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The Economic & Financial Options in Retrofitting Commercial Buildings
Presented by: Wally Geer [email protected]
Special Thanks to those who made this presentation possible:
SDG&E Energy Innovation Center California Center for Sustainable Energy A special word of thanks to those organizations whose research
contributed content to today’s presentation:
California Building Commission USGBC C4 Chapter SDG&E TMC Development U.S. Small Business Administration U.S. Department of Energy The California Energy Commission
A few requests & comments
I know we all have busy lives, but please turn your cell phone off or set it on “vibrate”, thank you.
If your cell phone rings, the “Wally Rule” is in full force & effect
We will talk about a lot of facts today, but please appreciate that some subjective opinions I may voice are strictly my own and I’m not speaking on behalf of our gracious host today
Today’s Learning Objective:
It’s all about “Green”, and I don’t mean saving the Redwoods, the Whales or
the Ozone!
Agenda:
Common Myths about upgrading Commercial Properties Energy Consumption 101 Potential Benefits of Energy Retrofitting The Economic Case for Retrofitting The Legislative Case for Retrofitting (AB 1103) How can an owner reduce their energy costs? Everything you every wanted to know about Energy Audits, but were afraid to ask Financial Techniques to analyze your options Financial options to pay for your retrofit Some final thoughts + questions & answers
Common Myths about Energy Savings as it applies to Building Valuations:
“Energy costs contributes negligibly to overall value”
“Uncertainty in energy reporting methods is so high that building specific estimates are effectively meaningless”
“Energy’s impact on value, as with all other elements of value, is ultimately defined by the market”
The Reality of Energy Savings as it applies to Building Valuations:
“Although Value is ultimately defined by the market, your relative position on the Value Scale is determined by Net Operating Income”
“Every Dollar saved in Operating Costs equals an additional dollar of Profit on an owner’s bottom line.
“Many Energy Savings Retrofit Features are relatively low tech and highly cost effective”
Common Myths about Energy Savings
“Our building is already energy efficient” “Energy costs are a pass through to tenants and don’t really
effect me as an owner” “The goal of high energy efficiency really doesn’t matter on
small buildings” “We’ve been told to focus on “LEED” points and not energy
efficiency” “We don’t anticipate selling our building in the near future, so
energy efficiency really doesn’t matter to us” “Energy Providers don't really want to save us money”
“Energy 101” Facts:
Our Buildings consume 30% of all Energy Use & 60% of all Electricity
They also produce 43% of all harmful carbon emissions
The Metrics of Building Operations:
Source: BOMA
Typical Energy Use by Category:
Source: Pacific Gas & Electric
Additional Benefits of an Energy Efficient “Healthy” Building
Properly balanced buildings with appropriate outside air sources produce a 3% lower absentee rate.
Source: U.S.G.B.C. & National Institute of Health
Potential Benefits of Energy Retrofitting:
Lower Operating Costs
Higher Employee Productivity
Lower Financing Costs
Higher Operational Profits
Higher Building Valuations
Potentially Significant Return on Investment Dollars spent if appropriate retrofitting strategies are employed
The Economic Case for Retrofitting
Although each property has its’ own unique set of financial metrics, appropriate chosen retrofitting upgrades can provide double digit R.O.I.s
Case Study: Sleepy Time Inn Source of Study: Pacific Gas & Electric & U.S. Dept. of Energy
INCOME: Pre Retrofit Post Retrofit Gross Scheduled Income $ 506,624 $ 506,624
Vacancy $ 177,318 $ 177,318
New Scheduled Income $ 329,506 $ 329,506
EXPENSES: Electricity $ 18,766 $ 10,450
Natural Gas $ 5,447 $ 2,850
