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COURSE 2
COURSE INSTRUCTOR:
Jack S. Nyman
COURSE 2:
THEMES OF ENERGY PROJECT FINANCE
Core Concepts
Financing Strategies/Capital Deployment in Real Estate
Project Cash Flow and Evaluation
Project Finance Instruments
Overcoming Split Incentives to Implement Energy Projects
Writing and Negotiating Green Leases
WEEK 1
2.
3.
Differentiate the various types of short term and long term cost
savings and cost reductions.
4.
5.
Acquisition Costs
First Costs Purchase Price, Installation Costs, Training
Preparation Costs Engineering and design, permits,
renovations
Utilization
Direct Labor and materials for routine repair &
maintenance
Indirect Energy costs, overhead (salaries, supplies, etc.)
Periodic Not expected to occur annually
Disposal
Residual Value The costs incurred (or recovered) when
the investment has reached the end of its useful life
Location;
Amenities;
Terms of the lease;
Prestige (or lack thereof)
Mortgage payments
Rent receipts
Tax liabilities and insurance premiums
Utility costs
Repairs
Sources:1JOHNSON
Sources: Effect of Green (LEED and Energy Star) Designation on Prices/sf and Transaction Frequency: The Chicago
Office Market Sofia Dermisi and John McDonald (Journal of RE Portfolio Management) Jan-April 2011 17,1
1.
2.
3.
4.
Historical rate increases are used to estimate utility costs over time
Future costs are expressed in present-day dollars via a discount rate
All costs and savings across the period are directly compared
Decisions are made based on total costs of ownership (TCO)
Source: National Institute of Building Sciences, Whole Building Design Guide: http://www.wbdg.org/resources/lcca.php
Image: Garfield Place in Brooklyn, adapted from work by Mark ONeill, via Wikimedia Commons
Source: http://green.harvard.edu/theresource/new-construction/life-cycle-costing/
Source: Guide To Energy Management 6th Edition Capehart, Turner, & Kennedy Page 159
IMPACTS OF INCENTIVES
Example:
Bonus depreciation (federal): 50% in first year, for certain projects.
1. To qualify, a project must satisfy these criteria:
A. Recovery period of 20 years or less
B. Original use must begin with taxpayer claiming the deduction
C. Property generally must have been acquired between 2008-2013
D. Property must have been placed in service between 2008-2013
2. A reduction of up to $1.80 per SF is available to owners who install:
A. Interior Lighting
B. Building Envelope, or
C. Heating, Cooling, Ventilation, or Hot Water Systems
3. Installations must reduce total energy cost by 50%, compared to
minimum requirements of ASHRAE Standard 90.1-2001.
IMPACTS OF INCENTIVES
Benefits increase net cash flows:
0
Acquisition Cost
10
($2,000,000)
Utilization Cost
($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000)
Energy Savings
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
Annual Savings
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
Residual Value
Cash Flows
$500
($2,000,000) $400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,000
$400,500
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
35%
Depreciation Benefit
50%
$350,000
Tax Credit
10%
$200,000
Incentives
20%
$400,000
Subtotal
Net Cash Flows
$950,000
($2,000,000) $1,350,000
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
$38,889
$438,889
$438,889
$438,889
$438,889
$438,889
$438,889
$438,889
$438,889
$439,389
INTRODUCTION TO LEASES
Legal Definition of a Lease
A conveyance of lands or tenements to a person for life, for a term of
years, or at will, in consideration of a return of rent or some other
recompense. The person who so conveys such lands or tenements is
termed the lessor, and the person to whom they are conveyed, the
lessee; and when the lessor so conveys lands or tenements to a lessee,
he is said to lease, demise, or let them.
2. Gross Lease
A. Landlord pays for the buildings property taxes and insurance
B. Landlord pays some or all of the propertys operating costs
1.
2.
LEASE PROVISIONS:
COMPONENTS OF BASE OPERATING COST
Base operating costs are strongly influenced by how escalatables are
treated in the lease
LEASE PROVISIONS:
PASS-THROUGH OF CAPITAL COSTS
Lease provisions sometimes allow the pass-through, or escalation, of
capital costs.
LEASE PROVISIONS:
ELECTRICAL DELIVERY METHODS
1.
2.
Sub-meter service
3.
Rent inclusion
2.
3.
4.
Utility company reads the meter and issues monthly utility bill
to end user
5.
6.
7.
8.
2.
Owner pays one master bulk bill at wholesale rates. Billing covers:
3.
1.
2.
3.
Meter reading
2.
Billing and
3.
4.
5.
6.
2.
3.
4.
Per square foot base established by dividing the annual electric bill by
the total rentable area of the building (currently averaging in NYC
about $3.50/square foot)
5.
6.
7.
Ownerships right to perform the survey at any point during the term
of the lease provided for in the lease
8.
LEASE PROVISIONS:
ENERGY EFFICIENCY UPGRADES
Lease provisions also shape the financing of retrofits for energy efficiency.
Smaller Tenant
Fixed %
Operating
Cost
Electric rent
inclusion
Operating
cost
escalation
Direct or
Submeter
2.
3.
WEEK 1: HOMEWORK
1.
2.
3.