www.TranscendEquity.

com

Innovative Funding for Energy Retrofits

Tackling the Financial Barriers of Energy Efficiency in Commercial Real Estate

Approaches
Proven
Introduction to Transcend Equity Over 85 Years of
&
Managed Energy Services Agreement (MESA) Management Experience
As part of any commitment to sustainability, The
in Energy Services
Real Estate Market is exploring a wide variety of
strategies for making its assets more energy
efficient. The ideal approach should:
✓ Build asset value not through speculative J. Stephen Gossett
increases in rent or decreases in
occupancy but through measurable President
savings in operating or capital
expenditure;
✓ avoid creating any obstacle to asset
disposition;
✓ remain consistent with the near- and
long-term business strategy for the
asset.
In the course of evaluating various approaches,
Transcend’s MESA approach is one that may have
broad application to any commercial portfolio.
Other approaches are likely to emerge that are
suitable for different assets and asset classes,
but the Managed Energy Services Agreement
should be evaluated for its suitability for
commercial buildings.
Steve Gossett Jr.
Vice President
The Managed Energy Services
Agreement (MESA) is a balance-sheet
neutral method of accomplishing
major capital improvements in a real
estate asset with private funds.

✴ A property agrees to pay its historical

energy usage for a period of 5 – 10 years
with adjustments for changes in
weather, occupancy and type of tenant
user.
✴ Transcend Equity (creator of MESA)
assumes responsibility for payment of
the actual energy bills for the asset and Robert Myers - Director of
invests capital in a deep retrofit of the Project Development
asset’s energy systems.
In this way major system upgrades can be made,
leading to easier management, better tenant
comfort and satisfaction, typically without
requiring any expenditure of capital from
ownership. Meanwhile, the building becomes
“green” – MESA usually leads to ENERGYSTAR
rated buildings and accomplishes the most
difficult, energy-related components of LEED for
Existing Buildings.
MESA is an ideal funding strategy for
buildings with the following
Characteristics:
Total Energy Exceeds $2.50 per
Expenditure for square foot, leaving
electricity and all aside sub-metered
fuels tenant electric use.

Total Energy Usage Exceeds 75 kBTU per

for all fuels square foot. Requires
conversion of all fuels
to BTUs.

Rent Roll Does not reflect a

turnover of more than
40% of the square
footage in any single
year within the next six
years. (Total turnover
of 40% during a six
year period is fine, just
not 40% in a single
year.)

Major energy Are centralized with

systems for cooling expenses allocated pro
and heating rata rather than floor-
by-floor and sub- or
direct metered to
tenants.

Leases on a square Are mostly full service

footage basis gross or modified gross
with a base year. Triple
net leased buildings
with good credit
tenants are also good.
Q&A:
Why wouldn’t the owner make these investments if they generate returns to
MESA’s investors?
Because  in  most  assets,  the  savings  calculated  by  an  engineer  is  not  the  same  as  the  recovery  to  the  asset  
owner.    Our  ability  to  recover  capital  is  usually  restricted.    But  MESA  is  an  auditable  GAAP-­‐valid  opera>ng  
expense,  meaning  it  does  not  face  the  same  capital  recovery  problem.    
To  simplify  the  math,  the  table  below  gives  a  typical  set  of  improvements  for  a  1  M  square  foot  building  with  
the  cost  and  savings  in  rounded  numbers.

IMPROVEMENT SAVINGS COST

Bldg  Control  System   $270,000   $1,000,000  
Ligh>ng   $190,000   $450,000  
Variable  Frequency  Drives   $90,000   $550,000  
High  Efficiency  Chiller   $450,000   $3,000,000  
$1,000,000   $5,000,000  

Simple  Payback      5  years

The lease roll shows steady turnover and varying, but typical, terms for capital recovery.

TENANTS   SQUARE  FEET LEASE  TYPE LEASE  END  DATE CAPITAL  EXPENDITURE  
SHARING
A   200,000   Modified  Gross   1/1/2013   Useful  Life  
B   200,000   Modified  Gross   1/1/2015   None  
C   200,000   Modified  Gross   1/1/2017   Useful  Life  
D   200,000   Modified  Gross   1/1/2019   None  
E   200,000   Modified  Gross   1/1/2021   Useful  Life  
Q&A:
Where capital expenditure is allowed, the lease requires amortization to tenants according to the
useful life of the systems being installed. The allocable capital expenditure looks like this:

IMPROVEMENT   SAVINGS   COST   USEFUL  LIFE   ALLOCABLE  RECOVERY  

(AT  7%)  

Bldg  Control  System   $270,000   $1,000,000   10   $142,378  

LighKng   $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  Simple  Payback  is  9  years
Applying the recoveries to the leases and the turnover schedule, the payback is still 9 years. Pro
rata savings flow to the asset owner at lease turnover (as the base year falls) but other recoveries
(if allowed) are restricted to the pro rata share of useful life amortization, $110,511.

