Octus Announces Merger, Investment Agreements

As the opportunity to help building owners slash their utility bills magnifies, in concert with maturation of Octus's retrofit and financing offerings, we took an important step last week, executing definitive agreements to acquire two companies and receive necessary growth capital. Here's a synopsis of the news release (full version here at Yahoo Finance):

Octus, Inc. (OTC.BB:OCTI - News), a leading building efficiency company, today announced the signing of a definitive agreement with Alternative Energy Partners, Inc. (OTC.BB:AEGY - News) to acquire one hundred percent of Élan Energy Corp. and Sunarias Corporation in exchange for common shares of Octus. AEGY previously acquired Élan Energy Corp. and its operating subsidiary, R.L.P. Mechanical Contractors, Inc., in a transaction with a stated value of $5 million, and acquired Sunarias in a transaction with a stated value of $2 million.

In addition, Octus signed a definitive agreement with Lin Han Equity Corporation to transfer majority ownership of Octus to Lin Han, in exchange for common stock in privately-held Healthcare of Today, Inc., and working capital to fund Octus's growth strategy.

"The addition of Élan Energy, a proven, profitable and vibrant HVAC and refrigeration efficiency contractor, immediately boosts Octus's financial strength, customer offerings and market reach," said Octus CEO Chris Soderquist. "Market demand for combined energy and water-saving solutions, coupled with utility company rebates and project financing, has increased steadily in the last few months and these transactions will enable Octus to aggressively pursue existing and new business opportunities."

It's an exciting time to be involved in the energy- and water-efficiency industries. On top of several new developments at Octus, these transactions (targeting a close of March 15, 2011) will propel Octus's growth and enrich our offerings to building owners. More to come.

Small Business Energy Efficiency: Utilities Court a Historically Underserved Market

Around the country, a quiet revolution is taking place. Small businesses - who at times have played the part of ugly stepsister in the energy efficiency dance - may finally be getting their invitation to the ball. As utilities seek to reduce their customers' consumption of energy (for regulatory compliance or to postpone costly infrastructure upgrades), they are extending a hand to the 22.9 million small businesses country-wide with incentive programs that better meet the needs of these smaller consumers.

"From the neighborhood pizza parlor, dry cleaner and grocery store to service, health care and technology companies, small businesses have become the cornerstone of our economy. However, with all of this power to drive economies, small businesses have been left out of many cost-saving programs. This is especially true with utility-sponsored energy efficiency programs. Why? Small commercial accounts are very disparate and (until now) have been difficult to segment into actionable groups by utilities. Data about these small commercial accounts are often incomplete and difficult to gather, and yet, this is a sector that has great potential to help the environment by becoming greener -- and add precious dollars to their bottom lines."

A huge sector of the economy whose participation in energy efficiency can make a significant impact on the environment and their own financial health? It's hard to imagine that more effective utility programs haven't yet been delivered. Much of this is due to the split incentive (i.e., many small businesses do not own the properties they utilize, and thus are reluctant to invest in facility improvements) and a lack of quality information:

"Typically, utility data consist of the business' name, primary contact, phone number, address and type of business... This lack of information leads to another roadblock to outreach: the current benchmarking process. Utilities review year-over-year data on a business. Did a specific business use more or less energy last year? Have there been unexplained spikes or troughs in consumption? If there were more data points to consider and analyze, the utility would be in a better position to offer customized information about energy usage and recommend energy-efficiency programs; thus, truly offering something useful and economically sound to the business owner."

Thankfully, new technological developments will make it easier for utilities to build a solid knowledge base about their small commercial customers, which in turn will allow them to offer more customized and enticing incentives that speed attainment of the utility's own goals. And, the financial equation is only improving: Utilities are developing more lucrative rebates and incentives, and new financing programs (such as Octus's Building Energy Savings program, PACE financing, and utility-company on-bill financing) are proliferating.

We at Octus have seen many investor- and municipal-owned utilities get in the game by designing and delivering programs with the small commercial customer in mind - programs such as Roseville Electric's Small Business Commercial Lighting Program, for which Octus was one of four approved energy efficiency specialists. But we believe that the utilities are just warming up. And as their ability to better segment and target this diverse - but enormous - slice of the economy grows, so too will participating small business' bottom lines.

10 Ways to Reduce Energy Use and Costs in Your Building

Octus participated in an energy project financing panel at this week's Sacramento Clean Tech conference, shouldered by experts from Ernst & Young, Morrison Foerster and Five Star Bank. Great conversation and content, with an underlying theme (at least from our seat on the podium): If you own or manage a commercial building, investing in energy efficiency improvements is the best investment you can make. Period. And, of course, we plugged the Octus/Five Star Building Energy Savings project financing program and other readily-available financing options.

The panel concluded with standard audience Q&A, including questions about how the economics of energy efficiency retrofits and project finance work, and how CRE professionals can sagely make it happen. We served up a handful of easy-to-consume morsels, both physical (retrofits) and behavioral. Time was short; unfortunately, we did not have an opportunity to orate, in depth, the myriad measures Octus employs to help slash utility bills.

If time allowed, we would/should have shared a top-10 list from Johnson Controls, as reported in GreenBiz.com, summarizing how you can reduce energy use and costs. Bread and butter stuff for folks in the energy- and building-efficiency space, but worthy of a recap:

1. Assess how your building consumes and wastes energy. Conduct regular energy audits to determine what condition your equipment is in and how it is performing. These audits will show where and how energy is being wasted and prioritize energy improvement measures.

2. Use more energy efficient equipment. Install new energy efficient equipment and replace or eliminate outdated, inefficient equipment. Look for Energy Star labels for equipment and appliances.

3. Match HVAC and lighting output to occupancy. Install programmable building controls that enable systems to provide light, heat and cooling to building spaces only when they are occupied.

