TRIRIGA Insights

This summer, the House and Senate approved two distinct, but similar, telework bills, H.R. 1722 and S. 707 respectively, that would require Federal agencies to create formal telework policies and programs. Final passage of the telework legislation is expected to save Federal agencies approximately $11 billion annually and contribute to the reduction of carbon emissions from commuting. This coincides with last month’s announcement by President Obama that the Federal Government will reduce carbon emissions from indirect sources (e.g., employee travel, commuting, etc.) by 13% by 2020. In addition, according to analysis by the Telework Research Network, the five-year cost to implement the Federal telework program (Approximately $30 million) is equivalent to just half a day of lost productivity when Government employees cannot commute to work due to an extreme weather event like the blizzard that crippled Washington D.C. last winter. According to Kate Lister, lead researcher for the Telework Research Network, “The staggering costs of lost productivity from federal workers during last winter's snowstorms -- estimated by the government at $71 million a day -- would pay for the five-year cost of the bill in one day”.

Increasingly, public and private organizations alike recognize the multiple benefits of alternative workplace (AW) strategies such as teleworking or hotelling. Given that real estate represents one of the most significant costs for most organizations, reducing space per employee and increasing utilization through AW programs can provide an excellent return on investment. According to research conducted by the Telework Coalition, an effective telework program can produce savings of $10,000,000 over a five year period per 100 full-time teleworkers (see Figure 1).

Figure 1: “What Every Senior Executive Needs to Know About Distributed Work”, New Ways of Working/ TelCoa

The economic uncertainty over the last several years has intensified the move toward alternative workplace arrangements for many companies. According to a 2009 survey by the New Ways of Working Network (NewWOW), forty-five percent of respondents reported that their organization had launched their AW program within the past two years. In addition, 40 percent of survey respondents reported that they were expanding existing AW programs as a means of reducing costs due to recessionary pressures.

As companies pursue cost savings through AW strategies, they must also be aware of the impact to the most important asset—employees. According to NewWOW, companies that pursue an AW strategy solely to reduce costs risk a backlash by employees in the form of lost productivity, alienation or lack of engagement. NewWOW recommends that companies focus on increasing productivity as a primary goal of an AW program. As Figure 1 shows, the productivity gains and increased employee retention possible from a well executed AW program can greatly exceed the substantial real estate savings.

An effective AW strategy must simultaneously increase productivity, reduce cost, and accommodate future space requirements based on projected growth. In order to achieve these objectives, organizations require a system to align business objectives with workforce requirements and the current and future demand for space. To learn more about how this process works, click here, to read the TRIRIGA Whitepaper, “How TRIRIGA SFP meets IFMA's Strategic Facility Planning Process”.

Begin to prepare your organization for the new lease accounting standard

The IASB and FASB recently issued the Exposure Draft of the proposed lease accounting standards. As many expected, the Exposure Draft is nearly identical to the initial Discussion Paper issued in March 2009. The new lease accounting standard will require companies to capitalize all leases; placing an enormous strain on the financial statements of most companies. IASB and FASB will accept comments on the proposed standard until mid-December 2010, and plans to release the final standard in the second quarter of 2011. The Effective Date of the new standard may not be known until the final rule is issued, but many expect that 2013 will be the first year that companies must follow the new lease accounting standard when preparing financial statements. Although this date may seem remote, companies should start to prepare now in order to successfully transition to the new standard and reduce the negative impact on their financial statements.

As Bill Bosco, member of the IASB’s International Working Group on Lease Accounting, explained in the recent Learn from the Leaders Webinar entitled “Action plan to prepare for the new lease accounting standard”, preparation for the new lease accounting standard can be broken down into a transition action plan and an ongoing process action plan.

The focus of the transition action plan is to fully understand the proposed changes, collect the necessary data about existing leases, and then prepare necessary accounting entries to book existing leases under the new standard. In general, the transition project would include the following steps:

1.Become familiar with proposed lease accounting standard

2.Create a project team with members from all departments involved (Lease Administration, IT, Accounting, Finance, etc.)

3.Verify that lease administration, accounting, and other software systems meet the requirements of the new rule

4.Implement system enhancements or new systems

5.Extract all pertinent lease information:

• Lease term and rents – timing and amounts
• Renewal option terms and rents
• Contingent rent/percentage rent terms
• Residual guarantee terms
• Purchase options terms (currently not needed for accounting but good to know)
• Service elements in lease

6.Identify internal sources for the following information:

• Intentions regarding renewal and purchase options (Business Management)
• Incremental borrowing rate (Finance/Treasury)
• Sales projections for percentage rents (Business Management)
• CPI for percentage rents (Finance)
• Residual guarantee payments (Business Management)

7.Prepare necessary transition entries to book the leases

In parallel with the transition plan, companies must also plan for ongoing operations after the new lease accounting standard becomes effective. To learn more about the transition action plan and the ongoing action plan, please watch the on-demand presentation by Bill Bosco, “Action plan to prepare for the new lease accounting standard”.

Recently, the National Oceanic and Atmospheric Administration published the annual State of the Climate Report summarizing the key climate indicators of 2009. The report, compiled by 300 scientists from 48 countries, concludes that “global warming is undeniable”. Not only was the past decade the warmest on record, but almost every climate indicator shows that climate change is occurring at a more dramatic pace than was predicted by scientists just a few years ago. Although the United Nation’s International Panel on Climate Change (IPCC) predicted in their 2007 report that climate change would bring increased flooding, heat waves, and glacier melting; the severity of the flooding and heat waves experienced around the world over the last few months has been more intense than most expected.

Increased flooding

This year the United States has experienced widespread flooding from New England to Oklahoma. Intense rain in Northern Iowa caused a dam to fail and Middle Tennessee experienced a “1000 year” flood after receiving 19 inches of rain over a two day period. In Pakistan, intense flooding has killed at least 1,600 people and 20 million have been injured or displaced. Approximately one third of the country’s land mass has been affected by the flood. China has also experienced intense rain and flooding this summer. Floods and landslides have killed more 1,100 people and hundreds more are missing.