Water $ 2,886 $ 2,886
Maintenance $ 17,206 $ 17,206
Operations $ 84,347 $ 84,347
Taxes & Licenses $ 64,489 $ 64,489
Reserve $ 8,232 $ 8,232
Subtotal Expenses $ 201,373 $ 190,460
Case Study: Sleepy Time Inn Source of Study: Pacific Gas & Electric & U.S. Dept. of Energy
Scheduled Income $ 329,506 $ 329,506
Expenses $ 201,373 $ 190,460
Net Operating Income $ 128,133 $ 139,046
Cap Rate 8.75% 8.75%
Opinion of Value $ 1,461,958 $ 1,586,678
Effect of Energy Retrofit $ 124,720
Cost of Energy Retrofit $ 65,000
Case Study: Source of Analysis: Greymar Associates & U.S. Small Business Administration Cost of Retrofit Features: Approximately $ 75,000
YEAR Estimated Monthly Savings Estimated Annual Savings
2010 (Base Year) $ 1,232.73 $ 7,396.38
2011 $ 1,282.04 $ 15,384.47
2012 $ 1,333.32 $ 15,999.85
2013 $ 1,386.65 $ 16,639.84
2014 $ 1,442.12 $ 17,305.44
2015 $ 1,499.80 $ 17,997.65
2016 $ 1,559.80 $ 18,717.56
2017 $ 1,622.19 $ 19,466.26
2018 $ 1,687.08 $ 20,244.91
2019 $ 1,754.56 $ 21,054.71
TOTAL: $ 170,207.08
Case Study: Source of Analysis: Greymar Associates & U.S. Small Business Administration Cost of Retrofit Features: Approximately $ 75,000
Item: 10 Year Cost Savings Energy Savings $170,207 Loan Origination Fees $315,000 Loan Spread Savings $ 78,000 TOTAL $563,207
Case Study (Adjusted): Source of Analysis: Greymar Associates & U.S. Small Business Administration Cost of Retrofit Features: Approximately $ 75,000
Item: 10 Year Cost Savings Energy Savings $170,207 Loan Origination Fees $115,000 Loan Spread Savings $ 78,000 TOTAL $363,207
The Legislative Case for Retrofitting
1978: What happened in California?
2004: California Green Building Initiative (aka EO S-20-40): This legislation mandated a 20% reduction
in state-owned buildings by 2015 2006: Global Warming Solutions Act (aka AB 32): This legislation mandated State CHG emissions to
1990 levels by 2020 October 2007 – AB 1103 is passed and signed by the Governor
AB 1103 The Commercial Building Benchmarking Law
AB 1103 is a “scoring system” with the intent of estimated the energy efficiency of an existing commercial building.
The scoring system is based on the EPA’s “Energy Star Rating System” as estimated by “Portfolio
Manager” software.
Energy Star Benchmarking Scores
Based on a 1 to 100 scale (100 being the most energy efficient building, 1 being a building that leaks
more than the 1959 Volkswagen convertible I went through college with)
The score estimates an “energy use intensity level” (measured
in kBtus / Sq. Ft. / Year)
Any building that scores 80 or higher is eligible for the Energy Star rating, but the rating is NOT a requirement of AB 1103
Why the Energy Star Rating System?
Free & Secure software that creates consistent benchmarking results
Based on over 140,000 buildings that have been benchmarked to date
Based on benchmarking data from over 20 different commercial building types
“Energy Star” is recognized by over 75% of Americans (according to the EPA)
AB 1103
Based on a “roll out” schedule, AB 1103 will apply to all non-residential buildings being sold, leased or refinanced if they are:
Owner Occupied > 5,000 Sq. Ft. Non-Owner Occupied > 50,000 Sq. Ft. Non-Owner Occupied > 10,000 Sq. Ft. Owner Occupied > 1,000 Sq. Ft. All Non-Residential building > 5,000 Sq. Ft.
AB 1103 A Brief History
October 2007: AB 1103 is passed by the California Legislator & signed by the Governor
January 2009: Utility companies must provide consumption data upon request by customer
October 2009: AB 531 is passed by the California Legislator & signed by the Governor which provides the CEC to establish the roll out schedule of AB 1103
December 2009: Roll out schedule of AB 1103 is established and Phase 1 is to commence on Jan. 1, 2012
January – December 2011: Roll Out Schedule is modified, modified and modified !!
AB 1103 Most Recent Proposed Roll Out (as of Sept. 2011)
July 1, 2012: All building’s > 50,000 Sq. Ft.
January 1, 2013: All building’s > 10,000 Sq. Ft & < 50,000 Sq. Ft.
