Building Energy Retrofit Program

produced by the

Building Owners & Managers Association (BOMA) International and the

Clinton Climate Initiative (CCI)

Building Owners & Managers Association (BOMA) International Clinton Climate Initiative (CCI)

Building Energy Retrofit Program Table of Contents BOMA/CCI Building Energy Retrofit Program Overview ................................................................. 2 BOMA International’s Role ......................................................................................................... 3 Clinton Climate Initiative (CCI) Role ........................................................................................... 3 Owner and/or Operator Role ..................................................................................................... 4 Historical Barriers to Investment in Energy Efficiency .................................................................... 4BOMA Energy Performance Contracting (BEPC) ............................................................................ 5Best Practices .................................................................................................................................. 6BOMA/CCI EPC Project Development Process ............................................................................... 8 1. Define Project & Owner/Operator Criteria ............................................................................ 8 2. Assess Opportunity and Select ESCO ................................................................................... 10 3. Execute Letter of Intent or Investment Grade Audit Contract and Conduct Investment

Grade Audit .......................................................................................................................... 12 4. Evaluate IGA Results and Determine Final Project Scope .................................................... 14 5. Sign BOMA Energy Performance Contract (BEPC) and Conduct Building Retrofit .............. 15 6. Monitoring, Evaluation, and Training ................................................................................... 16 Financing ....................................................................................................................................... 17Contacts ........................................................................................................................................ 22Library of Documents .................................................................................................................... 24

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BOMA/CCI Building Energy Retrofit Program Overview

The Building Owners & Managers Association International (BOMA) has over a 100 year long history of supporting the development of best practices within the real estate industry through research, education, and advocacy. In the spirit of this tradition, BOMA has partnered with the Clinton Climate Initiative (CCI) and collaborated with major real estate companies and energy service companies (ESCOs) to identify the historical barriers to investment in energy efficiency in the commercial real estate sector and develop a model to help owners/operators execute larger, more sophisticated energy efficiency retrofits and bring about greater operational improvements in investment real estate. The BOMA - CCI Energy Performance Contracting Model provides building owners and operators a simplified, turnkey method for undertaking energy efficiency projects that are not only good business decisions, but also good for the environment. More specifically, BOMA and CCI have partnered to remove barriers to deeper investments in energy efficiency by creating a standardized energy services performance contracting model whereby capital investments that improve buildings’ financial and environmental performance are paid for out of the energy and operational savings created by those improvements. The savings are financially guaranteed by the ESCO performing the work, reducing risk and enabling deeper potential investment. The program includes advice on best practices in project development and execution, a series of model documents that can be used to streamline the project development process, and a number of additional resources that can be accessed for assistance in executing an energy efficiency project. There are many benefits to energy efficiency retrofits, both for building owners/operators as well as tenants. Owners/operators get state of the art equipment and a commensurate reduction in operating expenses, which boosts NOI, extends the useful life of the building systems, and makes the building more competitive. The new building systems and technologies also allow for better control of temperature and indoor air quality, improving occupant comfort all of which support better tenant satisfaction and retention. Improving energy efficiency also creates potential for improved tenant attraction and retention, as tenants enjoy a lower overall cost of occupancy and because tenants are increasingly demanding greener buildings. In fact, this model can be used not only for improving energy efficiency—certainly the key focus—but also as an important step to obtaining Energy Star, LEED, and other certifications.

Project financing can be provided by the implementing Energy Service Company (ESCO), a bank, a specialized financing company, a utility, or by the real estate organization itself should it choose to self-finance. CCI is working with leading financial institutions to increase building owners’ access to cost-efficient capital for energy efficiency projects, either through existing financial products or through the development of innovative finance structures.

Subject to lease requirements, the real estate organization can pass on to tenants the amortized cost of the project as an operating cost since most leases allow for capital

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improvements to be expensed as long as the project reduces operating expenses. Each real estate organization will need to review its tenants’ leases to make its own determination about the ability to pass through the costs of an energy efficiency project, but intuitively it makes sense that tenants would be supportive of investments in retrofits that help to lower operating costs and improve comfort. BOMA International is proud of our collaboration not only with the Clinton Climate Initiative, but also with major service provider partners, real estate organizations and other leaders, and formally thanks Trane, Siemens, Johnson Controls, Honeywell, and also Jonathan Furr, senior counsel at the law firm of Holland & Knight, who provided independent legal and EPC contracting expertise to the development of this program – all contact information for these and other partners can be found at www.boma.org. BOMA International’s Role BOMA’s role is to be the unbiased resource and solutions provider to facilitate voluntary, business case driven market transformation of the built environment. Due to all of these specific issues for commercial real estate, BOMA has worked with CCI, real estate industry leaders, and energy service companies to develop an industry vetted, standardized, and simplified model to address barriers to greater efficiency and sustainable real estate. The BOMA Energy Performance Contract model provides a standardized approach, with sample template documents for project development, bidding and ESCO selection, as well as the industry vetted EPC known as the BOMA Energy Performance Contract (BEPC). BOMA also provides educational resources to support understanding of the key value and business case drivers for increased energy efficiency. For example:

• Real estate professionals and service provider partners have access to education, information sharing and case studies through the annual BOMA International Conference and Every Building Show.

• Programs such at the Sustainable Operations Series (SOS) and BOMA Energy Efficiency Program or “BEEP” as it’s more commonly known, is a six course curriculum taking owners and operators through every aspect of energy efficiency.