Intense heat waves

The New York Times reports that record highs are outpacing records lows by a factor of two to one. This correlates with climatologists’ theory of what should occur during a period of rapid global warming. In Russia, this summer has been the warmest ever recorded with temperature in Moscow topping 100 degrees Fahrenheit for the first time in the city’s long history. Thousands of people have died and drought has reduced Russia’s wheat harvest by over 30%.

Accelerated ice melt

Although not a weather event, per se, the dramatic decrease in arctic and glacial ice cover is perhaps the most alarming evidence that increased carbon emissions are warming the planet. This summer a 100-square-mile mass of ice fell off of the Petermann Glacier in Greenland. Since 1979, approximately 1 million square miles of sea ice, equivalent to the area of Alaska and Texas combined, has disappeared. According to Scientists at the National Snow and Ice Data Center and the National Center for Atmospheric Research, Arctic ice cover is decreasing faster than any of the 18 computer models used by the IPCC had predicted.

What does this mean for your organization?

This is just a sample of the severe weather events that have occurred this year. Globally, the average number of weather-related disasters is three times greater than the average at the beginning of 1980. The recent weather disasters around the world have only reinforced the consensus that global warming is one of the most serious challenges mankind has ever faced. Every country and region will be affected, both directly and indirectly, by the increased frequency and severity of weather events.

All indications are that the extreme weather events experienced this summer will continue to increase in the future. Unless there is a concerted worldwide effort to reduce greenhouse gas emissions, these extreme weather events along with rising sea levels will result in trillions of dollars of damage and millions of lives displaced, injured, or killed. As this reality continues to sink in, investors, customers, and regulators will increase pressure on companies to measure and manage their carbon emissions. Investors will increase their scrutiny of a company’s exposure to climate change risks, and an increasing number of customers will evaluate a company’s environmental stewardship when making purchasing decisions. And, even if the Federal Government fails to enact carbon legislation, individual states will continue to take the lead and implement climate change regulations that will directly and indirectly place a price on carbon and increase the price of energy.

Learn more about TRIRIGA’s environmental sustainability software, TREES, to help your organization prepare for the increased focus on carbon emissions.

As detailed in the new whitepaper by Bob Cook, “The New Lease Accounting Standard and You”, the proposed lease accounting changes will force most companies to significantly change their lease administration processes and systems in order to comply with the new rules. Since the new standard will likely not include a grandfather clause for existing leases, companies must begin to prepare for the changes today.

The additional complexity introduced by the proposed changes, especially for companies with medium to large portfolios of leased properties, will require an advanced lease accounting system to manage existing leases and prepare for the upcoming lease accounting standard. There are a number of capabilities that a lease administration system should have in order to manage leases under the new rules. Here are five of the most important features to look for:

1. OSCRE Lease abstract support:
To prepare for the new lease accounting standard companies must collect critical information for each lease in their portfolio. For many companies, the collection and verification of applicable lease data will require the help of third-party lease abstractors. Support for the OSCRE (Open Standards Consortium for Real Estate) Lease Abstract standard streamlines the exchange of lease information between third-party abstraction firms and the company’s lease administration system.

2. Lease option tracking:
Under the new lease accounting standards, the book value of the lease asset will be the present value of the lease payments over the “most likely” lease term. This “most likely” lease term is determined based on the likelihood any renewal options will be exercised. A lease administration system should include the capability to identify all available lease options including renewals, expansions, early terminations and purchase options. In addition, the lease accounting system should be able to track other lease terms, like contingent rent agreements that will have a material impact on lease valuation under the proposed lease accounting changes.

3. Critical date tracking with alerts:
The lease administration system should have the capability to track important lease dates and alert lease administrators in advance when an action is required. For example, a lease may have an automatic extension clause that extends a lease if the lessee does not formally terminate the lease within a specified timeframe. The lease administration system should send alerts to the appropriate person and then automatically adjust the lease value based on the decision taken (extend vs. terminate). This feature is especially important given the impact that a lease may have on the balance sheet on the new lease goes into effect.

4. Automated audit capabilities:
Due to the increased visibility placed on leases under the new lease standard, automated audit capabilities and compliance with Sarbanes Oxley (SOX) section 404 becomes critical. Under the new lease accounting standard, assumptions regarding the exercise of renewal options and estimates of contingent rents can have a significant impact on the book value of leases. The lease administration system must track changes to data values, actions taken by users and provide explanation for the required change. These assumptions and changes should be easily audited.

5. Integration to financial accounting systems
Increased collaboration between the lease administration function and the financial controller will be important to prepare for the new lease accounting standard. The lease administration system should include integration capability to transfer data to and from financial accounting systems. Initially, lease administrators may need to extract data in order to make or validate assumptions about renewal options or contingent rents. Once the new lease accounting standard has been implemented, the lease administration system can send necessary data to the financial accounting system to accurately account for leases on the financial statements.

Once the exposure draft is released and the specific are better understood, additional capabilities for the lease administration system will likely surface.

To learn more about how to prepare for the new lease accounting standard, please attend the next TRIRIGA Learn From Leaders webinar on Wednesday, August 18 at 10 am Pacific (1 pm Eastern). During this presentation entitled “Action Plan to Prepare for the New Lease Accounting Standard”, Bill Bosco, a member of the International Accounting Standards Board’s (IASB) International Working Group on Lease Accounting, will discuss the actions that companies must take today to prepare for the changes to the lease accounting standard.

Recently, the U.S. Government announced that it will begin asking all 600,000 suppliers to provide greenhouse gas (GHG) data. This program is in support of Executive Order (EO) 13514, signed by President Obama in October or 2009, that calls for Federal agencies to “establish an integrated strategy towards sustainability in the Federal Government and to make reduction of greenhouse gas emissions a priority for federal agencies.” Collecting GHG data from suppliers specifically supports section 13 of the EO. This section focuses on measuring, managing, and reducing the greenhouse gas emissions from the governments vast supply chain.

In accordance with section 13 of the EO, the General Services Administration (GSA) has prepared a recommendation of how the Federal Government should track and use GHG emission data from suppliers. The GSA’s recommendations potentially have a significant effect on which suppliers are chosen to supply the $500 billion in goods and services procured by the government each year.

What is the GSA recommending?