4. Maintain equipment for maximum efficiency. Make sure that your equipment is properly serviced and maintained so that it runs as efficiently as possible. Increase operating efficiency of chillers, boilers and packaged cooling equipment through proactive service and maintenance.

5. Maximize lighting efficiency. Upgrade lighting to high efficiency bulbs and fixtures. Energy efficient lighting uses less energy and generates less heat, reducing your costs and easing the strain on your HVAC systems.

6. Measure water usage and waste. Conduct water audit in your facilities, campus, or geography to determine where water is being used and wasted. Reduce water consumption by installing low-flow equipment and fixing leaks.

7. Schedule cleaning during regular work hours. Experiment with different "day cleaning" schedules. Arrange cleaning schedules to overlap with work hours instead of having cleaning done after hours and keeping the lights, heating and air conditioning on at night. That will reduce energy consumption.

8. Insulate thoroughly. Insulate exterior walls, outlets, pipes, radiators, etc to reduce heat and cooling loss.

9. Meet LEED standards. Build, renovate, and operate your facilities according to Leadership in Energy and Environmental Design (LEED) standards. That will benefit your bottom line by lowering operating costs and increasing asset value. It will benefit the environment by conserving energy and water, reducing waste sent to landfills, creating healthier, safer occupant environments, and reducing harmful greenhouse gas emissions.

10. Make building occupants more informed. Educate and engage building occupants to promote energy conservation and reward wise energy decisions and behaviors.

Water: The Third Utility (and an efficiency goldmine)

Increasingly, current and prospective Octus clients have inquired about how they can reduce their water and sewer bills. We have deployed a number of energy-centric solutions -- including industrial ozone washing machines for hotels and our proprietary Wickool evaporative cooling device for rooftop HVAC units -- that both reduce energy costs and conserve water. These solutions fill specific needs for specific customers, but there is a more grand and growing opportunity to help building owners conserve water and reduce costs.

Here's our general logic: The thirst (demand) for water is increasing, and the supply of water is decreasing. Conversely, demand for energy -- electricity, in particular -- is increasing, albeit at a slower rate, but the supply, with renewable generation proliferating, is increasing too. If you own or manage a property, you are not myopically concerned with reducing your energy or water use; you care about slashing your utility bills.

From Buildings.com:

Major advancements in the technology and reliability of water equipment in the last 10 years have made the investment in water conservation very cost effective. While water and sewer rates vary, the process is worth your time for a variety of reasons:

• Water conservation is an investment with attractive ROI potential.
• Water rates are increasing.
• Sewer rates are increasing dramatically due to higher EPA mandates on municipal sewer plant operators (100 percent to 400 percent over the past 10 years).
• Droughts are requiring water conservation for businesses, or you face major water cost increases. Atlanta required a 10-percent reduction or a charge of an extra 25 percent.
• Water conservation and sewer plant operations benefit from water conservation since it directly impacts billion-dollar capital investments to address peak loads (like electricity).
• Some cities have demand-side management (DSM) rebates to incentivize water-conservation investment.
• Fresh water is a major element in our lives and the viability of our communities and, ultimately, the earth.

The article highlights that the U.S. government alone owns or leases 500,000 buildings that use 350 million to 500 million gallons of water per day. Water-conservation efforts in federal buildings have produced savings of more than 30 percent with no cutbacks in operations or service levels. These water-conservation projects have included high-efficiency toilets (HETs), high-efficiency urinals (HEIs), and other improvements.

And, it's a threefold savings opportunity: When you reduce water consumption, your reduce sewer charges. (Sewer charges can be one-third to two times the cost of the water, depending on local rates.) When you reduce hot-water use in showers and clothes washing, you’re also reducing your natural gas or electricity bill since the volume of hot water needed has been reduced.

Furthermore, with the Octus/Five Star Bank Building Energy Savings project financing program, building owners can implement energy- and water-saving initiatives with no up-front or ongoing costs.

Commercial Building Energy Efficiency Retrofits: $190 Billion Market

How big is the market for energy-efficient retrofits of commercial buildings? In a word: Immense. In numbers: Tens of billions of dollars, as we've quantified in previous SmartEnergyWorks posts. As ambitious and bullish as we are at Octus about the market -- and our opportunity to build an extraordinary business -- the Urban Land Institute just upped the stakes.

According to ULI, and as reported in SustainableBusiness.com, the market potential for energy efficiency retrofits in commercial real estate is projected to total $190 billion over the next ten years. From the article:

... the sheer size of the commercial real estate sector's carbon footprint illustrates the potential of energy-efficiency measures to make a dramatic impact on reducing emissions. The nation's approximately five million commercial buildings are responsible for 18% of total annual energy consumption in the U.S.; moreover, only 7% of those buildings represent half of the overall floor area of commercial buildings.

Investing in energy efficiency in real estate--an emerging practice with great market potential--requires new business practices and government incentives to overcome investment barriers. "Recent efforts to catalyze investments in energy efficiency in buildings have challenged how policy makers and market participants view real estate finance and valuation practices," the report says.

"Are investments in energy efficiency to be approached as a discreet value capable of being financed independently of the underlying real estate asset, and then traded as "efficiency-backed" securities on secondary markets? Or, is an energy efficiency investment to be treated in the same way a lobby upgrade is, which without question drives new value to the real estate asset? The answer is both, as policymakers work to unleash market forces to reduce energy demand."

The reports states that innovation in this emerging investment market requires evidence of real costs and returns. Information now available on building performance indicates that feasible energy retrofits for an individual building typically save 20% to 30% and in some cases as much as 60% of energy use, depending on a building's age, type, design, condition and maintenance.

