2010 ULI Fall Meeting Presentation October 13, 2010 10:45 am to 12:00 pm

1. Banking on Energy Efficiency
in Real Estate
Wednesday,
October 13
10:45 a.m. - 12:00 p.m.

2. Kate Q. Knight (Moderator)
AIG Global Real Estate
Beau Engman
Vice President, Commercial Energy
Solutions, Johnson Controls
John Christmas
Senior Vice President, Hannon Armstrong
Bob Hinkle
President and CEO, Metrus Energy
Greg Hale
Center for Market Innovation, Natural
Resources Defense Council
Nina Albert
Chief, Office of Green Economy, District
of Columbia

3. Proprietary and Confidential
FINANCING ENERGY EFFICIENCY IN THE
COMMERCIAL BUILDING SECTOR
BARRIERS AND OPPORTUNITIES
Fall 2010

4. Proprietary and Confidential
DISCUSSION CONTEXT
 Low-cost, quick-payback measures are not interesting.
 New construction already addressed.
 Deep reductions in energy intensity in existing commercial investment
properties are the challenge.
 Efficiency in public/institutional buildings is “policy-driven”, while efficiency
in commercial buildings is “market-driven”.
 Focus is addressing market barriers to retrofit financing in the existing
commercial sector.

5. Proprietary and Confidential
ENERGY STAR AND INCREASED TENANCY
Multiple other studies show similar
results
Co-Star study shows higher occupancy rates for
ENERGY STAR buildings
National average comparison of occupancy rates of Energy Star-
labeled buildings vs. non-labeled buildings over a two-year period.
(1) Source: Co-Star Group
(2) E.g., Washington D.C. and NYC; San Francisco and Los Angeles also considering similar mandates
(3) The General Services Administration is the single largest lessee of commercial space in the nation. Mandate starts in 2010.

6. Proprietary and Confidential
AVAILABILITY OF ENERGY EFFICIENCY FINANCING
• Markets that Work
– Federal
– MUSH
• Markets that Don’t Work (yet)
– Residential
– Office Buildings
– Retail / Food Service
– Hospitality
• Key Differences
– Owner is credit-worthy
– No Mortgage
– No Holding Period Horizon
– No Split Incentive
15%
85%

7. Proprietary and Confidential
THE FINANCE PROBLEM IN ENERGY EFFICIENCY
Commercial Investment Property Sector
High upfront cost
+
Returns over time
=
Need for financing
Despite clear energy efficiency benefits…
Lower operating costs/increased cash flow
Potential increase in occupancy
Potential increase in property value
Potential energy efficiency credits
… there are financing barriers
Commercial properties owned by unrated, limited
liability “shell” entities,
Properties fully pledged under mortgage /
mezzanine investment,
Mortgagees disallow 3rd party liens on real property
improvements,
(1) E.g. a new chiller

8. Proprietary and Confidential
CURRENT STATUS
With PACE stuck in the regulatory mud, does the
industry have a Plan B?
Ideally without relying on ARRA funds
Creating a commercial performance contracting
market, using the Federal ESPC market as a model

9. Proprietary and Confidential
Federal ESPC: the Lender’s Perspective
Acceptable hybrid credit: If savings are verified, agency pays
If not, contractor pays
Firm cash flow
Standardized contract
Standardized M&V protocol
Proven technologies
No energy price risk
Diversity of contractors
Projects bundled by ‘aggregators’ to critical mass for securitization

10. Proprietary and Confidential
Creating a Commercial Performance Contracting
Market, using Federal as a Model
Goal is to simulate the same hybrid credit structure.
Critical elements -- back-stopping the property LLC with a Federal guarantee.
-- confining the guaranty to LLC default, not performance.
This would effectively simulate the hybrid credit structure of a Federal contract:
Owner obligation limited to verified savings
Contractor pays shortfalls directly to lender
If savings are verified but owner defaults, USG pays lender

11. Proprietary and Confidential
Commercial PC -- the Lender’s Perspective
Acceptable hybrid credit Same of Federal
Firm cash flow Same of Federal
Standardized contract BOMA BEPC
Standardized M&V protocol Same as Federal
Proven technologies Same as Federal
No energy price risk Same as Federal
Diversity of contractors Wider diversity
Projects bundled by ‘aggregators’ Wider diversity

12. Proprietary and Confidential
Cost of Capital
Best proxy for pricing Commercial PC is Federal ESPC.
Federal ESPC pricing average roughly 225 bps over USTs.
Commercial PCs may require a slight premium, e.g., 50 bps, at the outset,
suggesting pricing at 275 over USTs.
Cost comparisons on 10-Year* Projects --
Commercial PC may eventually be priced lower than Federal ESPC for four reasons:
greater volume, more competition, wider diversification, and make-whole provision.
* Current yields on 10-Year US treasuries are roughly 2.75%.
Federal ESPC Commercial PC Baa Corporate PACE Commercial
Mortgage
5.00% 5.50% 5.75% 7-8% ??