In order to incentivize Federal suppliers to provide GHG data, the GSA has recommended that Federal agencies should be encouraged to use GHG emission data as a “procurement preference” when making purchasing decisions. Suppliers that comply with the request for GHG emission data can reasonably expect some level of preferable treatment from Federal agencies. According to the GSA, “Federal agencies should use suppliers GHG emissions reporting status as an evaluation factor in contract awards.” It is important to note that today and Federal agency has the ability to use supplier GHG emission data as an evaluation factor to award contracts. In addition, the GSA has proposed that suppliers who demonstrate leadership in carbon management should receive public recognition from the Federal government. Finally, the GSA recommends that GHG emissions reporting should eventually be a mandatory requirement for a supplier to simply be considered in procurement decisions.

When will recommendations be implemented?

Using a phased approach, the GSA’s recommendations could start to take effect as early as fiscal year 2011. Initially, suppliers will be asked to voluntarily provide GHG emission data for direct emissions (Scope 1) and emissions from purchased energy (Scope 2). Although Federal agencies will not be required to use GHG data as a factor when selecting suppliers, many will factor the data into the decision making process based on their commitments to reduce indirect emissions under EO 13514.

In the second phase of the program, beginning as early as 2012, suppliers will also be asked to provide data about other indirect emissions (Scope 3). For certain products categories, Federal agencies may be able to use GHG data as an “evaluation factor”; enabling them to select a product with a low carbon footprint over the least costly choice. In this phase, suppliers will be expected to have emission data verified by a third–party.

How will the recommendations affect procurement decisions?

According to the GSA’s recommendations, “The most significant incentive for Federal suppliers to submit GHG inventory data is the desire to remain competitive in the Federal marketplace.” As Federal agencies look for ways to comply with EO 13514, they will inevitably evaluate their supply chains to identify ways to reduce indirect (Scope 3) greenhouse gas emissions. All else being equal, agencies will select goods and services from companies that track and manage carbon emissions.

What should suppliers do to prepare for the recommendations?

The GSA’s recommendations to meet the requirements of EO 13514 are yet another reason why companies must address carbon emissions and energy use today. Companies with low carbon intensity compared to their competitors will have an advantage in procurement decisions. Not only does this apply to the Federal Government, but Wal–Mart and other large companies have begun to track, and make decisions based on, the carbon emissions of its suppliers. Suppliers who fail to account for their carbon emissions will be at a significant disadvantage in the near future.

Even more important than simply tracking emissions, is the fact that efforts to reduce carbon emissions often equate to energy use reduction that saves money and improves general profitability and competitiveness. To optimize this alignment between carbon reduction and energy efficiency, organization must understand what area of the business represents the best opportunity for improvement. For many companies, facilities are a major contributor to GHG emission and represent a huge opportunity to reduce environmental impact and energy use. In order to effectively compete within a procurement system that evaluates carbon emissions in the purchasing process, companies need the ability to measure their carbon emissions and then identify cost–effective opportunities to reduce emissions and energy use.

Last week hurricane Alex slammed into the northeast coast of Mexico; bringing with it winds of over 100 miles per hour. Although Alex ranked as a relatively low intensity Category 2 hurricane, the storm still caused over $1 billion of damage and affected hundreds of thousands of people. Experts predict that this is just the start of an unusually strong hurricane season. The National Oceanic and Atmospheric Administration (NOAA) predicts an “extremely active” season with between 8 to 14 hurricanes. The Tropical Meteorology Project at Colorado State University’s Department of Atmospheric Sciences estimates that there is a 76 percent chance that a hurricane will hit the US coast between June and November of 2010. This probability is more than 20 percent greater than the average hurricane season.

Figure 1: Hurricane Alex.

Given the very real risk of hurricanes, earthquakes and other disasters, organizations must be prepared to deal with the potential damage and business disruption that natural and manmade disasters can cause. Effective disaster recovery and business continuity plans are critical to minimize business downtime and property damage. A major component to these plans is facilities. Real estate and facilities management departments must have access to facility information critical to emergency preparedness and disaster recovery management. According to industry analyst, Mike Bell, a business continuity plan must include the following information related to facilities:

• Robust information on facility capacities, contract obligations, and values
• The location, identity, and roles of essential staff, and an established contingency plan for these personnel in the event of a business disruption
• Contingency plans for mission critical facilities in the event of a catastrophic business disruption
• Facilities disaster recovery processes that align and support enterprise business continuity plans

Unfortunately, many organizations struggle with inflexible and cumbersome legacy systems that have incomplete and inaccurate data, poor integration, and a lack of pre-defined processes.

Integrated Workplace Management Systems streamline emergency management

An Integrated Workplace Management System (IWMS) streamlines the creation and implementation of disaster recovery and business continuity plans. IWMS provides critical insight into mission-critical facilities and delivers the centralized repository of essential facility information, processes, and procedures necessary for an effective emergency response.

To learn more about how IWMS delivers the capabilities to support your organization’s disaster recovery plans, read Integrated Workplace Management System – A critical tool in business continuity and disaster recovery management, a whitepaper authored by leading industry analyst Michael Bell.

The new lease accounting standards will increase the importance and role of Corporate Real Estate professionals.

Under the proposed lease accounting changes, Corporate Real Estate (CRE) professionals will be tasked with new and critical responsibilities related to the preparation of financial statements. To comply with the proposed lease accounting standards, CRE professionals must develop, maintain and supply accurate lease information, and create new portfolio planning processes in order to inform the forward looking assumptions necessary under the new lease accounting standards. See Figure 1 below.

Figure 1: New Responsibilities for Corporate Real Estate.

In the third and final session of TRIRIGA’s webinar series, The New Lease Accounting Standards and You, Bob Cook, Real Estate and Financial Strategist, provided insights into the increased responsibilities for Corporate Real Estate professionals including, but not limited to the following:

• Maintenance of complete, accurate and timely lease data
• Process design for hand-off’s, data checks, global processes and SOX-compliant processes
• Technology integration requirement plans for re-designed processes, including the need for global access and/or entry, database of record and getting IT support for new and enhanced technology
• Assumption-making processes, long-term planning, alternative workplace strategy, rights to renew and ethics training
• Creation and management of an effective communications program in order to streamline understanding of all downstream effects

Figure 2: Increased Responsibilities for Corporate Real Estate.