As we discussed a few weeks ago, several energy efficiency project financing vehicles (including the Octus-Five Star Bank Building Energy Savings program; click here for a recent Business Journal article) are emerging. Coupled with increasing incentives and rebates from utility companies, the market is ripe, albeit with barriers. The ULI report echoes our thinking: there is a strong business case for commercial real estate owners and managers to incorporate energy efficient practices in their business strategies:

• Operating-cost reductions through energy savings in an era of tighter budgets
• The creation of reputational advantage in the context of evolving voluntary and regulatory emissions reductions targets
• The creation of new markets or lines of service leading to economic expansion
• Improved tenant working environments, leading to employee retention and higher productivity
• Lower building vacancy rates and tenant turnover
• Reduced business risk in the midst of energy price volatility and changes in consumer preferences regarding green building
• Reduced reputational risk in a globalized, increasingly transparent marketplace.

As SustainableBusiness summarizes, the report cites the need for a change in the perception of energy efficiency as an "investment in less," as in less environmental impact, to an "investment in more," or an investment that produces more value and cost-saving.

We could not agree more.

Commercial Building Energy Use: Start Your Disclosures

If you are a CRE professional in California, section 25402.10 of the California Public Resources Code is probably the last thing on your mind. If you lease, sell or finance commercial properties, come January 1, 2011, it will be top of mind. Specifically, the state will require disclosure of energy ratings and building performance. From the statute: An owner or operator of a nonresidential building shall disclose the [EPA's] Energy Star Portfolio Manager benchmarking data and ratings for the most recent twelve-month period to a prospective buyer, lessee of the entire building, or lender that would finance the entire building.

Last spring the California Energy Commission published a proposed schedule, which after January 1 will require disclosure for any nonresidential building that is solely occupied by the owner or that measures more than 50,000 square feet. Any nonresidential buildings that measure 10,000 to 50,000 square feet will be required to comply as of January 1, 2012, and those as small as 1,000 square feet must be compliant by July 1, 2012.

Analogous -- but obviously, with more depth and variables -- to automobile fuel efficiency stickers, as discussed below. For Octus Energy and other companies involved in generating energy savings and financing energy projects, it will further validate and quantify the value of a building's operating and energy efficiency.

Here's an in-depth look from California Lawyer:

A building's energy score must be accurately calculated, either on the EPA's Portfolio Manager website (www.energystar.gov) by a knowledgeable building owner, or by a third-party energy firm. Although the EPA provides helpful resources on its website (see the Tools and Resources tab), this can be complicated stuff. And because an inaccurate disclosure could create liability, some owners will opt to spend a modest amount of money for professional help.

The required disclosures can also create legal issues regarding tenants' privacy rights. A building owner or an energy disclosure professional is responsible for entering data regarding the tenants' energy consumption over the previous twelve months, along with building parameters such as hours of operation, computer usage, and thermal settings. For the landlord of a triple net leased building, this entails disclosing the tenant's energy bill, which raises potential confidentiality issues. At a minimum, counsel should be writing leases that specifically allow for this statutory disclosure; however, in the absence of a specially tailored clause, seek the tenants' cooperation in attempt to comply with the law.

Limitations of the EPA's online Portfolio Manager may prove problematic for some commercial buildings. For example, though office buildings can be rated quite easily, other facilities such as movie theaters, bowling alleys, and funeral homes are not specifically addressed by the free online software.

Despite imperfections, California's energy disclosure law is an important step forward. Commercial tenants, buyers, and lenders in this state will soon be comparing buildings based on their energy efficiency and, it is hoped, the market will reward more–energy efficient buildings.

So what should attorneys suggest to their clients who own buildings? They should first see if the online compliance resources will suit their purposes. If a more searching analysis is required, the clients can consider having their buildings surveyed by an energy engineer to understand their energy spending and how to reduce it. Indeed, some owners may wish to be more aggressive in the "green market," opting for a full-blown energy audit to identify ways to make a building more efficient.

Energy disclosures do more than comply with legal rules. They also can contribute to a smarter real estate market, just as the fuel efficiency stickers on new cars help educate consumers. And studying a building's energy use may lead to less consumption, higher net operating profits, and a healthier planet.

Well said. To learn more about EPA's Energy Star Portfolio Manager tool, click here.

Energy Efficiency Tax Deductions: Hidden Gem for Commercial Properties?

Retrofitting commercial properties with energy-efficient equipment -- lighting, HVAC and energy management controls -- is a fairly straight-forward process. Equipment is upgraded, buoyed by utility company incentives and rebates. The reduced energy costs more than cover the cost of building improvements. And, as the building operates more efficiently, net operating incomes and asset values are bolstered. In short, reducing energy use is both the least expensive form of energy and one of the most lucrative investments a property owner can make.

Can it get better? Project financing -- oftentimes with no out-of-pocket costs for property owners; click here for information about Octus's program and other emerging solutions -- is catalytic, perhaps a game-changer. And, energy tax deductions are frosting on an already tasty cake. If your company builds, owns or leases commercial buildings, and you have installed or retrofitted the property to be more energy efficient, you may be eligible to deduct all or part of the costs associated with the installation or retrofit. Here's a summary from SourceCorp:

The EPAct §179D Tax Deduction provides a tax deduction of up to $1.80 per square foot for the installation of systems that reduce the total energy and power costs by 50 percent. Eligible building systems include interior lighting systems, heating, cooling, ventilation, hot water systems and building envelope systems.

To qualify for a full or partial deduction, the energy-efficient building property must meet the following criteria. The building:

• must have been placed in service after December 31, 2005.
• must be located in the United States.
• installation made is part of interior lighting systems, HVAC and hot water systems or the building envelope (insulation, exterior doors, exterior windows, roofing material).
• has been certified that installation will reduce total annual energy and power costs by 50 percent or more as compared to a reference building.
• energy and power consumption calculations are based on IRS-approved software programs that compare the subject facility to an ASHRAE Reference Building.
• must be certified by an IRS-qualified professional engineer or contractor licensed in the same jurisdiction as the proposed building.