• BEEP in particular includes within course 5, “The Financial Valuing of Energy Efficiency,” the information about EPC processes in general and the BEPC specifically.

Clinton Climate Initiative (CCI) Role

• CCI will serve as a liaison between ESCOs, owners, operators and financial partners to ensure continuity, focus on the mission, and long-term program performance.

• At the operator or owner’s request, CCI will serve in a consultative role, advising on best practices, introducing suppliers and other providers, and supporting the project development where needed.

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Owner and/or Operator Role 

Assign  a  Project  Manager  to  oversee  the  energy  efficiency  project  and  serve  as  a primary point of contact throughout the process; 

Create a project‐dedicated cross‐functional team to enable timely decision making.  This team  should  include,  or  receive  approval  directly  from:  financial,  legal,  procurement, building operations, and other key decision‐makers; 

Compile  portfolio  data  including,  at  a  minimum,  each  building’s  annual  energy consumption, utility spend and copies of twelve months of energy bills as well age, size, systems  information, and date of any upgrades.   Please see the “Property  Information Summary”  in  the Additional Resources section below  for a comprehensive example of what information is desirable to have compiled.        

Develop a work plan, timeline, and project milestones;  

Define specific project goals and financial criteria. 

Get buy in conceptually early and then formally along the way from key decision makers based on concept that the project is intended to lower costs and improve performance without upfront capital outlay. 

 

 Historical Barriers to Investment in Energy Efficiency   BOMA and CCI have together identified certain common issues that have historically created barriers to the financing and execution of energy efficiency retrofit projects in multi‐tenant commercial investment real estate.  It is in the context of these challenges that BOMA and CCI have developed the BEPC model.    

Holding period bias:  Hold periods for investment real estate have continued to shorten, and  thus  lengthy energy performance  contracting  (EPC) efforts  common  in  the public sector for over 20 years, have made deeper  investments  in efficiency more difficult to execute in the investment real estate sector, as the asset could be expected to be sold “at any  time” and certainly before an EPC project could be developed, contracted  for and  implemented.   Thus many owners are reluctant  to  incur any obligations  that may complicate a future sale.  This creates a myopic focus on short‐term results that negates most of the more robust energy efficient technologies, which may require 5‐10 years to payback.  The result is a bias toward short payback projects, e.g., lighting. 

 

Owner/tenant  split  incentive:    Unlike  the  federal  sector  where  the  government commonly owns the buildings it occupies, most private sector real estate assets are held by  “non‐occupying  owners”.    This  factor  combined with  net  or modified  gross  lease structures  where  multiple  tenants/lessees  pay  utilities  either  directly  or  through reimbursements, largely insulates the owner not only from rising energy costs, but also from the benefits of  investment  in  improved energy efficiency.   The result  is an owner with limited incentive to invest in energy efficiency due to this perceived split incentive between tenant and owner.  Similarly, while the tenants pay for energy costs, as lessees 

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they won’t proactively invest in long-term capital improvements for a building they do not own. Notwithstanding this perceived split incentive, many leases contain clauses that permit owners to pass-through the capital costs of efficiency improvements to the extent that these costs are offset by a reduction in operating expenses.

• Investment capital constraints: While some owners have ready internal capital to

invest in their properties, many do not, or have finite capital availability. In this environment, energy efficiency projects must compete with other building improvements for limited internal capital - e.g. refurbishment of common areas to support leasing, tenant improvements, or leasing commissions all take first priority for capital. These factors significantly limit the availability of capital for a comprehensive energy efficiency program.

• Collateral issues: Whereas most government buildings are fully-owned by an

investment-grade government entity and are not leveraged with a mortgage, private sector assets are typically owned by an unrated limited-liability company (in fact, a special-purpose vehicle specifically created to own that asset) and will have a mortgage under which all real property improvements are pledged under a first priority lien in favor of the mortgagee. While the LLC may have a large parent, generally speaking, the parent does not guarantee the obligations of the LLC.

BOMA Energy Performance Contracting (BEPC)

The process outlined in this program uses Energy Performance Contracting (EPC) as a mechanism for carrying out projects to reduce energy use in existing buildings. The BOMA Energy Performance Contract (BEPC) platform is a refinement of this innovative contracting model, which uses the utility and operational savings derived from a building efficiency project to repay the cost of the project. For over two decades, EPC has been offered by Energy Service Companies (ESCOs) as a self-financing mechanism to pay for energy efficiency retrofits and capital improvements, but due to its complexity, long timeline, and the fact that lenders have historically required a lien or a personal guarantee from the owner, EPC has largely been confined to the public sector, where building owners are generally longer-term holders of their real estate, are able to accept liens and go through lengthy contracting processes. In creating the BEPC model, many key aspects of the energy efficiency retrofit process were vetted by top ESCO’s and real estate companies to streamline the project development and implementation process and create boiler-plate documents, including the BOMA Energy Performance Contract itself. In this model, the owner sets the financial and environmental parameters and the ESCO audits the building(s), designs the project, establishes a maximum project cost, calculates minimum energy savings, and acts as the prime contractor for project implementation, providing ongoing monitoring and verification of project performance after

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completion. Under the BEPC, the ESCO financially guarantees the energy savings that will be achieved, assuming project risk and compensating the owner for any savings shortfalls. With the standardized BOMA Energy Performance Contract (BEPC) and CCI’s partnerships to lower project costs and provide funding sources, there is an opportunity to reduce the time it takes to complete these types of projects from 18 - 36 months down to twelve months or less. Further, since the contracts are standardized, real estate professionals need not become experts in performance contracting or energy performance guarantee provisions to execute a successful project.