To learn more about how the new lease accounting standards will change your processes and strategies, click here to view the TRIRIGA webinar series, The New Lease Accounting Standards and You.

The intent of new lease accounting is to shine a spotlight on the lease obligations of companies to make them more visible to investors than they are today. Under proposed changes to lease accounting rules, the SEC estimates that $1.3 trillion of operating lease obligations will be added to balance sheets. All companies with leases will be affected, some more than others, and some industries more than others. While retail companies will have their balance sheets affected most, the impact on non-retail companies might be the most surprising. See Figure 1 below.

Figure 1: Future operating lease obligations to go on balance sheets.

The spotlight on lease obligations will lead to a spotlight on the policies, practices, processes and people who manage real estate assets within U.S. companies. In the second session of TRIRIGA’s three-part webinar series, The New Lease Accounting Standards and You, Bob Cook, Real Estate and Financial Strategist, provided insight into the challenges created and how companies must re-think their corporate real estate strategy under the proposed standard.

New Challenges:

New lease accounting rules require that all leases be recognized as capital assets and require an adjustment in the way they are recognized on the Profit and Loss Statement (P And L) of companies. Rather than a “Rent Expense”, companies will recognize lease obligations as “Depreciation” and “Interest” expenses. While payments to landlords remain the same, for accounting purposes they will be divided into principal and interest payments – similar to a self–amortizing loan.

As a result, the interest component will be greater in the early years than in later years. Figure 2 illustrates how the proposed lease accounting changes will have a negative effect on earnings during the first half of the lease term.

Figure 2: Example lease under new accounting standards.

Implications on Real Estate and Financial Strategies:

The longer the lease term, the worse the problem! A 5-year lease (or one with 5-years remaining at the effective date) will increase the lease obligation by 9.52% in the first year, while a 15-year lease will increase the lease obligation by 23.02% in the first year of new accounting rules.†

Therefore, companies must re-evaluate real estate and financial strategies in the context of new lease accounting standards. Traditional Own vs. Lease strategies may flip based on a company’s focus on Return on Assets (ROA) and EBITDA, or P And L impact. See Figure 3 below.

Figure 3: Strategy Re-Think: Own vs. Lease.

Similarly, corporate real estate strategies may change relative to lease term. Long-term leases may look more attractive to companies that previously looked to avoid increases to the balance sheet, as all leases will be capitalized. Short-term leases may look more attractive to those companies eager to avoid heavy P And L expenses in early years. See Figure 4 below.

Figure 4: Strategy Re-Think: Short vs. Long Leases.

To learn more about the impact and preparation required to comply with the new lease accounting standards, click here to view the second session of the three-part webinar series, The New Lease Accounting Standards and You.

† Assumes a 6% Discount Rate

More than 100 Corporate Real Estate and Finance professionals registered for the TRIRIGA’s New Lease Accounting Standards and You webinar series in order to understand and prepare for the anticipated lease accounting changes. In the first of the three-part webinar series, Bob Cook, Real Estate and Financial Strategist provided insights to the major implications that the new lease accounting standards will have on corporate real estate strategy, processes, and internal budgeting.

In this thoughtful presentation, Bob outlined the steps everybody involved in Corporate Real Estate will need to take in order to prepare for the new lease accounting changes:

1. Prepare for the spotlight- With an estimated $1.3 trillion of new assets being added to the balance sheet of major companies, the new standards will shine a huge spotlight on corporate real estate; and result in increased scrutinized by CEOs and CFOs.

2. Understand the budget shortfall- Permanent ratcheting up of lease expenses will create an estimated 5-15% increase in contribution to the Profit and Loss (P And L) of companies.

Figure 1: Lease accounting changes will create impact on income statement

3. Re-think your strategy- The new lease accounting standards will financially impact your current real estate strategies. As companies re-asses their real estate strategy, companies must understand the impact of ownership and term.

Figure 2: Lease accounting changes will force a rethink in real estate strategy

4. Consider the downstream effects- New processes for each downstream effect will need to be implemented to conform to new lease accounting standards.

Figure 3: Lease accounting changes will impact downstream processes

5. Prepare for compliance challenges- New tools, technology and personnel will be required to create, test and implement processes to be compliant with both the new lease accounting standards and SOX.

6. Evaluate leases based on no grandfathering- Leases signed today will follow the new lease accounting standards on the effective date which means that the new lease accounting rules affect today’s decisions.

7. Prepare for the leadership gap- The new lease accounting standards create a challenging multi-functional and cross-business unit project in which ‘point’ person(s) must be assigned.

To learn more about the changes, impact and preparation required to comply with the new lease accounting standards, click here to view the first of the three-part webinar series, The New Lease Accounting Standards and You.

In the next session of this series, Bob Cook will provide insights to the strategic and practical implications of the proposed lease accounting changes. Click here for more details.

Obama asks Federal agencies to “accelerate efforts to identify and eliminate excess properties.”

On Thursday, June 10, 2010, President Obama issued a memorandum that directs Federal agencies to eliminate excess properties and use existing properties more effectively. This directive would save $3 billion by 2012 and aligns with the administration’s increased focus on cost reduction and environmental stewardship throughout the Federal Government.

Real property assets represent one of the best opportunities to save costs and reduce carbon emissions. The Federal Government’s real property portfolio consists of nearly 900,000 buildings with a total area of almost 3.3 billion square feet †. According to the Office of Management and Budget (OMB), the Federal government has more than 20,000 properties that are designated as excess ‡ and more than 55,000 properties that are partially or completely vacant. Besides simply selling excess and vacant facilities, the administration has asked agencies to optimize the use of real property assets by addressing utilization and occupancy rates, operating costs, and energy efficiency. These combined efforts support the administration’s initiatives to reduce costs and improve environmental performance.

First, since real estate expense is often a top-three operating expense item, disposal of unneeded real estate provides one of the most effective ways to reduce costs. For example, General Electric reduced facility costs by more than $1 billion over the last seven years through a concerted space reduction effort. Through a similar program of space management and reduction, the Obama administration expects a reduction in facility costs of $3 billion by the end of 2012. This objective aligns with a recent memorandum from the Office of Management and Budget (OMB) directing non-security Federal Agencies to reduce 2012 budgets by at least five percent.

