1. CUTTING EDGE ENERGY PRACTICES FOR THE CORPORATE END USER December 8, 2010 2 Park Avenue New York, New York

3. Electricity Oil Gas

4. TENANT ENERGY USE

5. IMPORTANT Tenant Space Base Building

6. End user pays utility directly Direct Meter Owner bills tenant based on private submeter reading, usually marked up 2-12% Submeter Per sf estimate of tenant electric costs included in the rent Electric rent inclusion Regardless of lease type, landlords charge for tenant electric separately.

8. Existing Facilities Program Small Business Direct Installation - For businesses with monthly peak demand < 100kW - Free energy surveys and custom recommendations Free bulbs, faucet aerators, HW thermostat setbacks Incentives up to 70% of the cost of upgrades http://www.coned.com/energyefficiency/businessdirect.asp Fixed $ incentives for VFDs, chillers, HVAC, motors, meters, lighting (prescriptive) $0.16/kWh for electric efficiency, $20/MMBtu gas efficiency (performance-based) $0.10/kWh + $750/kW for Combined Heat and Power http://www.nyserda.org/programs/Existing_Facilities/default.html

9. BASE BUILDING ENERGY USE (and the Landlord- Tenant Relationship)

10. The most important factor affecting efficiency is who pays for it. Full service gross Modified grossNet lease Owner pays for all core building operating and capital expenses. Owner pays for capital and a “pool” of operating expenses. Tenant pays all increases in the pool after the first year of the lease. Tenant pays base rent and all operating costs defined in the lease, and often most or all capital costs. Owner pays Tenant pays

11. In modified gross leases, tenants pay for a pool of core building operations as they exceed Year 1 of the lease.

12. Tenant responsibility for capital expense is usually very limited. Only operating costs included as “Additional Rent” No capital expense sharing Amortized to tenant by useful life (GAAP) Capital expense sharing only for items that save operating

13. Landlord Operating Costs (Up to Base Year) Tenant Operating Costs (Above Base Year) Expenses Why? Because it gives cost predictability to landlord and lender, expense review/control to tenant.

14. Landlord Operating Costs (Up to Base Year) Tenant Operating Costs (Above Base Year) Expenses But savings (e.g. from an energy retrofit) go entirely to the tenant.

15. A typical project. I MPROVEMENT S AVINGS C OST Bldg Control System $270,000$1,000,000 Lighting $190,000 $450,000 Variable Freq. Drives $90,000$550,000 High Efficiency Chiller $450,000$3,000,000 $1,000,000$5,000,000 Simple Payback 5 years

16. When capital can be shared, it is typically tied to “useful life” following GAAP. Useful Life Capital Sharing Operating Expense Savings Savings sufficient to cover capital

17. Capital sharing restrictions alter the economics – and GAAP requires silo’ing of measures. I MPROVEMENT S AVINGS C OST U SEFUL L IFE A LLOCABLE R ECOVERY ( AT 7%) Bldg Control System $270,000$1,000,000 10 $142,378 Lighting $190,000 $450,000 7 $83,499 Variable Freq. Drives $90,000$550,000 12 $69,246 High Efficiency Chiller $450,000$3,000,000 25 $257,432 $1,000,000$5,000,000$552,554 Adjusted Payback 9 Years I MPROVEMENT T OTAL S AVINGS T OTAL C OST Energy Retrofit Package$1,000,000$5,000,000 Payback5 years

18. The simplest solution to the split incentive – a full service gross lease. Landlord Retrofit Cost Energy Savings Management Responsibility

19. If “modified gross” with a base year is unavoidable, lease must adjust capital recovery. Operating Expenditure Clause 1. Additional rent may include amortization of capital items that save operating costs. 2. Amortization can bundle cost and savings of retrofit items (i.e. will not follow GAAP “useful life” method). 3. Landlord may amortize the expense in an amount equal to total savings.

20. NEW LEGISLATION

21. All additions, alterations and repairs must comply with NYC Energy Conservation Code, not just those affecting more than 50% of the building New stringent “Green Codes” under development at the Mayor’s Office

22. 2. L IGHTING Lighting systems in buildings over 50,000 sf must comply with new energy code by 20205 AND S UBMETERING In buildings over 50,000 sf, tenants over 10,000 sf must be submetered by 2025

23. 3. B ENCHMARKING 4. A UDIT/ R ETROCOMMISSIONING (RCx) All buildings over 50,000 sf must be benchmarked using EPA Portfolio Manager by May 2011 Results to be posted on Dept of Finance website Buildings over 50,000 sf must have an Energy audit every 10 years unless Energystar or LEED rated or has 6 of 7 green attributes o Energy Report to include paybacks, detailed analysis by system Must have RCx every 10 years unless LEED rated o RCx Report to include detailed systems operations description

24. http://www.nyc.gov/html/planyc2030 /html/plan/buildings_plan.shtml G REENER G REATER B UILDINGS L EGISLATION - for detailed information -

25. BUYING AND/OR GENERATING POWER

26. Recent installations:

27. A 2001 PACE University study found potential for 1,600 MW of co-gen in office buildings