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Green Capital Needs Assessments
                     Financing Green Improvements with Energy Savings

                      Presented at the Partners in Innovation Conference




    Ethan Handelman
    ehandelman@recapadvisors.com
    617.338.9484 x5904

    April 14, 2010

1
Recap Real Estate Advisors and On-Site Insight (OSI)


             Solutions to complex multifamily asset problems


    Track record
    • Over $4 billion in multifamily
      assets under management
    • Completed over 6,000 capital
      needs assessments
    • Closed $2.7 billion in
      transactions on nearly 800
      properties nationwide

    Services
    • Asset management, transactions, advisory, asset resolution, capital planning

    Clients
    • Investors, lenders, public agencies, for-profit and non-profit owners




2
Challenges for Greening Existing Multifamily



    • Cost Issues
      – Existing building systems may have a remaining useful life
      – Funding is finite and often has time limits
      – Components of cost: initial and ongoing
    • Operating Issues
      – Units are occupied
      – Cash flow must be maintained
      – Replacement systems interact
    • Other Issues
      – Cost of capital varies (grants vs. debt vs. equity)
      – Funding sources may require green rehab
      – Efficiency savings can be difficult to underwrite


3
Green Decisions are Financial Decisions



    • Need for financial metrics
      – Make financial decisions connected to environmental impact
      – Prioritize limited capital
      – Compare options consistently


    • Tools in the GCNA
      – Simple payback analysis (SPA)
      – Life-cycle cost (LCC) analysis
      – Net present value (NPV) of potential savings
      – Investor rate of return (IRR) for capital invested
      – Savings-to-investment ratio (SIR)




4
The Audit – Life Cycle Cost Analysis


    STEP ONE: PRODUCT COMPARISON                                        Calculated Life Cycle             25


    Conventional:         Atmospheric Low-Pressure Steam                                Cost over Life Cycle (EUL)

             Action        Quantity   Unit Cost    Total Cost     EUL     First Year     Inflated     Discounted
        Install/Replace        1       $6,300       $6,300        20           1         $8,074        $7,227
           Maintain            1        $500         $500          1           2         $17,730       $6,998
          Utility Cost       5,134      $1.55       $7,958         1           1        $290,132      $119,336
                                                                Total Life Cycle Cost   $315,935      $133,560


    Green:                HE Condensing Hydronic                                        Cost over Life Cycle (EUL)

             Action        Quantity   Unit Cost    Total Cost     EUL     First Year     Inflated     Discounted
        Install/Replace        1      $14,900       $14,900       25           1         $14,900       $14,900
           Maintain            1       $250          $250          1           2         $8,865        $3,499
          Utility Cost       4,370     $1.55        $6,774         1           1        $246,957      $101,577
                                                                Total Life Cycle Cost   $270,722      $119,976

    ECONOMIC RETURN ANALYSIS                                    PRODUCT RECOMMENDATION
     Green NPV             $13,584                                      Green:
     Green IRR              22.9%                                       HE Condensing Hydronic
     Green SIR               2.77                 Override with Green Product?




5
The Audit – Life Cycle Cost Analysis


    STEP TWO: REPLACEMENT TIMING
    Remaining Useful Life         8                     Final Product Choice
    Replacement Year              9                      Green:                               HE Condensing Hydronic

    Immediate Replacement                                                1                    Cost over Life Cycle (EUL)

            Action            Quantity      Unit Cost    Total Cost     EUL     First Year     Inflated     Discounted
         Install/Replace         1          $14,900       $14,900       25           1         $14,900       $14,900
            Maintain             1           $250          $250          1           2         $8,865        $3,499
           Utility Cost        4,370         $1.55        $6,774         1           1        $246,957      $101,577
                                                                      Total Life Cycle Cost   $270,722      $119,976


    Replacement at End of Remaining Useful Life                          9                    Cost over Life Cycle (EUL)

            Action            Quantity      Unit Cost    Total Cost     EUL     First Year     Inflated     Discounted
         Install/Replace         1          $14,900       $14,900       25         9            $9,183       $8,669
            Maintain             1           $250          $250         1          10           $6,575       $1,874
           Utility Cost        4,370         $1.55        $6,774        1          9           $186,725      $55,402
    Expenses for Current Product Through Useful Life
          Utility Cost          5,738       $1.55          $8,894        1           1         $79,088       $60,630
                                                                      Total Life Cycle Cost   $281,570      $126,575