– Owner/operator controls the process and specifies all project criteria Benefits of BEPC include:

– Streamlined project development – Minimized project costs (up-front legal costs, man-hours, project management,

component costs) – Easy editing of template documents to fit specific goals and objectives – High confidence of project implementation – Potential for projects to be self-funding, with energy savings covering debt service – Building performance assured through performance guarantee for the life of the

agreement More information about EPC can be found at: www.boma.org Best Practices The Clinton Climate Initiative (CCI) has signed a memorandum of understanding (MOU) with a number of large ESCOs that establishes a series of Energy Performance Contracting Best Practice Terms and Conditions for project procurement, development, and contractual processes. These terms and conditions, similar to what the US Federal Government and other large customers have negotiated with the ESCO industry, are meant to promote transparency, protect building owners’/operators’ financial and operational interests, and encourage an atmosphere of open partnership and shared mission between building owner/operator and the ESCO. CCI partner ESCOs have agreed to extend these Terms and Conditions to building owner/operator partners of CCI. Building owners/operators should educate themselves about these Terms and Conditions, and should specifically request them early in the project development process so they can be prepared to ensure such terms are met in the project.

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CCI MOU Terms and Conditions Term Benefit to Owner

A savings guarantee allows the building owner or operator to calculate the real return on the investment in the project, definitively model future cash flows and create a financial model with confidence. This guarantee can be used in certain financial product to get 100% upfront financing for the EPC project. This guarantee will be backed by the ESCO and the contract will make clear how and when any shortfall is reimbursed to the owner.

Guaranteed Savings At the end of the audit process, the ESCO will provide the owner with a fixed minimum guaranteed annual energy savings, measured in kWh or other units of energy consumption and converted to dollars (or other currency) based on a cost per unit of energy at the time the contract is completed. If the savings is not realized, the ESCO will make the owner whole by paying for any savings shortfall.

Like the savings guarantee, this standard construction method allows the owner to make investment decisions with confidence and predict returns under different financing scenarios.

Guaranteed Maximum Price (GMP) At the end of the audit process, the ESCO will provide a GMP for the recommended project. The owner and the ESCO will sign a contract to implement a project with a fixed maximum cost.

• Total cost and savings by type of measures, with savings broken down by fuel type, and (non-guaranteed) other savings, such as labor and capital savings

Transparent Pricing ESCOs will use transparent pricing methodology in the project as requested by the building owner or operator. Some examples of transparent pricing methodologies include:

• Total materials costs, labor costs, and margins for the whole project or breakdown of total labor costs, total material costs, labor margin and materials margin by ECM

• Breakdown of total soft costs (including such items as design, project management, profit, etc.) for project, in percentages or fixed amounts

• Breakdown of final cost for each intervention, as well as total amount of soft costs and ESCO overhead and profit

• Additional information to ascertain that competitive bidding and CCI Purchasing Alliance requirements have been met

This allows owners to understand and negotiate the cost structure of the project before agreeing to proceed, make confident investment decisions, ensure value for money, confirm inclusion of CCI products and prices and enable gain sharing/cost reduction strategies. This provision can also be used to satisfy competitive bidding requirements of ownership.

CCI has negotiated favorable pricing on over 1,000 energy efficient building technologies. ESCOs have agreed to incorporate these prices where favorable to owners in order to minimize project costs.

CCI Purchasing Alliance Prices Where available and favorable, ESCOs will incorporate CCI negotiated product price discounts in their EPC projects.

This cost incentive method provides incentive to the ESCO as GC to minimize project costs.

Gain Sharing Any reduction of final project cost below GMP will be shared between the ESCO and the owner in a negotiated split.

This is the international best practices standard for measuring energy savings – see “Measurement and Verification” section of this document for more information.

Standard M&V protocol ESCOs will use one of four standards provided in the International Performance Measurement and Verification Protocol (IPMVP) protocols to measure and verify energy savings.

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BOMA/CCI EPC Project Development Process 1. Define Project & Owner/Operator Criteria

a) Defining Owner/Operator Criteria A key first step to any successful EPC project is for the owner or operator to determine the metrics for success early in the project development process. The owner or operator must define its main goals with as much specificity as possible and translate these goals into criteria for the ESCO. These requirements become part of the project scope that guides the ESCOs in their analysis, and are eventually incorporated into the contract language, so it is important for ownership to be clear on what these metrics are at the beginning of the project development process. It is also advisable for the owner to begin evaluating potential financing options early on.

Hurdle rate (minimum Internal Rate of Return or IRR) The owner should define, for example:

Required return on investment (ROI) Simple payback vs. life cycle costing Other cash flow or operating expense reductions requirements Desired outcomes, such as LEED certification, Energy Star Label, Green Globes, or other

specific improvements in rating. The level of detail on the break out of costs and savings as well as details about how

savings were calculated

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Percentage of energy and/or water consumption to be reduced

It is recommended that beyond identifying any known, specific project opportunities (i.e. if it is known that there is a need for a new chiller, that would be good to identify), that the project scope not specify a “list of retrofits” or total project cost, but rather focus on financial and environmental outcomes so that each ESCO is able to be as creative as possible in achieving the owner/operator desired goals. In doing so, proposals often have both similar recommended retrofits as well as very different approaches. Owners/operators are best served when ESCO’s are enabled to use their engineering and operational expertise to drive the best possible projects designed to achieve intended goals.

b) Project Site(s) Selection There are a number of factors for an owner/operator to consider when selecting a suitable project site(s) for an EPC project. In general, the facility should have high annual energy use, a lower Energy Star rating, and sufficient energy saving opportunities to generate the necessary cash flow to amortize all project costs over the contract. In general, larger facilities with complex building systems are the best candidates for EPC projects but that does not mean there aren’t significant opportunities for smaller projects. The larger the annual energy costs and potential for savings, the greater the opportunity for all parties to benefit from energy performance contracting.

