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.

The Future of Energy Efficiency is an Even Sweeter Deal for Business

It is widely known that energy efficiency is a great decision for businesses of all stripes. Reduced expenses, greater cash flow, improved productivity - all at a typical payback period of just 2-4 years. Unfortunately, energy efficiency has historically lacked the glamor and following of "sexier" energy resources like solar. Perhaps because of this, financing options and other incentives for efficiency have lagged comparatively. This may be about to change.

A recent CleanTechnies article - "How to Make Energy Efficiency Affordable" - explores recent developments in project financing that make it easier for businesses to install energy-efficient equipment:

Consider the transaction that Metrus Energy, an EE developer and financer, announced in December with defense manufacturer BAE Systems, Siemens Industry and Bank of America. Under the deal, BAE Systems' facility in Greenlawn, New York will install $2 million in energy efficiency with no upfront payment or capital investment.

This may sound like a traditional energy service performance contract, which also spares the customer from an upfront capital investment. But Bob Hinkle, Metrus Energy CEO, explained that the deal is quite different. Called an energy services agreement, or ESA, it is more akin to a solar power purchase agreement (SPPA), except there is no power to be purchased. What's monetized is energy saved.

"Customers do not have to use their own capital. It is like a power purchase agreement where the customer is charged only for the output," Hinkle said. "But in energy efficiency, the output is not a kilowatt-hour generated; it is a kilowatt-hour saved, or a therm saved."

Better yet, there is a demonstrated interest on the part of investors to make such financing agreements a reality. Clean technology investors country-wide are considering ways to enable energy-saving projects - and share in the profits they produce:

The fund could serve as the third-party owner of the energy efficiency installations, collecting payment from the shared savings achieved by the businesses. [It] could then recycle the profits to pay for other clean technology projects.

Here at Octus, we partnered with Five Star Bank to develop the Building Energy Savings financing program, which we pair with utility cash incentives to produce extremely favorable financial outcomes for our clients. We're also working with clients to get them approved for a lucrative 0% financing program that has recently become available to qualified California businesses. As financial alternatives continue to expand, you can be sure we'll be at the forefront to ensure the companies we work with get the sweetest return possible.

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.

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.

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.

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.

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."