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.

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.

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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 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."

Energy Efficiency and Real Estate: Opportunities for Investors (take two)

In a post last week, we summarized a Mercer and Ceres report, Energy efficiency and real estate: Opportunities for investors. The report equips real estate investors and property managers with a pragmatic framework, and anecdotal evidence, to make informed decisions about how to implement energy-efficiency initiatives, with a central theme: If you’re not investing in energy efficiency, you are leaving money on the table. Corroborating music to our ears.

The report concludes with eight terse and meaningful morsels:

• Energy efficient buildings offer a measurable financial benefit over non-green buildings, in the form of higher rent, occupancy, valuation and lower operating costs
• No- or low-cost energy efficiency improvements can have quick and dramatic impacts on property operating costs
• Poorly performing buildings represent an opportunity for a significant investment gain when it comes to energy efficiency
• Additional improvements require planning, partnerships and initial investments, but can also decrease operating expenses and raise resale and leasing value
• Investment managers and products that consider energy efficiency and green building practices are increasingly available to investors
• Barriers to implementing energy efficiency improvements are eroding as demand grows, research on the benefits continues, and supporting products and services improve feasibility and cost-effectiveness
• A growing number of strong networks, initiatives and tools are helping investors, owners and property managers measure and improve energy performance and prioritize new projects and programs
• All of the above factors facilitate indirect approaches to energy efficiency improvements, which provide further opportunities to investors

As Energy Efficiency Booms, Buildings Get a Brain

The Cleantech Group recently released a comprehensive analysis of energy efficiency innovations in commercial office buildings. The findings are promising -- and lucrative -- for commercial building owners, managers and developers, let alone smart energy investors.

“Commercial office buildings consume 40% of the electricity produced in the U.S. and 18% of total U.S. energy,” said Sheeraz Haji, president of the Cleantech Group. “Our analysis shows that energy efficiency is poised to overtake solar as a top investment category in 2010, and commercial buildings represent a prime target. Lower investment costs, financial incentives, and faster payback periods are fueling product competition as data-driven technologies battle over the building’s brain.”

As we opined in a previous post, commercial, industrial and municipal buildings are dumb, inefficient and, above all, wasteful. If you own or manage a building (or a portfolio of buildings), you are unnecessarily wasting money every day. But, if your building has a brain -- if it's intelligent and you are intelligent in your management of your asset -- you, well, get smart. Andrew DeGuire, vice president, strategy and acquisitions with Johnson Controls, explains:

True building efficiency can only be achieved when executives take a more holistic view of their portfolio of buildings. Robust building control systems can be networked within buildings and across a portfolio to integrate security, lighting and HVAC with other enterprise applications, providing real-time data to track performance, decrease operating costs, and set future efficiency goals.

According to the Cleantech report, the focus on performance is driving an information and communication technologies invasion of buildings to enable greater visibility and control as vendors compete to be the gateway to building intelligence. Data-driven energy efficiency products and services look poised to grow, including low-powered Wi-Fi sensors, energy management software, building automation, and smart lighting and windows.

We could not agree more. A decade ago, few computers and information systems were networked; now, it's commonplace. Today, few buildings (and their energy-consuming equipment, specifically lighting and cooling systems) are networked. Ten years from now, we may look back and chortle at the back-then arcane -- boy, they were dumb! -- and wasteful condition of buildings.

Key Lessons: Energy Efficiency Retrofits

Leanne Tobias, author of Retrofitting Office Buildings to be Green and Energy-Efficient (recently published by the Urban Land Institute), shares a high-level summary of readily-available energy efficiency opportunities. Here's a snapshot:

• Energy efficient and sustainable retrofits can be remarkably cost-effective. A number of the case studies profiled in the book achieved payback in a year or less, and an early sample of U.S. LEED-certified retrofits showed average paybacks of approximately 17 months, with an average cost per square foot of just $.21.
• Many of the retrofit approaches with the best paybacks are the simplest. A few of the readily implemented, low-cost ways to reduce building energy use include such approaches as operational changes, lighting retrofits, and replacing constant speed drives with variable speed drives on major mechanical equipment. These types of changes are not technologically advanced, but they are extremely cost-effective.
• There are also some fascinating technological advances being introduced to the building energy-efficiency market. Among them: smart meters and smart grid systems, which use wireless technology to monitor and optimize energy use in real time.
• One of the most intriguing trends is the extensive use of passive heating and cooling to minimize reliance on mechanical systems. Passive heating and cooling approaches include the use of natural ventilation, the uncovering of thermal mass (exposing walls and underfloor slabs), and the use of vents or chimneys to regulate interior temperatures.

