NYSERDA: Lease-Based Analysis

8/17/2019 NYSERDA: Lease-Based Analysis

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Introduction

Clarifying Concepts

Flow of Funds

Lease-based Analysis Example

Implications


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Focus proposes a five step, structured, cost-shared process to meet market needs.


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Introduction

Clarifying Concepts

Flow of Funds


Implications


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Gross leases are the norm in NYC.


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Building operating cost charges to tenants in grossleases are determined by one of two methods.

Method Operating coststied to:

Relationship toenergy costs

Fixed percentage • Consumer price index

• Porter’s wage

• Flat %

None

Operating expenseescalation

• Base year of pre-existing costs

• If no base year,equivalent to a netlease

Direct


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“Escalation” method is norm for large tenants: ownerpays tenant’s “base year” operating expenses.

Gross rent $51.00/SF

(Base operating) ($ 5.50/SF)

Net rent to owner $45.50/SF


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Lowering “base year” operating expenses increasesowner net income.

Gross rent $51.00/SF

(Base operating) ($ 5.50/SF)

Net rent to owner $45.50/SF

Savings fromefficiencyimprovement in

new leases

$1.25/SF

Savings fromefficiencyimprovement in

new leases

$1.25/SF

$51.00/SF

($ 4.25/SF)

$46.75/SF

Currentleases

Newleases


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Base operating cost is derived from a pool of eligibleexpenses or “escalatables.”


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Escalation (passthrough) of capital costs may bepermitted, depending on an expenditure’s purpose.


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If permitted as an escalatable, capital costs may beamortized in various ways:


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The “split incentive” refers to the disconnect betweencapex responsibility and opex benefit.


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Some leases allow “grossing up” – adjusting expensesto a higher occupancy before pro rata allocation.


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Tenants are responsible for their own operating costsexcept – sometimes – electricity.

TenantElectric


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Electric rent inclusion varies widely in application.


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In practice, the mix of lease provisions depend ontenant negotiating power.


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Introduction

Clarifying Concepts

Flow of Funds


Implications


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These factors affect the cash flow of the building...


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Owner benefits from energy efficiency investmentdepend on the mix of lease provisions in a building.

Does leasehave

operating

expenseescalation?

Does leasehave

operating

expenseescalation?

+from fixedfactorleases

+from fixedfactor

leases

Expensessaved by

energy projectescalatable?

Expensessaved by

energy projectescalatable?

+from reductionin base for new tenants

+from reductionin base for new tenants

NO

YES

NO

YES

Large $savingsproject


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Is capitalexpense

escalatable?

(–)fromunrecoverableexpense

(–)fromunrecoverableexpense

NO

YES +from capex

contribution tofinancing ofproject

+from capex

contribution tofinancing ofproject


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Is grossing upallowed?

YES (–)from decrease inescalatable pool

(–)from decrease inescalatable pool

NO


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Is thereamortization

period

turnover?

YES

(–)from capex pass-through from newleases,

possible baseinflation

(–)from capex pass-through from newleases,

possible baseinflation


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Savings on tenant electric use can alsoimpact owner cash flow.

Submeter

Electric rentinclusion

YES

YES

(–)from possiblemark-up loss fromsavings

(–)from possiblemark-up loss fromsavings

+from savings untilnext survey

+from savings untilnext survey


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These factors affect the cash flow of the building:


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Lease provisions also affect the financing of theenergy efficiency upgrades.


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Introduction

Clarifying Concepts

Flow of Funds


Implications


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Example: 420 19th Avenue HVAC & lighting upgrades.Capital costs: $5M. Annual savings: $1M/yr.


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The multi-tenant building has a mix of lease types.

Lease Type

Fixed operating(CPI, Porter’s Wage)

40% NRSF

Leases with operating

clauses

60% NRSF


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Capital Expense Type

Pass-through 38% NRSF

Pass-through subject to

lease interpretation

22% NRSF

The multi-tenant building has a mix of lease types.


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A discounted cash flow analysis captured changesacross multiple years.


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A discounted cash flow analysis captured changesacross multiple years.

2009 2010 2011 2012 2013 2014… 2018

Termina

l ValueGain – fixed factorleases $100 $90 $80 $80 $65 $60 $0

Gain – capex & interestpass through $745 $700 $630 $575 $450 $0* $0

Gain - New lease netrent gain/base decrease $100 $175 $240 $335 $500 $800 $1,200

Loss – gross-up &submeter losses ($40) ($40) ($43) ($43) ($45) ($45) ($54)

Debt Service ($1,200) ($1,200) ($1,200) ($1,200)($1,200)

Capitalized Value @ 5% $19M

Yearly Total ($295) ($275) ($293) ($253) ($230) $815 $1,146 $19M

Note: All dollar amounts in $1000s. Years past 2009 escalated at 3% inflation/year. Debt term of 5 years.


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Result: value proposition very different from standardinstallation payback estimate in an energy assessment.

Lease-based

analysis

Lease-based

analysis

• Capitalizes change inowner cash flows;

• Captures value impact ofinvestment made today

Energy Assessment

Savings Analysis

Energy Assessment

Savings Analysis

• Combines owner andtenant savings;

• Does not reflect change inasset value

Note: NPV discounted at 6% per annum


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Introduction

Clarifying Concepts

Flow of Funds


Implications


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To “savings opportunities,” several factors should beadded to process of prioritizing among buildings.


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Lease-based analysis will be more helpful with certainbuilding types and owners than others.

NYSERDA: Lease-Based Analysis

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