Excessive or higher than market annual utility costs with savings opportunities Good candidates for EPC projects possess most of the following characteristics:

Stable facility use Consistent energy-use patterns over several years – stabilized occupancy Access to several years of utility records, Assets identified for strategic repositioning (such as desire for LEED certification) Assets that are already planned to undergo a major capital improvement Assets rating below a 75 on Energy Star – although with improving technology, even

Energy Star labeled buildings have opportunities

While not required, it can make economic sense to combine several facilities into a single project offering. Although the projects need not be executed simultaneously, multiple building projects with excessive energy costs are usually very attractive to ESCOs and may allow the owner to get improved overall pricing, financing terms and greater execution efficiency by obtaining a greater number of energy improvements through a single procurement. The owner should compile the information detailed in the “Property Information Summary” for each building that the ESCOs will eventually be asked to evaluate in order to enable the ESCOs to judge whether the selected building is likely to contain a viable project and thus a win-win solution. If the owner chooses to use a competitive ESCO selection process, it is advisable to select a maximum of 3 ESCOs to evaluate one building.

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2. Assess Opportunity and Select ESCO

Under the BOMA/CCI model, real estate companies and ESCOs work together to determine a series of Energy Conservation Measures (ECMs) that meet owner financial requirements, and implement the ECMs through the BOMA Energy Performance Contract (BEPC) structure. Because BEPC projects can include long-term contractual relationships, choosing and working with an ESCO should be viewed as creating a partnership.

The process of selecting and ESCO is akin to selecting an architect. The owner assesses the ESCO’s track record, financial strength, creativity, technical skill, and pricing, then chooses the firm that stands out the most. There is no contract signed until the owner engages the ESCO to conduct an Investment Grade Audit (IGA). And with a well designed IGA contract (provided in the Additional Resources section, and editable to meet specific ownership, operator and ESCO needs), the owner is not at risk of paying for an audit of a building where the ESCO is not able to propose a project that meets the owner’s investment criteria. The owner is not making any kind of financial or legal commitment by simply choosing an ESCO. The ESCO selection process can be as formal or as informal as the real estate company wishes, depending on the owner’s procurement requirements and desired implementation timeline. Some companies have existing relationships with ESCOs and may prefer to work with those firms; some may wish hold informal meetings and interviews to choose an ESCO partner; others may use a more formal Request for Qualifications process followed by a Request for Proposals and Preliminary Opportunity Assessments. For owners/operators that know in advance that a Preliminary Opportunity Assessment will be required before selecting an ESCO partner, it can save time to combine the RFQ and RFP processes and schedule one meeting for each ESCO to present its qualifications and Preliminary Opportunity Assessment together. See the “Sample ESCO Evaluation Criteria,” “Sample RFQ,” “Sample RFP,” and “Sample Combined RFQ/RFP” documents in the Additional Resources section for examples. To begin the process, the owner or operator should provide the ESCOs with the information contained in the “Property Information Summary” (included in the Additional Resources section) along with the RFQ or the “Combined RFQ/RFP.” This information enables the ESCOs to better understand the opportunity, to judge whether the selected building(s) is likely to contain a viable project, and to determine whether the given ESCO’s particular expertise is or is not suited to execute. This information also makes the technical walk-through more productive, should one be required. If the owner/operator elects to use an RFQ process and there is a clear stand-out after the qualifications interviews, the owner/operator can choose to proceed with that firm to negotiate an Investment Grade Audit contract, bearing in mind that there is no obligation to proceed until a mutually agreeable Investment Grade Audit contract is executed. The owner or operator can choose this strategy and still meet competitive bidding requirements by requiring that the IGA include competitive bidding of project components.

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Alternatively, following the RFQ interviews the owner/operator can choose issue an RFP to one or more preferred ESCOs to schedule a technical walk-through and request a Preliminary Opportunity Assessment of the building(s) chosen for the project. These Preliminary Opportunity Assessments are helpful as they allow the owner/operator and the ESCO to preliminarily assess project scope, costs and savings so as to enable all parties to obtain appropriate buy in from key decision makers. Guided by the project goals and criteria established by the owner/operator, these Preliminary Opportunity Assessments are best estimates based on the ESCOs’ experience and expertise, but do not have guarantees behind them.

During the technical walk-through of the selected building(s), the owner/operator’s technical staff can assess the ESCOs’ field teams using the “Technical Interview Questionnaire” provided in the Additional Resources section. The ESCO teams will also ask questions of the owner/operator’s staff in order to better understand the building and any known issues. The owner/operator’s technical team reports back its evaluations of the ESCOs’ teams, which the owner/operator can then factor in to the assessment of the ESCOs. After the walk-through, the ESCOs draft Preliminary Opportunity Assessments laying out recommended Energy Conservations Measures (ECM’s), and the estimated costs and savings associated with each measure. See “Sample RFP – Request for Preliminary Opportunity Assessment” in the Additional Resources section.