Secondly, given that buildings are responsible for a large percentage of the Federal Government’s carbon footprint, disposal of vacant facilities and increased utilization of existing facilities provides a critical component to meeting GHG reduction goals. Based on conservative estimates, a 3 percent decrease in real property inventory would equate to a reduction in energy costs of almost $80 million per year and a reduction of GHG emissions of almost half a million metric tons per year. This opportunity supports the Federal Government’s commitment, based on Executive Order 13514, to reduce GHG emissions by 28 percent by 2017.

In a recent memo discussing budget reduction initiatives, the Director of the OMB, Peter Orszag, wrote “agencies should not simply reduce spending across the board. Instead, agencies should aim to restructure their operations strategically.” Similarly, a strategic approach is needed to reduce and optimize real property assets without impinging on the effectiveness of agency operations. In addition to identification and disposal of excess assets, agencies are encouraged to eliminate lease arrangements that are not cost effective, pursue consolidation opportunities within and across agencies, and increase occupancy rates through innovative space management and workplace arrangements. In order to apply these tactics effectively, agencies need tools to fully manage the current portfolio and, more importantly, to create an accurate forecast of future space requirements. With this information, agencies can create a strategic plan to increase the effectiveness of real property assets which contribute to Federal cost reduction and environmental performance goals.

As discussed in a previous posting, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are considering major changes to the financial accounting standards for leases (FAS 13). Under the proposed changes, all operating leases would be reclassified as capital leases and, as such, be accounted for on the organization’s balance sheet. This reclassification would also change the way that leases are accounted for on the income statement. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) will release the much anticipated exposure draft detailing the latest proposed lease accounting changes updated with modifications made due to feedback received during the comment period. The exposure draft is the last step before IASB and FASB issue the final standard. Although these changes will likely go into effect in 2012, professionals responsible for the real estate and facilities assets must understand today how their current portfolio strategy will affect financial statements after the new standard takes effect. There are several potential points that organizations need to be aware of today in order to prepare for the upcoming lease accounting changes.

No grandfathering

The most important point to consider in regards to the proposed lease accounting changes is that, in all likelihood, existing operating leases, signed prior to the implementation of the new rules, will require reclassification as capital leases that must be accounted for on the balance sheet. This means that real estate professionals must immediately consider the effect that existing and planned leases will have on financial statements once the proposed rules are implemented. Since operating lease obligations often represent a larger liability than all balance sheet assets combined, lease reclassification can significantly alter an organization’s balance sheet. Based on SEC estimates, U.S. public companies will have to reclassify more than $1 trillion in operating leases under the proposed FAS 13 changes.

Lease duration

Under the proposed changes, accounting for leases with renewal or termination options will become much more complex. Currently, renewal and termination options are not accounted for in any financial statement. Under the proposed lease accounting change, for each lease containing options, an organization must specify the most likely lease term based on contractual, non-contractual and business factors. This most likely lease term is used to calculate the value of the asset and liability recorded on the balance sheet. Organizations must update the most likely lease term each reporting period to reflect any new facts or assumptions that are material to the lease term estimate. These changes to the lease term can have a major impact to the value of the leased asset on the balance sheet. This is especially true when a lease has an option to purchase the leased property and exercising the option is deemed the most likely lease term. Under this scenario the discounted exercise price of the purchase option would be added to the asset and liability associated to the lease.

Adjustable rent

Accounting for leases with adjustable rent (aka, contingent rent) provisions will also become more complicated under the proposed changes. Under the current FAS 13 rules, there is no requirement to account for anticipated changes in rent due to a change in revenues, an inflation index, or another metric. Under the proposed lease accounting changes, the asset and liability arising from leases with adjustable rents will be calculated using estimated future rent levels. In order to estimate future rents, FASB has recommended using an approach similar to the lease duration estimate that would require a “most likely” rent to be identified from the range of possible rents. As with the estimate for lease duration, the most likely estimate of future rents would need to be adjusted each reporting period based on any new material information. Unlike the estimate for lease duration, adjusted future rent estimates will usually not have a large affect on the balance sheet since contingent rents generally make up a small percentage of total rent expense.

Start preparing for FAS 13 lease accounting changes today

Since the proposed lease accounting changes will likely require organizations to reclassify existing operating leases to capital leases, it seems reasonable that real estate professionals would start factoring these changes into their current real estate portfolio strategy. However, in a recent survey conducted by Jones Lang LaSalle and CoreNet Global, 83 percent of respondents were either unfamiliar with the details or completely unaware of the proposed lease accounting changes. In the same survey, 90 percent of respondents reported that at least 95 percent of their real estate leases were structured as operating leases. Given the potentially enormous impact that the FAS 13 changes will have on the balance sheet, the time to address these changes is now. To learn more about the FAS 13 changes please register for TRIRIGA’s upcoming Learn from the Leaders Webinar Series: The New Lease Accounting Standards and You. During this three part series, real estate and financial strategist, Bob Cook, will review the proposed lease accounting changes in detail and provide insight into how real estate portfolio strategy may be affected.

Energy benchmarking is crucial to optimize return on energy efficiency investments.

In order to capture energy savings in a cost effective manner, organizations need to understand which facilities offer the most room for improvement. From TRIRIGA’s Webinar Series: Maximize Return from Energy Benchmarking, Laurie Gilmer, P.E., CFM, LEED-AP reported that $200 Billion per year is spent on electricity, gas and water in commercial facilities throughout the U.S. A 10 percent improvement in building energy efficiency would save about $20 billion in operating cost, reduce greenhouse gases, and provide a significant contribution to the bottom line.

Energy Use Intensity (EUI) provides a good metric to evaluate buildings with a similar use in a similar geographic location. An understanding of a building’s energy performance helps organizations formulate high return plans that maximize the investment of time and capital. Buildings with the highest EUI represent good candidates for energy efficiency improvements. Buildings with the lowest EUI should be properly maintained to preserve energy performance. See Figure 1.