"The most often overlooked tax benefit relative to the Energy Policy Act extension is the tax benefits construed for commercial building owners," said Julio Gonzalez, chief executive officer of Engineered Tax Services. "Real estate investors can now reduce the payback period in investing in energy-efficient components with the added benefit of deducting up to the entire expense of these assets immediately, versus depreciating these assets over 39 years. The Energy Policy Act of 2005 includes a tax deduction for investments in energy-efficient commercial building property designed to significantly reduce the heating, cooling, water heating, and interior lighting energy costs."

According to Gonzalez, Congress extended the energy tax benefits through 2013, and it may increase them from $1.80 per square foot to $3 per square foot later this year. A partial deduction of $0.60 per square foot is available for investments that reduce energy costs by 16 2/3% in one of three systems—lighting, heating and cooling, or building envelope.

Importantly, this is a tax deduction, and not a tax credit -- a tax credit is a dollar-for-dollar credit against your tax obligation, whereas a deduction reduces your gross income, and, therefore, will save you taxes as a percentage of the tax obligation.

++++

Post-script (29 Sept. 10): Thorough, blow-by-blow recap of 179D tax deductions in an article authored by Engineered Tax Services: Are Millions of Dollars Hiding in Your Buildings? Read on. It's real, viable and lucrative for CRE owners, managers, tenants and service providers to pursue and provision energy-efficiency upgrades.

Energy Efficiency Project Financing: Solutions Proliferate

A few weeks ago, we debuted a unique project financing platform (click here to read the news release). In concert with Five Star Bank, Octus can finance energy-savings retrofit projects ranging from $25,000 to $500,000, with little to no out-of-pocket investment by property owners; the utility company rebate/incentive serves as the down payment/equity for the financing. And, energy savings generated from our work more than cover the cost of facility improvements. We're bullish about the financing vehicle and its prospects, and our program's debut coincides with several emerging energy-efficiency financing programs.

Portland-based Equilibrium Capital published a study earlier this year, Energy Efficiency: Turning Negawatts into Marketable Securities. The study commences with a quick history of the energy efficiency market opportunity:

In his 1990 article, “The Negawatt Revolution,” Amory Lovins envisioned “negawatt markets” which would treat saved electricity like any other energy source or commodity. He estimated that energy efficiency ultimately represented a trillion-dollar-a-year global market. Last year, the World Business Council for Sustainable Development estimated in their report, “Transforming the Market,” that the worldwide market for energy efficiency in buildings could be worth between $900 billion and $1.3 trillion by 2050.

Last year McKinsey & Company conducted a comprehensive study of the U.S. energy efficiency market. The study analyzed the potential of retrofitting buildings by market sector, providing metrics based on the current pace of efficiency investment. McKinsey estimated that the total 2009-2020 present value of energy savings across all U.S. sectors is $1.2 trillion, representing a 130% return on $523 billion of upfront investment. This translates to $130 billion in total annual end-use energy savings in 2020.

Big numbers, terrific macro economics. As the report states, "These numbers are impressive, but we estimate that the U.S. market will be significantly bigger. The market drivers will be increasing access to capital and utility markets, as well as making it easy for property owners to understand and attain the benefits of energy efficiency retrofits. Our forecast shows that the U.S. market for end-use energy savings due to energy efficiency will reach $170 billion in 2020 and generate attractive returns for building owners, energy providers, and investors."

But, the challenge remains: Financing commercial building energy-savings measures to capitalize such opportunities. That's where Octus's financing program comes in (on a micro, project-by-project level). And, it's where several emerging financing vehicles are focused. EqCap continues:

In the energy efficiency ecosystem, we see four major segments: utility and energy firms; energy efficiency executors; energy efficiency equipment vendors; and funding sources. While some of the major players have broad solutions covering multiple segments, including companies like Johnson Controls, Schneider Electric, Siemens Building Solutions, and Constellation Energy, we expect to see a next generation of companies that will emerge into big players in energy efficiency. The winners in this space in the long term will not only offer excellent products and services in their core area of expertise, but they will need strong alliances throughout the ecosystem, and also have a thorough understanding of government and regulatory policies in their regions.

The biggest investment opportunity in this market is innovative financial instruments that can fund energy efficiency building retrofit projects on a large scale, turning negawatts, or saved energy, into marketable securities. To-date, most of the revenue in this market has been generated in the public sector. But emerging new business models and approaches for financing retrofits will dramatically increase progress in the commercial, industrial, and residential market segments. Our portfolio company, Equilibrium Resource Management (EqRM), is one of four players addressing this major opportunity in the United States, along with Metrus Energy, Transcend Equity, and E&I Advisors.

To paraphrase Jackson Browne, at Octus, we may not have the answer, but we believe we've got a plan. Our approach focuses solely on the result commercial building owners desire -- generating energy savings through facility improvements -- which, we believe, is best accomplished through a turnkey solution: Analysis, design, utility rebates, project financing, project implementation, and measurement and verification.

Smart Hotels: Tips to Generate Energy Savings

Over the past decade, Octus Energy and our energy efficiency development arm, Quantum Energy, have developed energy-savings projects for more than 100 hotel properties. Why are hotels prime candidates for energy conservation? Energy Efficiency Guide for Colorado Businesses paints the picture:

Guests affect heating and cooling loads in their rooms, consume hot water, and increase energy use in dining facilities. Hotels and motels tend to have quite high hot water heating loads - about 33% of the total - because of showers, laundries, and food service. HVAC loads constitute another 30%, lighting 20%, and plug loads 17%.