July 1, 2013: All owner occupied building’s. Owner Occupied Buildings of < 5,000 Sq. Ft. would be exempt
How Can an Owner Reduce their Energy Costs ?
Start with a professional energy audit and analysis
The complexity of your energy audit should match your needs and budget
Think “Retrofit” First & “New Technology” Second
Focus on Value versus Cost & chose your analysis savings format wisely
Find a balance between your goals and your budget Think “Life Cycle”, NOT “Initial Cost”
OK, Sounds good, but “What’s next?”
1.) PRIOR TO INITIATING AN ENERGY AUDIT: Identify your energy saving objectives Define the metrics to be used in the analysis Research potential funding sources & funding strategy Research incentive programs
2.) PERFORM THE ENERGY AUDIT BY: Determining the type of Audit you require Energy Audits are a “Team Sport” Document existing conditions & analyzing existing systems Identifying energy saving opportunities
OK, Sounds good, but “What’s next?”
3.) ANALYZE THE NUMBERS AND FINANCIAL IMPLICATIONS: Set Cost & Saving Targets Determine financial techniques to base your financial decisions on Calculate Returns Analyze financing options
4.) AFTER YOU HAVE PERFORMED ALL OF THE ABOVE: Define a game plan that fits your budget and financing options “Just do It”
1.) Prior to Starting an Energy Audit
Identify your energy saving objectives
Define the metrics to be used in the analysis
Research funding source & funding strategy
Research incentive programs
Identify your energy saving objectives
Improve cash flow as a result of lower energy costs
Create higher building valuation to prepare building for sale
As part of a refinancing strategy
As part of a marketing strategy
To accommodate tenant needs
Define the Metrics to be used in the Analysis
Energy Star scoring system Title 24 or CalGreen documented format Specific metrics formula required for incentive programs (cash
or tax incentives) Metrics specifically required by lending agencies Metrics required by Code Authorities
Research potential funding source & funding strategy
Cash
Conventional Bank Loans
Non-traditional Lenders (i.e. SBA, State & Federal lending programs, etc.)
Energy Service companies (ESCOs)
Leased improvements
Other Options
Research Incentive Programs
Utility Company Incentives
State sponsored programs administered by Utility Companies
State & Federal (non-tax based) incentives
I.R.S. & State of California Tax Incentives
Vendor Incentives
The Energy Audit: Part Science / Part Black Magic
Projected Performance does NOT equal Actual Performance
2.) PERFORM THE ENRGY AUDIT BY:
Determine required level of audit Energy Audits are a “Team Sport” Document existing conditions & analyzing existing systems Identifying energy saving opportunities
Determine the type of Audit you require
Preliminary Audit
Case (or technology) specific Audit
Goal Specific Audit
Comprehensive Audit
Preliminary Audit
Generates a rough estimate of potential cost savings
Identifies primary categories of energy savings that should be potentially further studied
Provides a preliminary analysis of economics that might justify further studies
Generally produces a limited amount of projections & metrics
Case (or technology) Specific Audit
Provides detailed analysis of specific technologies & systems Provides no energy management plan May potentially miss high value non-targeted energy saving opportunities
Are only as valid as the operating engineers running & evaluating the system
Goal Specific Audit
Generally performed as a result of a specific need related to financing, leasing or building certification
Generally requires specified metrics and formats to achieve the desired goal
Could be produced by a specific vendor trying to sell his (her) technology and retrofitting services
May potentially miss high value non-targeted energy saving opportunities
Can produce a desired result, but in regards to energy savings, can result in a “tail wagging the dog” implementation strategy
Comprehensive Audit
Analyzing all major building systems & how they work within a synergistic system
Considers on site and / or cogeneration of energy
Includes highly comprehensive energy cost savings projections
Includes estimates of the cost of retrofits suggested
Analyzes returns based on owner’s financial goals and criteria
Energy Audits are a “Team Sport”
Prior to starting your Energy Audit & analysis, assemble your team:
Building Owner (if privately held small company) CEO, COO, CFO, CTO in larger companies Director of real estate and facilities management Building level maintenance & operational staff Major vendors & service providers Major tenants that influence building’s operation
Document existing conditions & analyzing existing systems
Building Design, construction type, square footage, insulation type
Site plan, building orientation, windows and other fenestrations & other glazing
Ventilation & mechanical systems
Building hours of operation & building use
Document specialty how power consumption uses (i.e. server farms, high power manufacturing equipment, etc.)