Figure 1. Portfolio Priorities Based on Energy Use Intensity

While EUI provides an appropriate metric to evaluate a group of relatively similar buildings, owners of large geographically and functionally diverse portfolios require a way to normalize energy performance by weather, building use, and other factors. The ENERGY STAR® rating compares the energy performance of buildings across an entire real estate portfolio and has become the de facto external energy benchmarking standard in the United States over the past ten years. ENERGY STAR’s 0 to 100 rating system makes it easy to identify facilities that are prime candidates for energy performance improvements. Similar to the EUI analysis, buildings with the lowest ENERGY STAR scores are good candidates for investment and buildings with the lowest ENERGY STAR scores should be properly maintained. See Figure 2.

Figure 2. Portfolio Priorities Based on Energy Star Rating Performance

Based on a sample of 4,000 ENERGY STAR rated buildings nationwide, top performing buildings use 3-4 times less energy per square foot than the worst performers. Newer buildings are surprisingly equally represented across all performance quartiles which means that new does not always equal efficient. Buildings with an ENERGY STAR score of 50 are considered average and buildings that score 75 or higher are eligible for ENERGY STAR certification. See Figure 3.

Figure 3. EPA Performance Rating

Increasingly, many states and municipalities require public and private organizations to obtain an ENERGY STAR rating. “Mandatory building energy rating policies are now in place in more than 30 countries worldwide and are in place in some form or other in California, Nevada, Washington, Oregon, New Mexico, and, most recently, in New York City, which in December enacted a landmark measure to require building benchmarking and labeling,” according to The Corporate Social Responsibility Newswire. Read how New York City Implements TRIRIGA TREES to Reduce Energy and Carbon Footprint.

To learn more about how to formulate and improve your overall environmental strategies for your facilities, watch this on-demand webinar, Identify and Prioritize Efficiency Opportunities in Commercial Buildings.

As discussed in a previous posting, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are considering major changes to the financial accounting standards for leases (FAS 13). Under the proposed changes, all operating leases would be reclassified as capital leases and, as such, be accounted for on the organization’s balance sheet. This reclassification would also change the way that leases are accounted for on the income statement. Rent payments would no longer be included in EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). Instead, a before tax depreciation and interest amount would be calculated to account for the annualized use of the property.

FAS 13 changes will affect financial statements

The impact of the FAS 13 changes on an organization’s financial statements will vary based on a number of factors. For organizations with a small percentage of operating leases, in relation to their total real estate portfolio, the effect of the FAS 13 changes will be minor. Initially, total expenses will increase slightly due to additional depreciation and interest expense that exceeds the previous rent expense. However, as the interest expense falls over the life of the lease, the initial expense increase will eventually turn into an expense decrease with the net effect being no change in net income over the life of the lease. On the balance sheet, equity will decrease slightly at first since the asset book value will decline faster than the liability book value during the first half of the lease term. This equity decrease diminishes over the life of the lease and eventually disappears.

Large organizations will see dramatic impact

For larger organizations with many operating leases, the impact of the FAS 13 changes will be more dramatic. A 2009 Jones Lang LaSalle survey found that 90 percent of respondents reported having almost all leases structured as operating leases. For these organizations, the effects of the FAS 13 changes are more difficult to predict. A recent CBRE study found that the effect of the FAS 13 changes become more significant when applied to an entire portfolio of operating leases. Since large portfolios of operating leases will generally expire at different times, the decrease in total equity on the balance sheet will remain as leases are constantly created or renewed. Similarly, the combined operating expenses for a large portfolio of leased properties will eventually stabilize at a level similar to the expense level under the current accounting standard and will not negate the initial decrease in EBITDA.

Although the size of an organization’s leased portfolio in relation to all properties and assets will be the major factor in determining the impact of the FAS 13 changes on financial statements, lease duration and the incremental borrowing rate are also important factors. An increase in either of these factors will have a negative impact on equity and expenses under the proposed changes. This does not imply that a short-term lease is always preferable over a long-term lease under the proposed changes. Short-term leases with options for renewal will likely have to account for the renewal options when calculating the value of the lease asset and liability. And, as discussed previously, the impact on financial statements is just one of many variables that need to be considered when evaluating lease strategies.

Real estate decision support will be critical

According to Ross Selvidge, managing director with CBRE Strategic Consulting, transitioning to the new accounting changes will require "accurate, centralized, and standardized lease data with projections of the anticipated rent obligations for each and every year for each individual lease". This applies today considering that the FAS 13 changes do not "grandfather" existing operating leases. Existing operating leases will need to be converted to capital leases as soon as the change takes effect. Real estate professionals need to understand the potential financial statement impact of the FAS 13 changes when entering into new lease agreements.

The proposed FAS 13 changes illustrate the fact that, more than ever, real estate executives and professionals require a real estate decision support system that provides the ability to prioritize real estate and facilities objectives and make tactical decisions that align real estate actions with the organization’s overall business strategy.

A year of natural disasters

So far, 2010 headline stories have been marked by a series of natural disasters of almost unprecedented scale. Whether we examine the earthquakes of Haiti and Chile or the winter storms that have battered the Northeastern United States, structural damage to facilities, electrical grid failures and transportation disruptions limit the continuity of business operations and disaster recovery efforts within these affected areas. (see figure 1.)

Figure 1: Storm causes havoc in the Northeast – 2/27/2010

Suspension of operations at mission critical facilities such as headquarters, data centers, call centers, manufacturing sites and laboratories can rapidly translate into millions of dollars of lost productivity and customer disaffection.

Lack of an integrated facilities database can hamper disaster recovery

To minimize the impact of natural disasters on mission critical facilities, real estate and facilities departments must deliver vital insights required to formulate an overall business continuity plan and specific disaster recovery scenarios. From these plans, real estate and facilities departments must be prepared to execute these plans immediately with other members of the recovery team including IT, human resources, risk management, operations management and communications.

Unfortunately, many organizations lack the unified and integrated facilities database and process support that are crucial in the planning and execution of a comprehensive facilities disaster recovery plan.

Make sure your company is prepared

While the February 27th 8.8 magnitude earthquake in Chile was measured to be 500 times stronger than that of Haiti’s, Chile’s preparedness and rapid response translated into less loss of life and critical infrastructure.

Use of an Integrated Workplace Management System (IWMS) within your business continuity planning can similarly prepare your organization to respond immediately and minimize disastrous consequences. At a high–level, IWMS identifies mission critical facilities and serves as the centralized repository of essential facility information, processes and procedures for an effective emergency response.