Here's a recap of a recently-completed Quantum project, this one for a 361-room national chain hotel for whom we secured generous utility company rebates and designed and implemented two energy-savings solutions:

• An energy-efficient laundry system that reduced water heating costs by 70% and water costs by 30%, generating annual savings of $28,000 with a nine-month payback.
• Retrofit of inefficient incandescent lighting with LED lighting systems that reduced energy use by 85% and extended individual lamp life by 40,000 hours, generating annual savings of $49,000, a one-year payback, and significant reduction in lighting maintenance.

Total payback: Less than one year, with savings cash-flowing thereafter.

Of course, there are myriad moving parts in a hotel, and thus multiple opportunities to generate savings. Colorado's energy efficiency guide amplifies more than two-dozen ways hotels can cut energy use. Read on and reap the savings.

Leading Real Estate Organizations Commit to Collaborative Action Plan for Green Leases

At Octus, we believe the missing piece to solving the commercial real estate energy efficiency puzzle is the alignment of economic incentives. CRE investors, owners and managers face a financial paradox: They recognize the value of making their buildings more efficient (increase asset values, boost NOI, raise lease rates, bolster occupancy), but if they're not paying the utility bill -- and if cash is short -- it's oftentimes difficult to make the investment.

Jones Lang LaSalle and a host of real estate investment and corporate leaders get it. To wit, they have aligned and committed to a statement of principles and a Green Lease Action Plan to resolve the challenges of energy and sustainability in leased commercial office space. The first organizations to agree to the Green Lease Action Plan include Bank of America, Beacon Capital Partners, Deutsche Bank, JPMorgan Chase, LaSalle Investment Management (the investment arm of Jones Lang LaSalle), RREEF (the real estate investment management arm of Deutsche Bank) and Whirlpool Corporation. Here's a summary of their efforts, announced in a July 26, 2010 news release:

Collectively, these organizations own or occupy leased office space in excess of 350 million square feet.

This industry leadership move is launched in association with Greenprint Foundation, a worldwide alliance of real estate owners, investors and financial institutions committed to reducing carbon emissions across the global property industry. Several participants in the Green Lease Action Plan are also founding members of Greenprint Foundation, including Jones Lang LaSalle, which is facilitating the Plan and registration process for all participating organizations.

"The efficient use of energy and other resources in buildings requires joint action from property owners and occupiers, but there are disincentives that often prevent the two sides from investing in the necessary capital improvements," said Michael Jordan, Senior Vice President of Sustainability Strategy at Jones Lang LaSalle. "We're inviting organizations to join us in addressing these energy and environmental challenges, to create business value for owners and occupiers alike."

The built environment is responsible for up to 40 percent of energy use and greenhouse gas emissions in many countries. Jones Lang LaSalle estimates that many commercial buildings can reduce energy use and the associated greenhouse gas emissions by 40 percent without affecting tenants' comfort; however, much of the achievable savings requires upfront investment that is paid back over a period of several years. In a building with many tenants that may relocate, expand or contract their space over time, it is difficult for owners and individual tenants to make a strong business case for retrofits.

The initiative to remove barriers to energy efficiency and sustainability in leased office space is based on three guiding principles:

1. Landlords and tenants should agree to operate the buildings as sustainably as is commercially feasible.
2. The value of energy savings achieved through building efficiency improvements should be available to pay for the improvements
3. To the extent feasible, usage and demand for resources throughout the buildings should be measurable and transparent to both landlords and tenants.

In endorsing these principles, leading organizations agree to:

1. Establish green lease principles to influence owner/occupier agreements and act on these principles across the portfolio over time.
2. Require leasing agents who work on behalf of participating organizations to complete a basic orientation about sustainability, green lease principles, and ways to resolve barriers to sustainability in leases.
3. Establish/adopt green site selection criteria for tenants and consider these criteria for new space acquisition.
4. Establish a standard for landlords to communicate key energy and environmental ratings to tenants and to prospective tenants and deploy this process at 50 percent of their properties within three years.

"This is not about owners or tenants making financial sacrifices to enhance energy and sustainability in buildings—it's about creating economic incentives on both sides to create win-win scenarios economically and environmentally," said Charles B. Leitner III, Chief Executive Officer, Greenprint Foundation.

"We see a clear need for a dialogue between landlords and tenants to align costs and benefits of green office space," said Lee Utke, Director of Global Corporate Real Estate at Whirlpool Corp. "As more and more tenants and landlords recognize these issues and commit to working toward a solution globally as well as nationally, we will be able to make a stronger business case for improvements in buildings."

These leading tenants and landlords have committed to the Green Lease Action Plan as an important step toward resolving the challenges, and are taking direct action to implement these concepts in the properties they own, occupy and manage. "We hope to expand the group of owners and occupiers to sign on to these principles, and accelerate our collective progress in overcoming this challenge," Jordan said.

Energy Retrofits to Commercial Buildings: $41 Billion Annual Savings Opportunity

We posit often about how Octus Energy is serving an existing market. Specifically, it is a waste-ridden space -- lots of it. By many counts, there is approximately 80 billion square feet of commercial building space in the U.S. By all counts, nearly all (97%, by most estimates) buildings are inefficient -- they are consuming too much energy and wasting billions of dollars each year in excess energy costs. We believe the wasteful tide is shifting.

A recent Pike Research report, profiled here, quantifies the opportunity: If all commercial buildings in the United States were retrofitted to be more energy efficient, more than $41 billion in energy savings -- each year -- would be generated.

Pike's report, "Energy Efficiency Retrofits for Commercial and Public Buildings," puts it into perspective:

"The current financial crisis has had a significant dampening effect on property owners' investments in their properties. Financing for such projects is scarce, and the limited investment in building efficiency is not keeping pace with the growing national demand for energy," says Pike Research's managing director Clint Wheelock.