Gather existing utility data
Identify Energy Saving Opportunities Step 1
Start by focusing on the “low hanging fruit” items first:
Lighting
Heating & Air Conditioning
Building Shell / Glazing & Insulation
Identify Energy Saving Opportunities Step 2
Provide an in-depth analysis of: Lighting & control systems HVAC Building Envelope Domestic Hot Water On site energy generation Hours of operation as the effect peak usage energy costs High Power consumption operational equipment
3.) ANALYZE THE NUMBERS AND FINANCIAL IMPLICATIONS:
Set Budgets & Saving Targets
Determine financial techniques to base your financial decisions on
Calculate Returns
Analyze financing options
Set Cost & Saving Targets
Cost & Savings Analysis SYSTEM COST Annual
Savings Metric
Basis of Return
Funding Source
Cross Contingency
Lighting & control systems
HVAC
Building Envelope
Domestic Hot Water
On site energy generation
Hours of operation as the effect peak usage energy costs
High Power consumption operational equipment
Set Cost & Saving Targets Typical Example
SYSTEM: COST Typical Annual Savings
Metric Basis of Return
Funding Cross
Source Contingency
Lighting & control systems $ 17,000 $ 3,850 IRR
HVAC $ 49,000 $ 2,880 LCCA
Building Envelope $ 5,000 $ 350 IRR
Domestic Hot Water N.A. N.A. N.A. N.A. N.A.
On site energy generation $ 48,000 $ 3,000 PV
Hours of operation as the effect peak usage energy costs
Zero $ 5,600 IRR
High Power consumption operational equipment $ 4,000 See “On Site”
PV "On Site Power”
Determine financial techniques to base your financial decisions on
Simple Pay Back Period (SPP)
Return on Investment (ROI)
Discount Rate (Not a stand alone metric)
Present Value (PV)
Internal Rate of Return (IRR)
Life Cycle Cost Analysis (LCCA)
Simple Pay Back Period (SPP)
“Simple Pay Back Period” is the amount of time it takes to recover the initial cost of the improvement.
“Simple Pay Back Period” is calculated by taking the cost of the
improvement and dividing it by the year one savings. For example, if an improvement cost $10,000 and returned $2,500 its’ first
year, the SPP would be 4 years SPP is generally expressed in years & months
Simple Pay Back Period Pros & Cons
Pros: Considered by some a good “quick check” for comparisons
Easily understandable by “non-financial” types
It can potentially be used in negotiating cost savings with tenants
Simple Pay Back Period Pros & Cons
Cons: SPP does NOT take into account the time value of money or the cost
of debt service to service those improvements that were financed
SPP does NOT factor in life cycle cost or operational costs
There are many preconceived myths and prejudices about what is a “good” Simple Pay Back Period
Summary: SPP is a VERY POOR metric to compare retrofitting options with
Return on Investment (ROI)
“Return on Investment” is the reciprocal of Simple Pay Back Period
“Return on Investment” is calculated by dividing the year one
savings by the cost of the improvement. For example, if an improvement saved $2,500 the first year and
the cost was $10,000, the ROI would be 25% ROI is generally expressed in a percentage value
Return on Investment Pros & Cons
Pros: ROI is simple and easily understandable
Is easily compared to owner’s cost of capital (an independent metric)
Is a good metric when doing lender, investors & potential buyer
presentations and justifying a higher building valuation and CAP rate.