To discover how IWMS delivers the capabilities to support your organization’s disaster recovery plans, read Integrated Workplace Management System – A critical tool in business continuity and disaster recovery management, a whitepaper authored by leading industry analyst Michael Bell.

On Monday (February 22) the Environmental Protection Agency (EPA) announced that planned regulation of greenhouse gas (GHG) emissions under the authority of the Clean Air Act would be phased in over the next several years. As reported previously, the EPA’s proposed regulation of GHG emissions from large emitters was expected to take effect in 2010.

Since the EPA’s announcement in September, a number of legislators and business leaders have expressed concerns about the cost of complying with new regulations in a struggling economy. In response to these concerns, the EPA has decided to postpone the start of the regulation and take a phased approach to implementation. Starting in the first half of 2011, the largest GHG emitters who are already required to comply with other provisions of the Clean Air Act will be required to obtain a GHG permit by demonstrating that best practices and technologies are being used to minimize GHG emissions. Depending on the amount of GHG emitted, other large emitting organizations will be phased into the program between 2013 and 2016.

In addition to the delay in implementation, the EPA may also increase the GHG emission threshold used to determine whether an organization is required to obtain a GHG permit. This could significantly decrease the number of organizations that are required to obtain permits.

Impact to Your Organization:

Although the changes to the EPA’s proposed regulation will reduce the compliance burden for most large emitters of GHG, it is important to note that this announcement has no effect on the EPA Mandatory GHG Reporting rule or any other federal, state, or local GHG legislation. And, given the fact that the material risks from climate change are not limited to the direct impact from legislation and regulation, the EPA’s announcement should have little influence on an organization’s carbon management strategy.

The bottom line is that organizations should not interpret the EPA’s announcement as a devaluation of GHG reduction efforts. More than ever, organizations that manage energy use and GHG emissions today will have a competitive advantage over those that wait for regulation to compel action.

Facilities and real estate assets represent a top-four cost of business for more than 67% of organizations. As organizations seek to contain their facilities operating costs, the real estate and facility management function has become strategic to the enterprise with the majority of C-suite executives having moderate (55.6%) to high (27.8%) awareness and priority for this function - see Figure 1.

Figure 1. CRE Function

While many organizations will struggle to contain escalating energy, occupancy and maintenance costs, Aberdeen Group reports that best-in-class organizations achieved annual savings rates of more than twice the annual TCO savings per square foot when compared to others – see figure 2.

Figure 2. Annual Savings Rates Achieved

A real solution to cut facility costs

When asked, 65% of these high-performers are more likely than their peers to rationalize their facilities portfolio to reduce costs and 55% develop a strategic real estate and facilities plan. According to the Aberdeen report, they understand the need for enterprise-class software to increase their utilization of space and achieve 20% higher space utilization than those that don’t.

March 2009, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a joint discussion paper highlighting proposed changes to financial accounting standards for leases (FAS 13) which governs the accounting treatment of operating leases. The FAS 13 changes outlined could have an enormous impact on the balance sheets and income statements of companies with significant operating lease obligations.

Today, FAS 13 requires that operating leases are classified as an off-balance sheet transaction and only the current year operating lease expense is accounted for in the income statement. Corporations must also include a note in their Security and Exchange Commission 10-Q and 10-K filings detailing the anticipated rent expense for the next five years. Proponents for changing the FAS 13 rule argue that the current standards fail to give an accurate view of a company’s liabilities. This argument seems valid given the fact that operating leases represent the single largest source of off-balance sheet financing for most organizations. Furthermore, for many organizations, operating lease obligations represent a larger liability than all other liabilities on the balance sheet combined. For this reason, the FASB has spent decades debating the proper accounting treatment of operating leases.

Highlight of proposed changes to FAS 13
The FAS 13 changes proposed in the March discussion paper would require that all operating leases be reclassified as capital leases. Capital leases differ from operating leases in that they must be recorded on the balance sheet and are treated as a financing transaction on the income statement. The right to use the leased property would be capitalized as an asset and the present value of future lease payments would be accounted for as a liability. Rent payments would no longer be included in EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). Instead, a before tax depreciation and interest amount would be calculated to account for the annualized use of the property. For a more in depth summary of the proposed changes read “FAS-Talking: Unpacking Real Estate’s Impact on Financial Statements” in the September 2009 issue of the CoreNet Leader magazine.

The proposed changes are currently being reviewed by FASB, IASB, and others. The next draft of the new lease accounting standards should be available later this year and the final rule could be put in place as early as 2011.

Impact of FAS 13 change to financial statements
There is little doubt that the proposed FAS 13 lease accounting changes would have an enormous impact on financial statements. Simply moving operating leases onto the balance sheet would add over one trillion dollars to the balance sheet of U.S. companies. The income statement changes would have a positive effect on EBITDA due to removal of rent expense from operating expenses. However, the additional depreciation and interest expense required by the proposed FAS 13 changes would result in an overall decrease to net income during the first half of the lease term.

For companies that control most of their real estate through operating leases, the proposed lease accounting change will have a significant effect on financial statements. Balance sheet and income statement changes have the potential to adversely affect debt covenants and performance ratios. All else being equal, financial metrics such as the debt-to-equity ratio and interest coverage ratio could increase significantly. There is much debate about the effect this will actually have on a company’s valuation and cost of capital since many investors and financial institutions already factor in operating leases into financial analysis. Regardless, companies who are affected by the proposed FAS 13 accounting change will need to thoroughly predict and explain upcoming changes to financial statements.

Impact of FAS 13 change on strategic real estate decisions
It is important to keep in mind that the proposed FAS 13 lease accounting changes do not have a direct effect on cash flow; arguably the most important indicator of financial performance. However, companies will need to invest time and money to evaluate lease structures, determine the impact to financial statements, and communicate the impact to investors well in advance. Although this exercise is critical, real estate executives and professionals must not lose focus on the primary goal to align real estate assets with the business strategy. Although the proposed FAS 13 rule change may alter the buy versus lease decision or add a new variable to lease negotiations, accounting rules are seldom a primary driver of real estate decisions. The proposed FAS 13 changes illustrate the fact that, more than ever, real estate executives and professionals require a decision support system that provides the ability to prioritize objectives and make tactical decisions that align with the business strategy.

