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Introduction
Clarifying Concepts
Flow of Funds
Lease-based Analysis Example
Implications
2

Focus proposes a five step, structured, costshared process to meet market needs.

Introduction
Clarifying Concepts
Flow of Funds
Lease-based Analysis Example
Implications
4

Gross leases are the norm in NYC.

Building operating cost charges to tenants in gross

leases are determined by one of two methods.
Method

Operating costs
tied to:

Relationship to
energy costs

Fixed percentage

Consumer price index

None

Porters wage
Flat %

Operating expense
escalation

Base year of preexisting costs

Direct

If no base year,
equivalent to a net
lease
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Escalation method is norm for large tenants: owner

pays tenants base year operating expenses.
Gross rent

$51.00/SF

(Base operating)

($ 5.50/SF)

Net rent to owner

$45.50/SF

Lowering base year operating expenses increases

owner net income.
Current
leases

New
leases

Gross rent

$51.00/SF

(Base operating)

($ 5.50/SF)

Savings from
efficiency
improvement in
new leases

Net rent to owner

$45.50/SF

$1.25/SF

$51.00/SF
($ 4.25/SF)
$46.75/SF

Base operating cost is derived from a pool of eligible

expenses or escalatables.

Escalation (passthrough) of capital costs may be

permitted, depending on an expenditures purpose.

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If permitted as an escalatable, capital costs may be

amortized in various ways:

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The split incentive refers to the disconnect between

capex responsibility and opex benefit.

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Some leases allow grossing up adjusting expenses

to a higher occupancy before pro rata allocation.

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Tenants are responsible for their own operating costs

except sometimes electricity.

Tenant
Electric

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Electric rent inclusion varies widely in application.

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In practice, the mix of lease provisions depend on

tenant negotiating power.

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Introduction
Clarifying Concepts
Flow of Funds
Lease-based Analysis Example
Implications
17

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

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Owner benefits from energy efficiency investment

depend on the mix of lease provisions in a building.

Large $
savings
project

Does lease
have
operating
expense
escalation?

+
from fixed
factor
leases

NO
YES
NO

Expenses
saved by
energy project
escalatable?

+
from reduction
YES in base for
new tenants
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()

NO

from
unrecoverable
expense

Is capital
expense
escalatable?

YES

+
from capex
contribution to
financing of
project

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NO
Is grossing up
allowed?

YES

()
from decrease in
escalatable pool

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Is there
amortization
period
turnover?

YES

()
from capex passthrough from new
leases,
possible base
inflation

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Savings on tenant electric use can also

impact owner cash flow.

Submeter

Electric rent
inclusion

YES

()
from possible
mark-up loss from
savings

YES

+
from savings until
next 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 the

energy efficiency upgrades.

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Introduction
Clarifying Concepts
Flow of Funds
Lease-based Analysis Example
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, Porters Wage)

40% NRSF

Leases with operating

clauses

60% NRSF

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

Capital Expense Type

Pass-through

38% NRSF

Pass-through subject to
lease interpretation

22% NRSF

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A discounted cash flow analysis captured changes

across multiple years.

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A discounted cash flow analysis captured changes

across multiple years.
Termina
2014 2018 l Value

2009

2010

2011

2012

2013

Gain fixed factor

leases

$100

$90

$80

$80

$65

$60

$0

Gain capex & interest

pass through

$745

$700

$630

$575

$450

$0*

$0

$100

$175

$240

$335

$500

$800 $1,200

($40)

($40)

($43)

($43)

($45)

($45)

Gain - New lease net

rent gain/base decrease
Loss gross-up &
submeter losses
Debt Service

($54)

($1,200) ($1,200) ($1,200) ($1,200) ($1,200)

Capitalized Value @ 5%
Yearly Total

$19M
($295) ($275)

($293)

($253) ($230)

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

$815 $1,146

$19M

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Result: value proposition very different from standard

installation payback estimate in an energy assessment.

Energy
Assessment
Savings
Analysis

Lease-based
analysis

Combines owner and

tenant savings;

Capitalizes change in
owner cash flows;

Does not reflect change in

asset value

Captures value impact of

investment made today

Note: NPV discounted at 6% per annum

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Introduction
Clarifying Concepts
Flow of Funds
Lease-based Analysis Example
Implications
33

To savings opportunities, several factors should be

added to process of prioritizing among buildings.

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Lease-based analysis will be more helpful with certain

building types and owners than others.

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