of forces working against this rather obvious energy solution. There is the political influence generated by coal-producing states and the unions representing coal miners, who would most certainly fight aggressively against any reduction in the use of coal. Their argument usually focuses on the hugh amount of coal we have in this country (more than 500 billion tons of proven reserves, with only about 1.1 billion tons extracted annually, most of which goes to produce electricity) and the fact that technology is being developed that can significantly reduce greenhouse gas emissions at coal-fired power plants (albeit, at the expense of plant efficiency). Moreover, the technology would be much more difficult to use at natural gas-fired power plants (because of the much lower carbon dioxide concentration in the flue gas) and it is therefore unlikely the technology would ever be used there. Hence, the argument can be made that in the long run coal-fired power plants with carbon dioxide emission control systems would actually produce less carbon dioxide than the uncontrolled natural gas-fired power plants.
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Then there are the environmental activists who have long fought against the use of nuclear energy, and who are now fighting the development of natural gas shale-producing formations, expressing concerns about possible groundwater contamination from the chemicals used to hydraulically fracture the shale. Extracting natural gas from shale formations involves blasting water (more than 98%) mixed with chemicals (less than 2%) into rock at high pressure, which causes the gas to flow out. In my view, the concern about groundwater contamination is difficult to understand. Shale gas formations typically are deeper than coal bed methane formations and have not traditionally been identified as sources for supplying drinking water, and are often geologically isolated from drinking water aquifers by several thousand feet of other strata including other shale formations that act as aquitards. Shale is a natural barrier to the vertical migration of fluids and is documented as confining layers to vertical migration of oil and gas. As such, the natural barriers between productive shale formations and groundwater zones should be able to ensure that groundwater resources are protected. Also, not much is being said by these environmentalists about the pollution associated with extracting gas from shale formations compared to mining coal. There can be little doubt that extracting gas from shale formations would be considerably more environmentally friendly than mining coal.
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Notwithstanding, it is unlikely that the present financial, political and economic climate will be conducive to development of a coordinated and integrated national energy strategy. Policymakers and regulators will certainly face many challenging decisions as our economy is realigned to meet whatever energy and environmental goals are ultimately put into place. But as is so often the case with government legislation and politics, things will likely be done in a piecemeal fashion resulting in a considerable amount of waste in time and money. It reminds me of the words Winston Churchill once said, "you can always count on Americans to do the right thing, but only after they have exhausted all the possibilities." But then again, as that famous New York Yankee Yogi Berra once said, "if the world was perfect, it wouldn't be."