Tenant   1   2   3   4   5   6   7   8   9   10  
             
A   $110,511   $110,511  $110,511  $225,102  $231,855  $238,810  $245,975  $253,354  $260,955    $268,783  
         
B      -­‐       -­‐       -­‐        -­‐        -­‐       $238,810  $245,975  $253,354  $260,955    $268,783  
         
C   $110,511    $110,511  $110,511  $110,511  $110,511  $110,511  $110,511  $253,354  $260,955    $268,783  
D      -­‐       -­‐        -­‐        -­‐        -­‐        -­‐        -­‐        -­‐        -­‐        $268,783  
               
E   $110,511    $110,511  $110,511  $110,511  $110,511  $110,511  $110,511  $110,511  $110,511    $110,511  
                 $  
 Total   $331,532    $331,532  $331,532  $446,123  $452,876  $698,643  $712,971  $870,573  $893,375   1,185,644  
 
Recovery   7% 13% 20% 29% 38% 52% 66% 84% 101% 125%

An investment recovery of 9 years would be difficult to justify for Commercial Real Estate. Since
MESA is an operating expense, though, it recoups the initial outlay much faster. Using this structure,
we can avoid capital expenditure on the asset, pay operating costs no higher than they were before,
and let someone else spend capital to retrofit the building and make it green.
Q&A:
What about triple net leased buildings?
In a triple net-leased property, the asset owner typically cannot share any capital costs with
tenants. And tenants are the sole beneficiaries of retrofit savings since they pay all operating costs.
Even under very generous assumptions about the owner’s ability to recover savings at turnover via
higher rent by marketing a lower cost of occupancy, the owner would recover the capital invested
in the same project described above in 11 years. MESA is even more ideal for such a property.
Transcend Equity would assume responsibility for engaging tenants and developing the project in
collaboration with them and ownership.
In a triple net-leased building, however, the MESA developer assumes the risk of tenant ability to
pay its utility expenses. Buildings with tenants that have not proven steady payers of rent or other
operating expenses are not good candidates.

What about buildings with all full service gross leases (i.e. where the landlord
pays all operating costs)?
MESA may be a good choice even in a building where the owner recoups all savings by virtue of
leases with all-in rents (typically called full-service gross) that place all operating and capital cost
responsibility on the owner. Why?
• Under MESA, Transcend assumes all performance risk. In the project above, the $1 M in
savings is a projection that assumes effective development, implementation and operation.
The returns associated with the project drop dollar for dollar if those savings are not
achieved. A complex retrofit or a difficult operating environment may make MESA
preferable in order to shift risk away from asset ownership.
• Securing commitments of capital may not be easy, particularly in joint ventures. An asset
manager must originate a project and feel secure enough in its feasibility and the validity of
savings projections to pursue the necessary capital. In a joint venture, this may mean
convincing a partner to share the cost. All too often as projects become complicated, it is
easiest to adopt the default position – to simply drop the project. Meanwhile, every year
that passes represents a year of savings that could be used to accomplish the retrofit. Since
MESA requires no expenditure of additional capital and uses the developer for origination
and development, execution is easier.

When would it make sense to use our own capital?

There are, of course, other options for retrofitting a property including spending our own capital.
We expect other investment structures like MESA to emerge in future years as well. Expenditure of
our capital may be most appropriate when:
• The local rental market is strong and an asset is approaching a major lease roll;
• Leases are full service gross (no base year) and the retrofit savings are relatively certain;
• A building is relatively efficient and a retrofit consists primarily of lighting or other items
with short useful lives and predictable savings that are high relative to cost.
 Managed Energy Services Agreement -
Tackling the Financial Barriers in Commercial Real Estate
MESA

4099 McEwen, Suite 420

Dallas, TX 75244 972-386-5335
www.TranscendED.com
info@transcendED.com