    ECONOMIC RETURN ANALYSIS                                                    TIMING RECOMMENDATION
     Timing NPV               $6,599                                           Replacement Year:                       1
     Timing IRR               17.74%
     Timing SIR                1.84




6
Case Study: Ridgecrest Apartments



    Property
    • 144-unit Section 236 elderly property
    • 1972 construction; many original finishes, systems
    • Owner seeking Weatherization Assistance Program funds

                                  Findings
                                  •15-year-old windows; stack effect
                                  •Many original 3-4 gpf toilets
                                  •Oversized boiler plant
                                  •Low R-Value wall insulation
                                  •Original cabinetry, vinyl tile flooring




7
Case Study: Ridgecrest Apartments



    Recommendations
    • Identified 13 ECMs and 8 GMs
    • Single-hung windows to accommodate air
      conditioners with thermal break and Low-E
      coated glazing
    • Improvement to wall insulation financially and
      physically infeasible
    • Installation of high-efficiency condensing
      boilers; downsize capacity
    • Linoleum flooring, solid wood cabinetry, solid
      countertop surfaces

    Potential savings
    • ECMs total annual utility savings of $48,152
    • GMs total life cycle cost savings of $26,060


8
Michigan’s Reinvestment Program



    • Stimulus funds recapitalize and green the existing
      inventory
    • $78 million of Exchange (Section 1602) funds
    • Rehab work guided by a GCNA within program limits
    • New use agreement and forgivable mortgage
    • Streamlined application process
    • Eligibility: existing properties > 8 years old with some
      form of MSHDA subsidy




9
Enterprise Retrofit Audit Protocol



     • Developed with Enterprise Community Partners
     • Creates baseline for investment-grade reporting
     • Incorporates 20-year capital needs projection plus an
       energy audit
     • Allows underwriting and cost projection of green retrofits
     • Consistent metrics for national data collection
     • Supporting Enterprise’s lending for green retrofits
       – California, 14 properties
       – Ohio, 5 properties
       – More to come




10
Green Capital Needs Assessments
                      Financing Green Improvements with Energy Savings

                       Presented at the Partners in Innovation Conference




     Ethan Handelman
     ehandelman@recapadvisors.com
     617.338.9484 x5904

     April 14, 2010

11

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Ethan Handelman, Recap Real Estate Advisors