ROI may serve as a required metric for some lending and financial scenarios
Return on Investment Pros & Cons
Cons: ROI assumes a consistent annual rate of savings ROI does NOT factor in life cycle cost or operational costs ROI is NOT based on a specific time period analysis for the savings
Summary: Although ROI is a potentially useful metric to make “Like for Like”
comparisons of vendor proposals, ROI shares the same problems that SPP has
Although ROI may be a good starting place, it is generally NOT a good metric to solely make significant financial decisions with
Discount Rate
“Discount Rate” is the minimum rate of return required by an investor
“Discount Rate” is the metric that is used when analyzing retrofit
options in the format of “Present Value” The HIGHER the perceived risk of an investment, the HIGHER the
“Discount Rate” The HIGHER the “Discount Rate”, the LOWER the “Present Value”
There are 2 Types of Discount Rates
“REAL Discount Rates” do not consider inflation as a factor “NOMINAL Discount Rates” take an assumed rate of inflation into
account when creating the value of an improvement
Discount Rates Pros & Cons
Pros: Discount Rates serve as the basis for “Present Value” calculations. You
CANNOT determine “Present Value” (PV) without a “Discount Rate” based on your own financial situation
Cons: Discount Rates are based on past and present financial information, which can
change in the future and therefore make the Discount Rate highly inaccurate and subjective.
Discount rates can be influenced by the cost of money (i.e. interest) and the leverage of debt used to make the improvements.
Summary: Discount Rate is NOT a stand alone metric to base decisions on, but is an
important number that must be used to calculate Present Value analysis
Present Value (PV)
“Present Value” is the value that a particular cash flow is worth in TODAY’S dollars.
“Present Value” is based on the concept that money earns interest or
income. Cash Flow Present Value = ______________________ (1 + Discount Rate) @ Day 1
If $0.91 (Ninety One Cents) were invested at a 10% return within one year, the “Present Value” of that $0.91 would be $1.00 (One dollar) at Day 1 of the investment.
Present Value (PV) 3 Year Example
Assume a $1.00 (One Dollar) Investment’s Present Value @ 10% over a three year period
Year 1 Value = $0.91
Year 2 Value = $0.83
Year 3 Value = $0.75
Present Value (PV) Pros & Cons
Pros: PV is simple and easily understandable
PV is a widely accepted standard by lenders, investors & Financial
Advisors
PV, when properly used, acknowledges the ups and downs of cash flow related issues
Present Value Pros & Cons
Cons: PV is based on a constant Discount Rate, but the Discount
Rate can be an inaccurate projection of the FUTURE based on data from the PAST.
If you are going to use PV as a metric to base decisions on, there must be an “End Date” to your Present Value Decision.
Summary: PV is a highly effective tool to base decisions on assuming your
Discount Rate is realistic and proves to be accurate
Internal Rate of Return (IRR)
IRR is a valuation method used to estimate the attractiveness of an investment or capital expenditure
IRR is sometimes referred to as “Economic Rate of Return” (ERR)
IRR takes into account the return of your capital as a declining
balance and bench marks it against an averaged Internal Rate of Return of the outstanding principal
Internal Rate of Return (IRR) Pros & Cons
Pros: IRR is a widely accepted standard by lenders, investors & Financial
Advisors
IRR is an accurate reflection of return versus Cost of Capital
IRR recognizes to ups and downs of cash flow
IRR is a good tool for an investor or building owner to compare a potential investment against their own cost of capital
Internal Rate of Return (IRR) Pros & Cons
Cons: IRR requires an end date to be calculated. The projected end
date can significantly influence the IRR IRR assumes that all cash flow is reinvested at the IRR Can prove to be inaccurate when based upon “annual” as
opposed to “monthly” savings
Summary: IRR is an excellent metric for sophisticated owners and
investors, but is only as good as the base line assumptions that are made to calculate it (i.e. “garbage in, garbage out”)
Life Cycle Cost Analysis (LCCA)
“LCCA” calculates total cost, versus savings, of the life of a specific piece of equipment or technology
“LCCA” is a significant metric when making long term, major
capital improvements or retrofits, including: Initial Cost Operational, maintenance & repair costs Financing costs Serviceable life of the equipment or technology Salvage Value at “end of life” (if any)
Life Cycle Cost Analysis (LCCA) Pros & Cons
Pros: Can prove to be an excellent metric when evaluating high ticket
installations of new equipment and systems
Incorporates the time & value of money into it’s analysis
Can be used as an additional set of metrics to further refine ROI & IRR calculations
Life Cycle Cost Analysis (LCCA) Pros & Cons
Cons: Not widely understood Requires a number of assumptions & variables that may or may not
come to pass in the future Can often be based on vendors claims, that are NOT warranties
Summary: For financially sophisticated owners & investors, LCCA is an excellent
metric, but is only as good as the base line assumptions that are made to calculate it (i.e. “garbage in, garbage out”)
Financing Options “Show Me the Money!”