The report asserts that some major companies have invested in green updates for their properties, but it has yet to really catch on. Pike believes it's about to change and that energy retrofitting for commercial properties will become a strong growth market through 2014 and beyond.

"In addition to cost savings, energy retrofits are attractive for purposes of greenhouse gas reductions, energy independence, green branding, property valuation, and productivity," according to the Pike Research report.

New Math: The 80% Energy Efficiency Opportunity

Our mission at Octus Energy is straightforward: to significantly reduce energy expenses and increase cash flow for building owners, managers and occupants. When we do this, we generate a triple bottom-line return for our clients (aka, the Octus 3 Ps):

Profit: Energy costs are reduced immediately and perpetually; NOI, building values, occupancy, and lease rates are bolstered.
People: As building environments improve, employee, occupant and customer morale, satisfaction and productivity increase.
Planet: Significant reductions in the carbon impact of facilities.

And, we holster a few metrics to our mission: Commercial buildings in the U.S. spend an estimated $100 billion annually for electricity, solely for lighting and cooling. With in-the-market solutions, energy costs can be cut in half: $50 billion per year. And, we are not seeking to create a new market, but rather serve an existing market.

A recent study, portrayed by our comrades at The Building Advisor, blows our metrics through the roof. “Up to 80 percent of commercial building energy is going up in smoke,” said F. Noel Perry, founder of Next 10.

Next 10 has issued a new study, “Untapped Potential of Commercial Buildings: Energy Use and Emissions,” which suggests that energy use by commercial buildings could be reduced by up to 80 percent through energy efficiency measures, based on national averages. The full report is available here.

The San Francisco Chronicle’s blog, The Thin Green Line, chimes in:

“Indeed, an average building’s energy use can be cut by half just with low-cost, low-tech improvements to lighting and insulation.”

Next10's study points out that behavioral changes, or tenant use (adjusting lighting schedule, etc.) in commercial buildings can provide energy savings at very low costs. The Building Advisor: "It’s real, folks: there are cash saving things you can do for your building that don’t cost anything."

Piling on, GreenerBuildings: While there is an emphasis on energy efficiency in new construction, it is actually existing building stock that represents the biggest potential for energy reduction, yet remains largely unaddressed by state legislation.

Kohl's Efficiency Kick: $50 Million in Savings

Kermit the Frog once bemoaned, it's not easy being green. One of the world's largest retailers, Kohl's Department Stores, would disagree with our amphibian childhood friend.

As reported in GreenBiz, Kohl's has reached another milestone in its aggressive sustainability campaign: 500 stores in the retail chain have now earned the Energy Star label. Smart company, smart energy. Here's an encapsulation of the story:

The [Energy Star] designation, now borne by almost half the company's 1,089 stores, recognizes the sites for outstanding energy efficiency and building performance. To obtain the label, buildings must rank in the top 25 percent of the rating system set by the Energy Star program maintained by the U.S. Environmental Protection Agency and the Department of Energy.

In announcing the achievement yesterday, Kohl's said its energy efficiency efforts in the past four years have helped the company avoid $50 million in electricity cost and have boosted efficiency by more than 20 percent.

The firm marked its accomplishment by making a new commitment to green building: Starting next spring all newly constructed stores are to pursue "Designed to Earn the Energy Star" designations.

The recognition means the building has been designed for a level of energy efficiency that would merit an Energy Star label, and "Designed to Earn" sites must perform at that level for a year in order to qualify for an Energy Star label. So far, five Kohl's stores have been deemed "Designed to Earn the Energy Star" this year.

"We are building on our commitment to drive energy efficiency companywide as we continue to near our goal of being carbon neutral," said Ken Bonning, Kohl's executive vice president of store planning and logistics, in a statement yesterday.

In December, Kohl's set a goal of becoming carbon neutral by the end of this year. The target applies to the company's U.S. stores, distribution centers and corporate offices, which are to operate with net-zero greenhouse gas emissions by the close of 2010.

Boosting Commercial Building Energy Efficiency: Five Tips

We chug Kool-Aid with our comrades at The Building Advisor: Like those of us at Octus, they're immersed in the contemporaneous opportunity to immediately and perpetually slash energy use and costs in commercial, industrial and municipal buildings. Here's how our colleagues commenced a recent post:

So, you want to increase your commercial building’s energy efficiency. You’re finally convinced that efficiency is the first fuel, that 40% is too much for commercial buildings to suck out of the US’ total energy production, and that the benefits of increasing efficiency reach not only the environment but to your business’ bottom line.

Said differently, you've applied common sense, logic has prevailed, and you're ready to take action (but, perhaps, you're not prepared to crank the throttle on your energy efficiency investments). What to do? The Building Advisor proffers five get-it-done-now tips:

1. Curtail overventilation – The number one culprit in the fight against energy waste. Lucas Klesh wrote a comprehensive post on overventilation here, soon to be accessible on Sustainable Facility. He goes into detail on the value of a property functioning economizer and damper system.
2. Adjust lighting schedule – Does your lighting schedule match your tenant schedule? Matching the two more closely allows you to get the most out of the energy usage when you need it.
3. Eliminate competing HVAC systems – As crazy as it sounds, many buildings run heating and cooling systems simultaneously. What’s even richer is that mechanical service providers often aren’t aware that this is happening. Stop your building from fighting with itself and reap the benefits in your utility bills.
4. Re-evaluate HVAC when space configuration changes – Have you downsized your staff? Put up a wall or other internal partition in a large office area? If there are unoccupied areas of your property or changes in your space configurations, most likely your HVAC systems aren’t up to par for the changes made. Re-assess the space’s needs by evaluating control points and air distribution locations.
5. Take weekends off – Unless your office or commercial building is in full swing seven days a week, make sure you’re not running air conditioning when there’s no one there to benefit from it.