Under the “Combined RFQ/RFP” approach, the owner/operator requests a technical walk-through in advance of the qualifications interviews, so that the owner/operator can discuss the results of the ESCOs’ Preliminary Opportunity Assessments at the interview as an additional means of selection. It is advisable that the owner/operator have key technical staff present at the interview to ask questions, judge the ESCOs’ technical acumen, and help to assess the ESCOs’ general project execution approaches. No costs are incurred by the owner/operator through the RFQ, RFP, and Preliminary Opportunity Assessment processes. However, once there is a desire to move forward with an investment grade audit (IGA), the owner/operator is responsible for the cost of the IGA, if and only if, the IGA confirms preliminary proposal findings (if applicable) and achieves outlined owner/operator goals and the owner/operator does not move forward with the project. As such, having some sense of the project costs, savings and benefits is often needed to gain approval to proceed with the IGA. Once an ESCO has been selected, the ESCO will further analyze the selected building(s) and evaluate the potential project. The ESCO can share any additional analysis with the owner/operator before executing the IGA agreement, so that both parties can have high confidence that the proposed project laid out in the IGA contract is likely to produce the desired energy and operational savings. Owners/operators may choose to select an alternative building for the ESCO to evaluate should the original choice prove unlikely to contain a viable project after preliminary analysis.

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Determine an ESCO selection process and define process in a written document for the ESCOs – see the Additional Resources Section for sample RFQ, RFP, and “Combined RFQ/RFP” documents that can be easily edited to meet project specific or owner/operator goals.

Owner/Operator Responsibilities:

o The document(s) should contain all of the information the ESCOs need in order to prepare for the selection process (whether it is an informal meeting, a formal interview, walk-through assessment or written response).

o The document(s) should be supplemented with the information outlined in the “Property Information Summary” which can be found in the Additional Resources Section.

Select initial list of ESCOs to review by pre-qualification through high-level review of ESCO capabilities, financial strength and project history.

Conduct timely ESCO review process including interviews, technical walk-throughs and opportunity assessments as desired.

Select “alternate” building(s) for the ESCO to evaluate if the original choice is deemed unlikely to contain a viable project.

3. Execute Letter of Intent or Investment Grade Audit Contract and Conduct Investment Grade Audit

With the more detailed Investment Grade Audit (IGA), project scope will be refined such that costs, savings, projected returns, and costs for any additional desired outcomes (e.g. Energy Star or LEED certification) will be fixed. In order to define the savings, the IGA results must establish a representative annual consumption baseline for all utilities and fuel types (e.g., gas, water, electric, etc.) which is why providing hard/electronic copies of actual utility bills is invaluable. The costs and savings laid out in an IGA report are financially guaranteed by the ESCo performing the work. Under CCI’s agreement with the ESCOs, the negotiated cost of the audit will be rolled into the total cost of the project, should the owner choose to proceed, and can be repaid from the project savings. If the ESCO is unable to discover a project that meets the investment and other criteria, there is no charge for the audit. If the proposed project meets the owner’s predetermined criteria and the owner decides not to proceed with the project after the audit is completed, the owner is obligated to pay the ESCO a “walk-away fee” for the audit, which is negotiated and agreed to before the IGA is undertaken

It is advisable for the owner/operator to require that the selected ESCO competitively bid out each proposed Energy Conservation Measure (ECM) and offer the owner/operator a range of choices regarding subcontractors that may be selected to implement a given ECM. The ESCO is always encouraged to make recommendations for why particular subcontractors and/or ESCO brand equipment should be selected – good examples for

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selection include 1) proven history and track record, and 2) financial strength or bonding capacity. This gives greater transparency to the process, and allows the owner/operator to meet any competitive bidding requirements from partners, investors, and/or management agreements. Please see the Additional Resources section for a “Sample Investment Grade Audit Contract.” Also see the “Finance” section below for additional detail.

For each proposed Energy Conservation Measure: detailed cost information, annual cost savings, annual maintenance cost impacts, simple payback, expected life and environmental impacts. Costs and savings should be fixed, definite numbers in the IGA Report, not estimates.

At a minimum, an Investment Grade Audit (IGA) should include:

Full analysis and definition of base year consumption for each fuel and utility type. Full description of the analysis methods, calculations, data inputs, and all technical and

economic assumptions. This analysis serves as the basis for the project design and anticipated performance. The cost of an investment grade audit generally varies between 6 and 12 cents per square foot, but costs could be higher or lower depending on the complexity of existing equipment and the effort required for collecting accurate data. There are economies of scale possible, however, which can reduce audit costs per square foot in large facilities. The time required to complete an investment grade audit varies by the facility size and complexity and data availability.

Under CCI’s agreement with partner ESCOs, owners/operators are entitled to certain Terms and Conditions from the ESCOs, and as such it is suggested that the real estate company understand, define, and explicitly request the following key elements in an IGA Contract: Owner-defined investment criteria

: This defines the “rules” for the ESCO as it goes hunting for a project. This can be expressed in many different ways such as simple payback, return on investment (ROI), hurdle rate or internal rate of return (IRR), operating cost savings in total and per square foot, etc. Goals can also be expressed in non-financial terms, for example, percent reduction in energy use, desired energy or environmental certification or GHG emissions. The owner/operator can define multiple criteria, but they should be feasible to attain together – i.e. a 20% energy reduction with a 2-year simple payback might not be possible. The results of any preliminary analysis can be considered when defining the investment criteria. For example, the owner/operator might define that the IGA proposal should meet the preliminary proposed costs, savings and returns within +/– X%.