  • 1. Green Capital Needs Assessments Financing Green Improvements with Energy Savings Presented at the Partners in Innovation Conference Ethan Handelman ehandelman@recapadvisors.com 617.338.9484 x5904 April 14, 2010 1
  • 2. Recap Real Estate Advisors and On-Site Insight (OSI) Solutions to complex multifamily asset problems Track record • Over $4 billion in multifamily assets under management • Completed over 6,000 capital needs assessments • Closed $2.7 billion in transactions on nearly 800 properties nationwide Services • Asset management, transactions, advisory, asset resolution, capital planning Clients • Investors, lenders, public agencies, for-profit and non-profit owners 2
  • 3. Challenges for Greening Existing Multifamily • Cost Issues – Existing building systems may have a remaining useful life – Funding is finite and often has time limits – Components of cost: initial and ongoing • Operating Issues – Units are occupied – Cash flow must be maintained – Replacement systems interact • Other Issues – Cost of capital varies (grants vs. debt vs. equity) – Funding sources may require green rehab – Efficiency savings can be difficult to underwrite 3
  • 4. Green Decisions are Financial Decisions • Need for financial metrics – Make financial decisions connected to environmental impact – Prioritize limited capital – Compare options consistently • Tools in the GCNA – Simple payback analysis (SPA) – Life-cycle cost (LCC) analysis – Net present value (NPV) of potential savings – Investor rate of return (IRR) for capital invested – Savings-to-investment ratio (SIR) 4
  • 5. The Audit – Life Cycle Cost Analysis STEP ONE: PRODUCT COMPARISON Calculated Life Cycle 25 Conventional: Atmospheric Low-Pressure Steam Cost over Life Cycle (EUL) Action Quantity Unit Cost Total Cost EUL First Year Inflated Discounted Install/Replace 1 $6,300 $6,300 20 1 $8,074 $7,227 Maintain 1 $500 $500 1 2 $17,730 $6,998 Utility Cost 5,134 $1.55 $7,958 1 1 $290,132 $119,336 Total Life Cycle Cost $315,935 $133,560 Green: HE Condensing Hydronic Cost over Life Cycle (EUL) Action Quantity Unit Cost Total Cost EUL First Year Inflated Discounted Install/Replace 1 $14,900 $14,900 25 1 $14,900 $14,900 Maintain 1 $250 $250 1 2 $8,865 $3,499 Utility Cost 4,370 $1.55 $6,774 1 1 $246,957 $101,577 Total Life Cycle Cost $270,722 $119,976 ECONOMIC RETURN ANALYSIS PRODUCT RECOMMENDATION Green NPV $13,584 Green: Green IRR 22.9% HE Condensing Hydronic Green SIR 2.77 Override with Green Product? 5
  • 6. The Audit – Life Cycle Cost Analysis STEP TWO: REPLACEMENT TIMING Remaining Useful Life 8 Final Product Choice Replacement Year 9 Green: HE Condensing Hydronic Immediate Replacement 1 Cost over Life Cycle (EUL) Action Quantity Unit Cost Total Cost EUL First Year Inflated Discounted Install/Replace 1 $14,900 $14,900 25 1 $14,900 $14,900 Maintain 1 $250 $250 1 2 $8,865 $3,499 Utility Cost 4,370 $1.55 $6,774 1 1 $246,957 $101,577 Total Life Cycle Cost $270,722 $119,976 Replacement at End of Remaining Useful Life 9 Cost over Life Cycle (EUL) Action Quantity Unit Cost Total Cost EUL First Year Inflated Discounted Install/Replace 1 $14,900 $14,900 25 9 $9,183 $8,669 Maintain 1 $250 $250 1 10 $6,575 $1,874 Utility Cost 4,370 $1.55 $6,774 1 9 $186,725 $55,402 Expenses for Current Product Through Useful Life Utility Cost 5,738 $1.55 $8,894 1 1 $79,088 $60,630 Total Life Cycle Cost $281,570 $126,575 ECONOMIC RETURN ANALYSIS TIMING RECOMMENDATION Timing NPV $6,599 Replacement Year: 1 Timing IRR 17.74% Timing SIR 1.84 6
  • 7. Case Study: Ridgecrest Apartments Property • 144-unit Section 236 elderly property • 1972 construction; many original finishes, systems • Owner seeking Weatherization Assistance Program funds Findings •15-year-old windows; stack effect •Many original 3-4 gpf toilets •Oversized boiler plant •Low R-Value wall insulation •Original cabinetry, vinyl tile flooring 7
  • 8. Case Study: Ridgecrest Apartments Recommendations • Identified 13 ECMs and 8 GMs • Single-hung windows to accommodate air conditioners with thermal break and Low-E coated glazing • Improvement to wall insulation financially and physically infeasible • Installation of high-efficiency condensing boilers; downsize capacity • Linoleum flooring, solid wood cabinetry, solid countertop surfaces Potential savings • ECMs total annual utility savings of $48,152 • GMs total life cycle cost savings of $26,060 8
  • 9. Michigan’s Reinvestment Program • Stimulus funds recapitalize and green the existing inventory • $78 million of Exchange (Section 1602) funds • Rehab work guided by a GCNA within program limits • New use agreement and forgivable mortgage • Streamlined application process • Eligibility: existing properties > 8 years old with some form of MSHDA subsidy 9
  • 10. Enterprise Retrofit Audit Protocol • Developed with Enterprise Community Partners • Creates baseline for investment-grade reporting • Incorporates 20-year capital needs projection plus an energy audit • Allows underwriting and cost projection of green retrofits • Consistent metrics for national data collection • Supporting Enterprise’s lending for green retrofits – California, 14 properties – Ohio, 5 properties – More to come 10
  • 11. Green Capital Needs Assessments Financing Green Improvements with Energy Savings Presented at the Partners in Innovation Conference Ethan Handelman ehandelman@recapadvisors.com 617.338.9484 x5904 April 14, 2010 11