Click here to read the entire post published in GreenerBuildings.

Energy Efficiency and Real Estate: Opportunities for Investors

Commercial real estate developers, owners and managers are not adverse to making money. However, many are tentatively uncertain when it comes to energy efficiency -- implementing energy- and cost-savings measures to improve the performance and increase the value of their assets. Until recently, their trepidation made sense; minimal information and benchmarks existed to validate and propel their energy-efficiency investments. Times are changing.

A recent report authored by Mercer and Ceres -- Energy efficiency and real estate: Opportunities for investors -- elaborates how and why fiduciaries responsible for real estate portfolios assume significant risk and overlook substantial opportunities to enhance returns if they fail to factor energy efficiency into their real estate investment decisions. The seminal report lays out the steps investors can take to improve energy efficiency, and presents best practices for different types of investments.

A few metrics validating the business case for energy efficiency:

• A 2008 McGraw-Hill Construction/US Green Building Council survey found that markets for green commercial and institutional buildings in the US have risen from 2 percent in 2005 ($3 billion) to about 10 to 12 percent of construction value ($24 billion – $29 billion) in 2008, with projected growth to 20 to 25 percent ($56 billion – $70 billion) by 2013.
• Current research by RREEF, Deutsche Bank’s real estate investment division, reveals a shortage of energy efficient real estate to meet this growing demand. Price and value premiums observed for green buildings reflect this shortage of such properties on the market.
• A Maastricht University study found an actual rental premium of 3.5 percent on US office properties, a 6 percent increase in occupancy for ENERGY STAR buildings (similar to McGraw-Hill survey results), and a 16 to 17 percent premium on transaction prices (sales price per square foot).
• In a 2008 study, University of Arizona Professor Gary Pivo and Indiana University Professor Jeffrey Fischer found higher income and income growth, lower capitalization rates, higher net operating income per square foot, higher market value, higher rent and lower expenses for ENERGY STAR rated properties, compared to properties with no energy efficiency rating.
• In a 2009 study, researchers at the School of Real Estate and Planning at Henley Business School found commercial building price premiums of 10 percent and 31 percent, respectively, for ENERGY STAR and LEED- certified buildings.

In addition, the report (page 26) sequences -- in plain, make-it-happen language -- technical improvements for energy efficiency upgrades: Retrocommissioning, lighting, supplemental load reductions, air distribution systems, and heating and cooling systems.

Overall, the three most significant drivers for energy-saving retrofits are energy cost reductions, responding to client demand and a desire to create a superior product. Based purely on economic returns, investing in energy efficiency is the single most viable investment a property owner or manager can make.

Building Star: The latest star for energy efficiency?

First there was Energy Star, the long-established energy ratings system. Then came Home Star, an energy-efficiency incentive program for homeowners. Now, the Senate is contemplating creating a Building Star program to provide incentives to commercial buildings related to their energy efficiency. Is the third star a charm?

Rebate and incentive programs are proliferating for commercial building owners, most all regionally managed and delivered by utility companies. Building Star has catalytic potential to nationally incent and reward energy-efficient measures in commercial and multi-family residential buildings. Additional incentives plus low-cost project financing ... there's a potential star in the making.

According to Environmental Leader:

The bill was introduced March 4 by Sen. Jeff Merkley (D-Ore.) and Sen. Mark Pryor (D-Ark.).

The program is expected to save building owners more than $3 billion on their energy bills annually by reducing peak electricity demand. “Buildings represent 40 percent of the energy used in the United States, and many have old equipment that waste energy and money,” Pryor said.

In addition to rebates to reduce the cost of energy-saving measures such as high-efficiency heating and improved insulation, “Building Star” would also extend low-interest financing options to small businesses and other building owners.

Through the umbrella group Rebuilding America, Building Star has the support of the National Electrical Contractors Association, the Energy Future Coalition and the Center for American Progress Action Fund. The American Architectural Manufacturers Association also has pledged its support for the measure.

Among items proposed to be covered by the Building Star incentives are:

- building envelope insulation;

- mechanical insulation;

- windows, window films, and doors;

- low-slope roofing;

- HVAC equipment, water heaters, and boilers;

- duct testing and sealing;

- variable speed motors;

- interior and exterior lighting;

- building energy audits, commissioning, tune-ups, and training; and

- energy management and monitoring systems.