Project realities:

Operational restrictions (construction timing restrictions, etc.) and local issues (permitting, etc.) will affect the price and timeline of the project. Bidding Requirements: This is also the place to define bidding requirements, such as competitive bidding and other requirements, such as what technologies or building components should be included or left out of the project scoping.

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Inclusion of CCI Purchasing Alliance products and pricing

: CCI projects have access to advantageous prices on over 1,000 energy efficient products. Owners and operators should request that the ESCO incorporate these products where beneficial. Desired Deliverable from IGA

o Gross maximum cost for each recommended measure

: under the CCI MOU, owners are entitled to transparency in pricing and a firm investment proposal as a deliverable, which should include:

o Fixed minimum savings (expressed both in units of energy consumption and then also converted into dollars based on utility rates in place at the time the BEPC is or will be executed) guaranteed

o Additional pricing information as requested by the ESCO

Owner and Operator Commitment

: The owner and operator must agree to provide certain information (to the extent the owner or operator has needed information) and adequate access to the facility. Project Schedule:

Parties must agree to act in good faith to keep to the project schedule outlined in the IGA contract. Details of Walk-away Fee

o

: After execution of the IGA and delivery of the IGA analysis, the owner or operator is agreeing to pay a negotiated fee to walk away from the project under certain conditions. Thus, it is critical to define prior to signing the IGA contract:

Fee Amount

o

– This can be expressed as a fixed cost (usually 6 to 12 cents per square foot according to the Energy Services Coalition) or as a percentage of total project cost. Payment Terms and Conditions

– The owner or operator should only pay the fee if the ESCO finds a project that meets the owner’s/operator’s defined criteria and the owner/operator decides not to proceed with project implementation.

Conformance with CCI Terms and Conditions

It is important to note that after signing the IGA contract there is a binding commitment on both parties, so confirming that project criteria and requirements are accurate and reasonably attainable—and that financing will likely be available if the project meets owner’s/operator’s criteria—are critical items to address. If the owner/operator is not able to proceed with the recommended project after the IGA is carried out because of an inability to secure financing, the owner/operator will be liable for the negotiated “walk-away fee.” The owner/operator should consult with legal counsel to review contracts if additional expertise is required. See the Additional Resources section for a “Sample Investment Grade Audit Contract.”

– Include the exact definition of how the ESCO will adhere to any CCI terms and conditions (T&C) requested by the owner/operator, including transparent pricing, incorporating CCI Purchasing Alliance products, etc.

4. Evaluate IGA Results and Determine Final Project Scope Upon receiving the results of the IGA, the owner/operator and the ESCO will together review the recommended energy conservation measures (ECMs) to determine which will be

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included in the final scope of the project. Since the audit results contain information that will be incorporated into the BEPC contract, the owner/operator should conduct a rigorous technical and financial review of the audit information before finalizing the contract. If third party financing is involved, this should be finalized before proceeding to sign the IGA Contract, not to mention the BOMA Energy Performance Contract authorizing the ESCO to begin project implementation. Please see the Finance section below for more information. Please also see the “BOMA Energy Performance Contract” in the Additional Resources section.

5. Sign BOMA Energy Performance Contract (BEPC) and Conduct Building Retrofit

The BEPC is the industry vetted, standardized contract that defines the design, construction, and ongoing measurement and verification of the project. BOMA and CCI have worked together with top real estate companies and Energy Service Companies to create the standardized BOMA Energy Performance Contract (BEPC) and the associated sample documents that make up the entire model – all of which can be found in the Additional Resources section. The BEPC is intended to standardize most aspects of the EPC process, and addresses the key complex criteria for performance guarantees, measurement and verification, etc. Many companies will be able to use the BEPC in its current template format, allowing the real estate company to focus on price and scope of work, much like the Architect International Association (AIA) construction contracts. Others will use the BEPC substantially without change but will focus not only on price and scope of work but also on insurance, indemnity, and warranty among other key provisions. Owners, operators and ESCOs will best determine what the best approach will be, which will be heavily influenced by project-specific criteria. Most key elements have been generally accepted by major ESCOs and several large real estate companies, so there is no need to become an “expert” and negotiate a very complex contract. This being said, BOMA and CCI recommend each owner/operator seek appropriate legal advice. Also see “Top Ten Business Issues in Energy Performance Contracting” in the Additional Resources Section.

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6. Monitoring, Evaluation, and Training Ongoing maintenance, measurement and verification, and performance evaluation are critical to the long-term success of EPC projects and also for the enforcement of the performance guarantee. The owner and/or operator as well as the ESCO have responsibilities in this ongoing process, as outlined in the BEPC contract. The mere presence of new equipment does not guarantee maximized efficiency; operational execution is absolutely critical to the success of any energy retrofit project. Many owner and operators are more than capable of providing the operational and maintenance capabilities required to ensure desired outcomes are achieved. But to ensure such proper maintenance and operating strategies to maximize efficiency post implementation of the project, the owner/operator or other such third party provider (such as a outsourced operating engineering service provider) should be trained on the new systems and strategy. Further, there should be regular communication between the owner’s/operator’s team and the ESCO technical and operational experts even after training has been completed. BOMA also provides ongoing educational programs, such as the six course curriculum known as the BOMA Energy Efficiency Program (BEEP) and the Sustainable Operations Series (SOS) to help support the sharing of on going best practices in operational excellence. If the owner or operator is not capable of executing proper operation and maintenance of the project(s) post the retrofit implementation, the owner/operator should request a proposal for such services from the ESCO or other service provider. In this circumstance, the owner/operator would need to execute a separate contract to ensure such proper operation and maintenance is provided to ensure performance goals are achieved. Measurement and verification (M&V) procedures will be funded by the owner/operator as part of the project cost (and which should be identified as included in preliminary and IGA cost proposals), and undertaken by the ESCO in accordance with the International Performance Measurement & Verification Protocol (IPMVP). Additional levels of measurement can be arranged to achieve LEED requirements, calculate the reduction in GHG / carbon emissions, compile data for Energy Star Portfolio Manager, etc.