Cash Cash Rebates from Utility Companies Tax Rebates Conventional Bank Loans Leased Improvements Energy Service Companies (ESCOs) Non-traditional Lenders (i.e. SBA, State & Federal lending
programs, etc.) Your Flaky Brother in Law whose never worked a day in his life and who just won the Lottery
Energy Service Company (ESCO)
An Energy Service Company (aka “ESCO”), is a business that develops, installs, and arranges financing for projects designed to improve the energy efficiency and maintenance costs for facilities over a seven to twenty year time period.
ESCOs generally act as project developers for a wide range of tasks and assume the technical and performance risk associated with the project. Typically, they offer the following services:
– Develop, design, and arrange financing for energy efficiency projects
– Install and maintain the energy efficient equipment involved – Measure, monitor, and verify the project's energy savings – Assume the risk that the project will save the amount of energy
guaranteed.
Energy Service Company (ESCO) Pros & Cons
Pros: Guarantees your energy costs for an extended period of time
Serves as a potential hedge against rising energy costs not
caused by your facilities operation
A properly negotiated contract can also integrate total life cycle costs which can stabilize cash flow projections
Removes the burden of energy management from the building’s owner
Energy Service Company (ESCO) Pros & Cons
Cons: Requires sophisticated owner or facility manager to participate in the
decision of selecting and contracting with an ESCO Is based on two parties (the building owner & the ESCO) “betting” on
the cost of energy in the future Can be costly if the ESCO fails (i.e. bankruptcy) in the future Summary: A potentially excellent option for major facilities who want the stability
of fixed expenses in relation to their future energy costs. Is only as good as the management & financial strength of the ESCO
How to evaluate if an ESCO is right for you?
Develop a facility profile
Set energy cost goals and priorities
Create an RFP for services
Invite ESCOs to visit you facility
Select an ESCO based on your RFP
Negotiate a long term contract that achieves your goals
Enjoy the benefits
SBA 504 Green Loans
The U. S. Small Business Administration is one of the largest lenders in America for privately held companies that own their own real estate
SBA loans can produce 90% Loans to Value (LTVs) as compared
to conventional lenders who are currently making loans at 70% to 80% LTVs
Under certain circumstances, energy upgrades and retrofits can be
financed in part, or in whole, at a lower rate than conventional lending.
SBA 504 Green Loans Pros & Cons
Pros: Can produce higher Loan to Values than conventional lenders
are currently offering in the market place
Rewards the owner with fewer origination fees and better rates if their building is retrofitted to a appropriate energy standard
Can apply to new construction, acquisition of an existing building, or refinancing of an existing building
SBA 504 Green Loans Pros & Cons
Cons: Only applies to business owners who operate in their own
facility and occupy at least 51% of the total building (the remaining 49% can be rented).
Requires strong credit and a documented track record of the operating company
Requires working with a conventional bank and a CDC (i.e. SBA Lender) that really understand the program.
Summary: An incredible program if your business and financial situation
matches the criteria of the program.
Some Final Thoughts:
There is no “One Solution Fits All” answer to reducing your energy costs and needs. Every building & every owner has their own unique set of needs & goals
Do your homework, work with qualified professionals Work with metrics you understand
Avoid first generation “Latest & Greatest” technology
Respect “single source vendors”, but take them with a grain of
salt. After all, they have a hammer
Some Final Thoughts:
You don’t have to be a tree hugger to embrace energy retrofitting, it just makes economic sense!
DO IT FOR THE DOLLARS, but know that you just might be doing others some good in the process
It’s Question & Answer Time
“Mr. Geer, may I be excused, my brain is full”
On behalf of the SDG&E Energy Innovation Center, the California Center for Sustainable Energy and myself,
THANK YOU FOR ATTENDING
May the Force and Lower Energy Bills Be with You!