GE to Double Investment in Energy Efficiency

Companies big and small are upping the ante when it comes to investments in energy efficiency. For CRE owners and managers, it's logical: Increase their NOI and asset values, boost occupancy and lease rates, and enhance the quality of their properties. For companies like Cisco and General Electric (and Octus Energy, of course), the investment in smart energy efficiency products and services is even more straight forward: Pour resources into a hyper-growth market where customer demand and financial incentives are proliferating by the day.

Take GE: Last week the company reported its plan to invest $5 billion in energy efficient and environmentally oriented projects has been met a year ahead of schedule. GE also announced it is committed to spend an additional $10 billion by 2015.

Why? GE's investment in its "ecomagination" program is paying off. The company said revenue from these products and services increased 6 percent to $18 billion in 2009 and that it has reduced emissions of greenhouse gases blamed for global warming.

"We are doubling down to drive even faster impact and to deliver our contribution to a 21st century energy transformation," explained GE Chairman and CEO Jeffrey Immelt.

The company said revenue from a portfolio of 90 energy efficiency products and myriad services will grow at twice the rate of total company revenue in the next five years.

Bottom line: GE reported its $5 billion investment has generated revenue of $70 billion. Smart energy = smart investment = smart returns.

Energy Efficiency Boom to Halt Commercial Real Estate Swoon?

We've refrained herein from posturing about politics and energy policy. Why worry about what you can't control?, our (apathetic?) side contends. That said, at Octus we're acutely focused on existing incentives, tax credits and other catalysts that fortify our clients: commercial building owners and managers who invest in energy efficiency. And, a recent report, "The Imminent Commercial Real Estate Crisis and The CRE Solution," caught our eye. A few snippets:

• CRE transactions have dropped a staggering 90 percent since 2007. Between now and 2014, $1.4 trillion in CRE loans are coming due; more than half of these are currently underwater. Commercial property values have plummeted by more than 40 percent, and commercial vacancies rates continue to increase.
• Congress can simultaneously address the looming CRE crisis and crippling construction unemployment through The CRE Solution. This can be jumpstarted quickly by building upon the existing Energy Efficient Commercial Building Tax Deduction (26 U.S.C. 179(d)) from $1.80 per square foot to a range of $3 to $9 per square foot for new and existing commercial buildings meeting specific energy reduction targets.
• For each $6 billion of deferred CRE revenue, for example, The CRE Solution would generate $73.4 billion in new private spending, $15.9 billion in new federal tax revenue, and $5.25 billion in state and local government tax revenue, according to the report findings.
• The CRE Solution would decrease building sector energy consumption and greenhouse gas emissions, increase after-tax cash flow and property values, reduce loan defaults, and increase new CRE sales, desirability, and investment value.

The 14-page report can be viewed at architecture2030.org.

BOMA San Francisco Launches Commercial Property Energy Efficiency Program

A preponderance of activity and attention in the energy efficiency industry focuses on tangible, physical improvements to buildings and their equipment. Rightly so, given the energy savings and returns generated through the implementation of lighting, HVAC and energy management technologies. But, such activities are only part (albeit a primary piece) of the energy efficiency puzzle -- there's much to be learned, and many dollars to be saved, through thoughtful behavioral and operational practices.

Last month, the Building Owners and Managers Association (BOMA) of San Francisco announced they will coordinate delivery throughout California of the BOMA Energy Efficiency Program (BEEP), an innovative series that teaches commercial real estate professionals how to reduce energy consumption -- and related costs -- with proven, no- and low- cost strategies for optimizing equipment, people and practices. From BOMA's press release:

Nationwide, the commercial real estate industry spends approximately $24 billion annually on energy. Yet energy consumption represents the single, largest controllable operating expense for office buildings. BOMA anticipates BEEP will reduce energy consumption by as much as 30 percent in participating commercial properties

"If 2,000 Bay Area buildings adopt BEEP's best practices during the next three years, the resulting savings gained from reduced energy consumption will amount to $400 million," said BOMA SF Executive Vice President Marc Intermaggio. "The fact is a 30 percent reduction in energy consumption in the nation's commercial buildings, which equates to $7.2 billion, is readily achievable simply by improving building operating standards."

Click here to visit BOMA's BEEP site and learn more.

Johnson Controls Paints a Promising Picture for the Future of Energy Efficiency

Johnson Controls is the world's largest provider of energy efficiency solutions for commercial buildings. While their approach -- provision of services as an ESCO (primarily for governmental organizations) and the sale of large-scale, proprietary energy management systems -- differs a bit from what we do at Octus Energy, our focus is the same: Generate sustainable energy savings through various means for commercial building owners. JCI is big brother. When they speak, people and companies and analysts take note.

At last week's CleanTech analyst day -- as summarized in an investment brief by analyst Canaccord|Genuity -- Johnson Controls shared a few interesting morsels:

The cleantech “megatrend.” Clean technology is now a “long-term global growth megatrend,” according to JCI management. Management specifically noted that buildings in North America and Europe, which together account for 40% of the world’s energy consumption and 70% of electricity usage, represent the single biggest opportunity for cleantech.

$24 billion opportunity. JCI estimates the energy solutions market is a $24 billion global opportunity, growing at approximately 9%-14% per year. Key market drivers for the energy solutions market include: 1) climate legislation and energy security; 2) corporate climate commitments; 3) volatile energy costs; 4) innovative funding models (including PACE, as Octus discussed here and here); 5) deployment of smart-grid technology; and 6) energy efficiency renewable resource standards.