•

IPMVP identifies four main M&V options for EPC projects:

Option A

o Option A costs from one to five percent of construction costs and provides an accuracy of +/- 20 percent.

is designed for projects using spot measurements of pre- and post-energy use together with agreed-to operating hours for estimating savings. Periodic equipment inspections also may be required to verify equipment condition.

• Option B requires continuous or repeated measurement of pre- and post-energy use for

specific equipment or a sampling of equipment. Sub-metering is typical of this approach.

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o Option B costs from three to 10 percent of construction costs with an accuracy of +/- 10 to 20 percent.

• Option C

o Option C, with monthly data, costs from one to three percent of construction costs and provides an accuracy of +/- 20 percent.

makes use of the main building meters to measure savings from all project efficiency measures. This approach involves continuous analysis of metered data.

• Option D

o Option D costs between three to 10 percent of construction costs and provides an accuracy of +/- five to 10 percent.

uses a calibrated computer simulation of pre- and post-installation energy use to measure project savings.

More information about M&V and the IPMVP can be found at: http://www.nrel.gov/docs/fy02osti/31505.pdf

One of the major goals of CCI’s relationship with BOMA is to report reductions in Green House Gas emissions. Many owners and operators have emissions reductions goals of their own, so owners and operators are asked to work with CCI to report GHG emissions reductions and share certain information with CCI so that CCI can not only measure the aggregate results of this platform but also create educational case studies of completed building retrofit projects. All sensitive information will be kept strictly confidential. Financing CCI works with financial institutions to improve building owners’ access to cost-efficient capital for energy efficiency projects, either through the use of existing financial products or through the development of entirely new funding mechanisms. CCI partners are leading financial institutions that have a track record in executing energy related financings and/or have demonstrated a serious commitment to the retrofit finance space. The Role of CCI CCI assists building owners who undertake energy efficiency retrofit projects in the following ways:

• Help the owner identify the key variables that will affect the financeability of a project. These variables include but are not limited to project scope and payback, current financial market conditions, owner constraints and finance related objectives;

• Aid the owner in determining the most likely options for financing given the key variables in the project;

• Connect owners with the appropriate financial institutions given the type of project being undertaken and the owner’s need for outside capital. CCI will use its existing

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institutional relationships and its knowledge of the retrofit finance market to expedite this process for building owners; and

• Serve as a resource and intermediary during the deal structuring and term sheet negotiation processes, as needed, helping both building owner and financial institution reach a consensus on terms and other potentially novel aspects of the deal.

CCI can help building owners formulate and then communicate their financing needs to the financial community. Beyond that, CCI can get as involved in the finance process as building owners would like, whether that entails CCI helping to organize a more formal proposal solicitation process, conducting modest financial modeling, exploring non-traditional methods of financing in partnership with a financial institution, ESCO and/or building owner, or conducting limited and defined research on finance related issues. Building owners with less immediate plans for undertaking retrofit projects may still contact CCI to discuss their longer term financing needs in this area. Please refer to the Contacts section for more information on CCI’s Finance Team.

Methods for Financing Energy Efficiency Building Retrofits

CCI works with financial institutions that have existing experience in providing capital for energy efficiency retrofits or are in the process of developing novel approaches to funding. Some of the more common products and mechanisms for financing this space include:

• Commercial leases, including capital and operating leases

• Tax-exempt municipal leases and municipal bonds

• Non-recourse and limited recourse loans

• Receivables purchase agreements (“RPAs”)

• Shared savings agreements

• Revolving and non-revolving loan funds

Although CCI has a number of existing partnerships with financial institutions, it is understood that any project brought to those institutions by CCI will be evaluated based on its own merits and offered financing under commercially viable rates and terms only.

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Financing Retrofits in the Commercial Building Space

CCI works with financial institutions to systematically address the more persistent barriers to financing retrofit projects in the commercial building space. While there currently is no “off the shelf” solution which addresses all of these barriers, CCI hopes to find practical, workaround solutions by engaging financial institutions and building owners alike. CCI and its partner financial institutions have identified the following as necessary for accelerating the uptake of retrofit projects in the commercial building space.

1) Maximize value of Energy Performance Contracts

2)

: CCI believes that the cash energy savings guaranteed by energy performance contracts, to the extent they can be properly isolated or more formally “secured” for purposes of a financing, might lead to lower financing costs on retrofit projects. CCI is consulting with legal firms who have leading project finance practices in order to understand how EPCs might be interpreted differently or modified over time so as to maximize their value in this regard.

