Many developers cite first-cost as a barrier to pursuing net-zero energy in their new and existing building projects. But one leading developer in Colorado is flipping the script on this assumption, showing that prioritizing energy performance can open up new cash flows, as opposed to draining existing ones.
John Madden Company (JMC) just closed on an energy efficiency project that will result in 30 percent energy savings for two buildings in their portfolio at no cost to JMC, and it will be cost-neutral to their tenants starting on day one. Existing building owners can learn a lot from understanding this project. Below, we’ve highlighted a few lessons learned that can advance buildings practitioners’ thinking about ways JMC’s approach can fundamentally shift performance economics.
Lesson 1: Lead with a vision, and support with actionable goals
When the buildings team at RMI first started working with Blair Bui, CEO of John Madden Company, it was a really refreshing experience. Not only was she a motivated, forward-thinking asset manager that wanted to find a way to make her portfolio more sustainable, she also wanted to look beyond her portfolio to inspire others in the real estate industry to pursue a similar path. JMC’s latest project does just that.
JMC is a family-owned business that owns and operates a campus portfolio of buildings in Greenwood Village, Colorado. They are passionate about sustainability and hope to differentiate themselves from the rest of the market by offering more efficient and sustainable buildings. This started with retrocommissioning their existing buildings and obtaining LEED EBOM certification for them, as more and more tenants were requesting this level of performance. Now JMC wants to raise the bar, and strive for a goal of net-zero energy over time. JMC understands that energy efficient assets are good for their tenants as well as their bottom line.
Blair Bui explained, “Transitioning our campus toward NZE is a process and it’s not going to happen overnight, but starting somewhere feels important to us. We’re starting with taking care of our tenants and creating a place for their employees to thrive.”
Lesson 2: Commercial PACE allows building owners to plan for longer-term efficiency projects with lower risk
John Madden Company has been working with McKinstry, an energy consulting company and design-build firm, since 2012 to evaluate and improve the efficiency of their buildings through active energy management, energy audits, and LEED certification. So, when the rooftop HVAC units for two of JMC’s buildings were nearing end of life, JMC and McKinstry chose to use replacing these rooftop units as a trigger to pursue a deeper energy saving project. JMC turned what would have just been a like-for-like rooftop unit replacement for most building owners into the largest commercial property assessed clean energy (C-PACE) project in Colorado!
C-PACE is a financing mechanism that enables low-cost, long-term funding for energy efficiency, renewable energy and water conservation projects and is repaid as an assessment on the property’s regular tax bill. C-PACE is a relatively new financing tool that has only been available in Colorado for the last few years and is currently only available in 16 other states in the US. PACE is a unique financing tool because it can cover 100 percent of a project’s hard and soft costs, offers long-term financing for up to 20 years, and provides for the energy projects to be permanently affixed to a property because the PACE assessment is filed as a special assessment on the property tax bill. This means the loan remains with the property even if property ownership changes, allowing for property owners that only plan to hold onto their property for a short period to pursue efficiency projects with longer payback periods. Oftentime the annual energy savings for a PACE project exceed the annual assessment payment, so property owners and tenants are cash flow positive immediately.
JMC’s PACE project will cost $7.1 million, result in $385,000 in annual energy and maintenance savings, and has an 18-year simple payback period. An 18-year payback period would typically be a nonstarter for building and portfolio owners since they may not even own their property in 18 years and want to see quicker returns on their investments. While JMC tends to have longer holds on their properties, PACE reduces the risk of this investment because the PACE loan remains with the property, not the property owner, so even if they choose to sell the property before the efficiency project pays back, they are not responsible for paying off the remainder of the loan. Additionally, since the PACE loan is spread over a 20-year period, the efficiency project can be paid forusing the energy savings. This means, since the payback period is shorter than the 20-year PACE loan term, tenants will see a slight decrease in operating expenses and experience better thermal comfort, and no upfront capital is required by the landlord.
Lesson 3: Bundling efficiency improvement projects results in deeper savings
This project shows the importance of bundling longer-payback efficiency projects with shorter-payback projects to get deeper energy savings with favorable economics. For example, the rooftop units replacement alone would have resulted in a payback period much longer than 20 years, so other efficiency measures with quicker payback periods were included to get under the 20-year payback period required to keep costs neutral to tenants.
This energy efficiency investment will result in 30 percent energy savings across the two buildings and set JMC’s portfolio on the path to NZE. Included in the project are active energy management, advanced submetering, completely new controls, new high-efficiency rooftop units, evaporative condensers, water saving improvements, and lighting improvements. Measures such as submetering, ongoing commissioning, and advanced controls tied to the building automation system will not only result in lower energy use, but also much better energy transparency.
This transparency can be used to engage the tenants on their energy consumption as well as troubleshoot high energy consumption in the buildings.
Lesson 4: PACE can be used to overcome the split incentive issue in leased buildings
The rooftop unit replacement demonstrates one of the more compelling value-adds of C-PACE—its ability to overcome the split incentive issue in leased buildings. Split incentives occur when those responsible for paying energy bills (tenants) are not the same as those making the capital investment decisions (landlords). JMC had to replace the rooftop units because they were almost at the end of their useful lives.
Typically, this would result in JMC taking out a loan to finance the new rooftop units, and they would be able to pass some of the cost through to their tenants, but would need to cover the majority of the costs themselves since there is a limit to how much cost they can pass through to their tenants. Since JMC would not be able to recover the full cost of the rooftop units, under normal circumstances they would be disincentivized from purchasing more efficient equipment. But because PACE is a tax assessment, not an operating expense, and has a longer term than most loans, JMC was able to pass the full cost of the rooftop unit through to the tenants (without any increases to their rent) and were therefore able to purchase more efficient equipment.
The unique ability of C-PACE to resolve the split incentive issue in triple-net leases makes it a powerful and exciting financing tool that existing building owners should consider, especially if they don’t have energy-aligned language in their lease.
Helping others to harness these lessons
This PACE project was a collaboration between John Madden Company; McKinstry; Bellco Credit Union, the project financier; Integro, the finance consultant; and the Colorado C-PACE program. Rocky Mountain Institute wasn’t directly involved with this PACE project, but has been working with John Madden Company to create various guides around net-zero energy. The first guide, released in January, shares best practices for leased net-zero energy buildings, including the value proposition to developers as well as components to include in an NZE lease.
The second guide is expected to be released in June and will share how portfolios can forge a path to net-zero energy over time using cost-optimal timing. This guide will include an analysis of JMC’s portfolio that builds on the analysis McKinstry did for the C-PACE project to develop a path to net-zero energy for JMC’s portfolio over time. While it is true that achieving net-zero energy in existing buildings can be more difficult than in new construction projects, using finance tools like C-PACE and well-timed upgrades, as JMC did, can bring existing buildings on the path to net-zero energy.