Feds step up. Legislation and regulation are key drivers in the energy efficiency marketplace. In the United States, there have been energy efficiency bills in both the lower and upper house (the American Energy and Security Act of 2009 in the House and the American Clean Leadership Act of 2009 in the Senate). The Senate bill has been passed out of committee and includes the following features:

• National electricity and renewable electricity standard
• Energy efficiency building retrofit program
• Energy efficiency programs for states
• Building codes incentives
• Building performance information
• New clean energy deployment administration

Meanwhile, recent events in the Gulf of Mexico are spurring interest in energy and climate bills that otherwise would not have been brought up or passed this year.

PACE financing programs gaining momentum. Property Assessed Clean Energy, or PACE, is a financing solution that enables property owners to pay for energy efficiency, renewable energy and water efficiency projects via an additional assessment on their property tax bill over a five to ten-year term. The PACE program benefits building owners by: 1) eliminating the need for large upfront cash payments; 2) offering a competitive cost of capital; 3) solving credit rating collateral issues; 4) potentially moving the projects off-balance sheet; and 5) allowing owners to pass through retrofit costs to tenants. Johnson Controls echoed our sentiment that PACE financing will be one of the keys to unlocking the huge retrofit opportunity in the commercial building sector.

IT convergence. JCI sees the “smart building” as the starting point that is needed before a “smart grid” is even possible; again, echoing Octus's energy management and building automation strategy through our Smart Energy Platform. Put simply, the “smart grid” can’t analyze much without a “smart building” providing it with real-time information. The company noted that the integration of equipment and controls coming together in one product has been a major advancement for the industry.

Energy Efficiency Investments Remain Strong

We chime often about the outstanding virtues of investing in energy efficiency: The ability to slash energy costs, increase property values, bolster occupancy and lease rates, improve workspace environments, and reduce carbon impacts. Add to this the return-on-investment generated by investing in energy efficiency improvements -- typically in the 30-to-50% range, oftentimes higher -- and it's no surprise that such investments are mushrooming.

A global survey of 2,882 companies (the Energy Efficiency Indicator) released by Johnson Controls last week validates and amplifies the emerging opportunity. "These survey results indicate the growing importance on having energy efficient buildings that are cost effective and sustainable," said Dave Myers, president, Building Efficiency, Johnson Controls. A few snippets:

• Energy price increases: More than two-thirds of companies surveyed expect energy prices to rise, and many have made or are considering efforts to cut operational costs with energy efficiency retrofits.
• Illuminating savings: Among companies that have conducted energy efficiency retrofits, 73% modified their lighting, 64% trained building superintendents to be more energy efficient, and about one-third made larger investments, including replacement of HVAC units and installing efficient glass.
• Money, money: The biggest factor in energy efficiency investment for these companies is that the investment pay for itself -- quickly -- within three years.
• Making it happen: Sixty-three percent of companies surveyed plan to make capital investments in energy efficiency and 70% plan operating budget expenditures in efficiency programs over the next 12 months. And, 85% plan to make efficiency a priority in their new construction and retrofit projects.

"Despite the recession, decision-makers have put efficiency high on their agendas for 2010, especially those in India and China," said Clay Nesler, vice president, Global Energy and Sustainability, Johnson Controls. "It's encouraging to see that the financial returns and environmental benefits of energy efficiency investments are recognized in all regions around the world."

Why Sustainability is Sustainable for Commercial Real Estate

Great post last week in RealEstateJournals.com engaging how and why sustainable buildings make sense for commercial real estate developers, investors and managers. Here's the initial tease from the post's author, Don Schoenheider, a vice president of Liberty Property Trust (NYSE: LYR), a $6.6 billion REIT:

Fifteen years ago the word “recycling” was something aging hippies did and a “carbon footprint” was what was left if you stepped too close to the fireplace and then walked on a rug. How times change: today both are top of mind for commercial real estate developers, brokers and tenants, and it is crucial to understand the benefits if you want to best serve your company or client.

Schoenheider believes -- and we concur -- commercial real estate development has forever changed on four important levels: building occupancy cost, employee productivity, customer relations and commitment to the future of business.

1. Occupancy cost. Sustainable buildings are first and foremost about efficiency – saving energy, saving water and keeping reusable materials out of landfills. Liberty has consistently demonstrated they can provide tenants with a commitment to a sustainable environment and save them money; at least $.15-$.30 cents – or more – a square foot in occupancy costs. Lower electric bills, lower water bills, lower gas bills … something they can easily (and happily) relate to.
2. Healthier buildings. Sustainable buildings tend to be healthier, meaning less time is lost to illness which translates into greater productivity and lowered employee turn-over.
3. Customer relations. Investors see the cost savings, employees see the health benefits, vendors see the opportunity to work with a progressive company and customers are actively looking for a commitment to the environment.
   
4. Sustainability: The future of business. Who will be the commercial real estate decision makers in just 10 or 15 years? Schoenheider posits. People who have grown up recycling, tracking that carbon footprint (and I don’t mean across the carpet), installing solar panels in their homes and driving hybrid cars. How will they view non-sustainable buildings? Just like disco (and grunge and ponchos and Ugg boots and …): obsolete.

Schoenheider wraps with a reflection of the past decade: We at Liberty remember saying in 2002 that a sustainable building was only expected to cost 10-20% more to develop than a standard building. Today as we approach break-even, the goal is to make them even less expensive to develop than standard buildings.

Companies like Liberty get it. The qualitative virtues of sustainable buildings are somewhat difficult to grasp; they're there, but they are intangible. However, there's no argument with the quantitative benefits. When you invest in making your real estate assets more efficient and sustainable, your NOI increases, asset values are bolstered, occupancy rates rise, and you can command higher lease rates. It's a sustainable path to the bank.