Identify other forms of security for lenders in the absence of asset-based collateral

3)

: Since most non-owner occupied commercial buildings are already mortgaged, the likelihood of a third party lender obtaining a security interest in ECMs that replace existing equipment is low. In the absence of being able to lend on a secured basis and in order to offer competitive pricing on deals, lenders will seek to obtain other traditional or non-traditional forms of security in projects. CCI is exploring ways to accomplish this.

Develop finance structures that can be replicated across the multi-tenant commercial building landscape

4)

: In every effort that CCI undertakes, the objective is to devise solutions that can be tested on live projects and, pending their success, get adopted by the market and brought to scale. CCI is working to create financing structures that can be used not only by well capitalized owners but also by lower credit quality borrowers and/or buildings in less developed commercial markets. As lenders extend capital to lower credit quality owners, the challenge will be to devise structures which can achieve a low enough cost of capital to avoid large cash outlays by owners up front. While CCI’s efforts have focused initially on commercial office buildings, a simultaneous goal of the initiative is to accelerate the market for financing energy efficiency projects in the retail and hospitality sectors.

Introduce additional features in a finance structure that address potential hurdles common to multi-tenant commercial investment properties: Any financing structure for retrofit projects in the multi-tenant commercial space must incorporate features which address the following issues including but not limited to a) misaligned incentives between building owner and tenant arising from net leasing arrangements; b) shorter hold periods on investment properties; or c) the anticipated effect of a retrofit financing on a future asset sale.

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Building owners who would like to play a more active role in helping to define retrofit finance for  the  commercial building market at  large are encouraged  to  contact CCI. Building owners might also determine that they have a building project which could be used as a test pilot for solutions which aim to achieve the objectives stated above.   Hannon Armstrong Building Energy Efficiency Investment Agreement (BEIA)  In addition to other financial products and funding mechanisms being pursued by CCI, CCI and BOMA International are working with Hannon Armstrong, an Annapolis‐based financial services firm,  on  a  financial  solution  for  retrofit  projects  in  the  commercial  real  estate  sector.  The Hannon Armstrong Building Efficiency  Investment Agreement (BEIA)  is specifically designed to address  the  most  common  barriers  to  financing  EPC‐based  projects  in  commercial  office buildings. These barriers, described earlier in this document, can be summarized as follows:   Owner / tenant split incentives  Difficulties that arise due to short hold periods on properties  Investment capital constraints  Collateral and credit issues 

 The BEIA’s principal  features, which  collectively aim  to address  the aforementioned barriers, are as follows:     Building LLC, not parent, is counterparty  No parent guarantee required  No personal guarantees required  No lien waivers from mortgagee required  One contract between Building LLC, Investor, and ESCO since HA would use the BEPC as 

an exhibit to the BEIA  ESCO’s performance guarantee embedded in the contract   ESCO is maintained as the entity performing the service  HA aims to perfect a security interest in only the redundant equipment  Payments subject to verification of savings  Contract obligations may be terminated or assigned, in the event of a sale  Template form that virtually any Building LLC can utilize  Replicable and scalable 

 The market‐oriented goal of the BEIA is that virtually any building in a metropolitan setting with good  financials,  that  has  demonstrated  threshold  occupancy  over  the  past  5  years  and  is reasonably  expected  to  continue  to  do  so  for  the  next  several  years,  can  be  eligible  for financing.  Hannon  Armstrong’s  goal with  this  financial  solution  is  to  first  establish  proof  of concept in the U.S. commercial office building market and then apply the model more broadly to  the mall and hospitality sectors. Owners should contact Hannon Armstrong or CCI early  in the project development process to determine whether a given project can be financed under the BEIA model. 

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Please note that energy service companies and some utility companies can provide financing as well. BOMA and CCI recommend that all BOMA Energy Performance Contract Model participants evaluate all options to determine the best terms, pricing and fit for their given project

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Contacts  GENERAL QUESTIONS for CCI boma@clintonfoundation.org  GENERAL QUESTIONS for BOMA kpenafiel@boma.org  TRANE Scott Lenger Director, Commercial Real Estate & Lodging Markets 1 Centennial Avenue Piscataway, NJ 08854 (732) 939‐3057 Scott.Lenger@Trane.com  SIEMENS Building Technologies, Inc. Mike Kearney Senior Director, US Energy Efficiency Services 1000 Deerfield Parkway Buffalo Grove, IL  60089 (847) 941‐5461 Mike.Kearney@Siemens.com  JOHNSON CONTROLS Peter White Director, Clinton Climate Initiative Building Efficiency 4011 SE International Way, Suite 605 Milwaukie, OR 97222 (503) 305‐2030 Peter.Z.White@jci.com  HONEYWELL Building Solutions Michael Taylor Vice President, Sales – Clinton Climate Initiative 1985 Douglas Drive, MN10‐192‐A  Golden Valley, MN 55422 (763) 954‐4275 Mike.W.Taylor@Honeywell.com  HANNON ARMSTRONG John Christmas Senior Vice President 

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HOLLAND & KNIGHT Jonathan Furr Senior Counsel (312)422-9018 Jonathan.furr@hklaw.com

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Library of Documents Sample RFQ Sample RFP for Preliminary Opportunity Assessment Sample Combined RFQ/RFP Sample Property Information Summary Sample ESCO Evaluation Criteria Sample Investment Grade Audit Contract Sample BOMA Energy Performance Contract Top 10 Business Issues in an EPC Black-lined Sample Opportunity Assessment Reports Black-lined Sample IGA Reports M&V: IPMVP details List of Professional Resources Reference Documents, Case Studies and Articles