13. Proprietary and Confidential
Implementation
Lenders/contractors screen projects according to published eligibility criteria*
Lenders aggregate projects into portfolios of critical mass.
DOE may issue single guarantee covering entire portfolio.
DOE due diligence should focus on government exposure: property profile.
DOE should outsource initial review process to a property management firm (JLL,
CBRE, C&W, etc.) or a management consulting firm (BAH, Bearing Point, Accenture
etc.)
* Current appraisal, historical occupancy, debt service coverage, debt-to-value, etc. With largely
objective criteria, there will be three levels of industry vetting – owner, contractor and lender.
Four if review is outsourced.

14. Proprietary and Confidential
The Argument for Performance Contracting
Primary tool utilized in the Federal/MUSH markets
PC effectively parses counterparty and performance risk, allowing the former to be
singled out for a guaranty.
The value in EE retrofits is not the equipment cost, but the creation of ongoing
savings over time. It is clear that the realization of long-term savings is tied to
verification and liability*.
The capital markets have accepted performance contracting.
Industry has a template commercial contract: BOMA BEPC
Option A (M&V) will facilitate lending to small-sized contractors and properties.
* Performance contracting is the best means of assuring energy consumption and GHG emissions
reductions will endure.

15. Proprietary and Confidential
Contact:
John J. Christmas
Hannon Armstrong Capital, L.L.C.
1997 Annapolis Exchange
Suite 520
Annapolis, MD 21401
410-571-6164
www.hannonarmstrong.com

16. Banking on Energy Efficiency
in Real Estate
Wednesday,
October 13
10:45 a.m. - 12:00 p.m.

17. FINANCING SOLUTIONS FOR ENERGY
EFFICIENCY IN COMMERCIAL BUILDINGS
Banking on Energy Efficiency
Urban Land Institute Fall Meeting,Washington DC
October 13, 2010
www.MetrusEnergy.com

18. Commercial Building Conundrum
18
• Highly underserved market
– Few financing options; Large volume
of EE projects with 3-7 year paybacks
• Significant investment opportunity
– $18B/year (U.S. EIA/LBNL)
– $250B over next decade (ACEEE)
• Current limitations
– Credit risk of single purpose LLCs
– Constraints of the existing mortgage
– Split incentives owners and tenants
– Lack of prioritization of EE by owners

19. No First Cost Financing Solutions
• Remove first-cost barrier by funding
100% of front-end cost of projects
– Efficiency ServicesAgreement (ESA)
– Leasing options for EE retrofits
• Under the ESA:
– Metrus finances, owns, and operates
an efficiency retrofit project
– Customer pays for only realized
energy savings
– ESCO designs, installs, and maintains
a project
19
Metrus
ESCOCustomer
Efficiency Services
Performance
Contract
(ESPC)
Efficiency Services
Agreement
(ESA)

20. &
Customer
• BAE Systems
• Industrial (defense contractor)
ESCO
• Siemens Industries
Efficiency Services Agreement
• 10-year ESA term
• Covers maintenance and
repair/replacement on selected equipment
• Customer has periodic buyout options
• Comprehensive multi-facility program
Project Size > $1M (Merrimack, New Hampshire)
• Lighting retrofit
• Kitchen equipment controls
• Demand control ventilation
• Air compressor replacement
• Transformer replacement
Project Performance
• Avg. Electricity Savings = >1M kWh/year
• Avg. Natural Gas Savings = >30k therms/year
• Various Non-Energy Savings
• Emissions Reduction = >400 tons of CO2/year
20
Project Case Study:

21. Strategies for Commercial Real Estate
21
CHALLENGES SOLUTIONS & STRATEGIES FOR EFFICIENCY PROJECTS
First Cost Hurdle • Fund 100% of all project design and implementation costs
Credit Risk of Building LLCs • Finance deals in top-tier markets; owner occupied or with stable rent rolls
• Tap into existing state-level programs that offer credit support
• Expand existing DOE loan guarantee program to include EE projects
Mortgagee Waiver • Work to obtain waiver on new EE property; seek participation at EE
project level from existing lender or a regional commercial real estate
lender
Securing Debt • Make permanent equity investment in each project alongside debt to
provide lending partners with added security
• Pursue project-level debt from the existing lender on a building
Split Incentives • Set customer payments based on units of energy savings (akin to a utility
bill)
Building Sale During Project
Term
• Existing owner pays early termination value or new owner (if credit is
acceptable) can assume the EE contract obligations
Limited EE tax benefits • Provide commercial EE with tax benefits on par with renewable energy

22. Contact Information
22
Bob H i n kle
i nfo@MetrusEnergy.com
www.Me trusEn e rgy.c om

23. Banking on Energy Efficiency
in Real Estate
Wednesday,
October 13
10:45 a.m. - 12:00 p.m.