January 23, 2010, the U.S. Securities and Exchange Commission (SEC) agreed for the first time that corporations are required to disclose climate change risks to investors. According to a joint press release from CERES and EDF, the SEC’s guidance is “the first economy-wide climate risk disclosure requirement in the world”.

The SEC’s decision was influenced by repeated requests over the past three years by investor groups who urged the SEC to require full corporate disclosure of climate-related business risks and strategies for addressing those risks. The announcement highlights a number of areas where disclosure of climate change risks would be required. These include: direct impact from legislation and regulation, indirect consequences of regulation or business trends, and the physical impact of climate change.

Direct impact from legislation and regulation
Increasingly organizations will face material impacts from climate change legislation and regulation. This is especially true for organizations that directly emit large amounts of carbon emissions. Many of these organizations are already experiencing the risks and challenges of complying with the EPA’s Mandatory Greenhouse Gas (GHG) Reporting rule and potential regulation. Under the SEC’s guidance, the potential material impact of this regulation should be addressed in financial reports to investors. As proposed legislation sits in the U.S. Senate, a price on carbon becomes more probable, organizations will certainly need to disclose the potential financial impact of direct carbon emissions.

Indirect consequences of regulation or business trends
Large direct emitters of carbon emissions will not be the only organizations affected by the SEC’s guidance. Many organizations with modest direct GHG emissions will still be affected by regulations and business trends related to carbon management. As discussed previously, regulation that puts a price on carbon will have the indirect affect of increasing energy costs for all organizations. And, increasingly, organizations that have direct or indirect carbon emissions in excess of the industry average will face a material risk of increased costs and decreased customer demand.

Physical impact of climate change
Certain industries such as insurance and finance will be directly affected by the climatic changes predicted by many scientists. Increased natural disasters such as storms and droughts will result in increased insurance payments and investment write-offs. As the evidence for climate change grows, organizations located in areas most affected will be required to disclose the risks of business disruption due to climatic changes and the risk of increased insurance premiums and capital costs.

With the SEC’s announcement, organizations that fail to disclose material risks from climate change face the real threat of lawsuits from investor groups or punitive action from the SEC. Mindy Luber, president of CERES and directory of the Investor Network on Climate Risk called the SEC’s announcement, “a clarion call about the vast risks and opportunities climate change poses for US companies and the urgency for integrating them into investment decision making”.

There is little doubt that the trend towards increased scrutiny of climate change risks by investors, regulators, and customers will continue. The longer an organization ignores the risks from climate change, the greater the negative effect on company valuation and profitability. As TRIRIGA CEO, George Ahn, stated in an article in the Environmental Leader last August, “All else being equal, companies that adequately disclose and address risks from climate change will be rewarded with higher valuations and a lower cost of capital.”

The first step toward accurately addressing risks from climate change is to baseline your organization’s energy use and environmental impact. To gain a sense of where and how to start reporting, consider real estate. Buildings represent 48 percent of energy consumption and present the most significant opportunities to reduce environmental impact, improve operating costs, and demonstrate carbon reduction accountability.

Although the economy has been the number one priority of business and political leaders over the last twelve months, climate change has remained a top issue across the globe. State and local governments continue to lead the way on legislation to reduce energy use and greenhouse gas emissions. As President Obama finishes his first year in office, federal legislation designed to reduce carbon emissions and address climate change gained momentum and will likely become law in 2010. Below is a recap of climate change legislation as 2009 comes to an end. The clear trend is for more stringent climate change legislation in the near future.

International
The much anticipated Copenhagen climate summit failed to deliver the legally binding climate treaty that many hoped for. However, the non-binding Copenhagen Accord that came out of the summit does demonstrate a commitment on the part of industrialized and developing countries to reduce global greenhouse gas emissions. Most importantly, China and other large developing countries made a commitment to reduce the carbon intensity of their economies. This step will help remove a key barrier to the passage of climate legislation in the United States.

Federal
The EPA Mandatory Greenhouse Gas Reporting rule is the first nationwide GHG regulation. Although this rule is focused on heavy emitters and requires only emission reporting and not actual abatement, it will most likely be used as a foundation on which to build federal legislation designed to reduce GHG emissions. Both of the climate change bills currently in Congress call for a cap and trade program that will likely use the EPA benchmark data to determine carbon emission allocations. The Waxman-Markey bill passed the House earlier this year and the Kerry-Boxer bill is still making its way through various committees. Although it is likely to take several months before a consolidated climate bill is passed by the House and Senate, the process is likely to move forward at a steady pace as long as EPA regulation of greenhouse gas under the Clean Air Act remains a possibility.

States
As is often the case with environmental legislation, California is leading the way with energy and greenhouse gas legislation. California's version of mandatory GHG reporting started in 2008. This year was the first year that organizations were required to report greenhouse gas emissions to the California Air Resources Board. In addition to California, at least 16 other states have passed some sort of mandatory GHG reporting legislation. A number of states, including California, have also enacted laws requiring large private buildings to provide an annual benchmark of energy use.

Cities
Many cities are also aggressively addressing carbon and greenhouse gas emissions within their jurisdictions. Since 2005, more than 1,000 mayors across the country have signed the U.S. Conference of Mayors Climate Protection Agreement. Participating cities commit to implement policies that will reduce GHG emissions in line with the targets set in the Kyoto Protocol. Although much of the effort to date has been focused on city owned buildings and operations, there is an increasing push to require private buildings to track and manage energy use and GHG emissions. Washington D.C. recently announced legislation that will require large privately owned buildings to provide an annual benchmark of energy use. New York City recently introduced a series of bills that require large privately owned buildings to benchmark energy use, make lighting improvements and sub-meter multi-tenant buildings. Several other cities will soon follow suit and, undoubtedly, legislation will include tougher measures to require privately owned buildings to make energy improvements to meet a minimum performance level.

Climate change legislation is a part of doing business
Increasingly organizations realize that the risks from climate change are real and have a material impact on the bottom line. Legislation to address this threat will only become more stringent and most organizations will likely be required to measure and manage energy use and greenhouse gas emissions. Organizations that begin managing energy use and GHG emissions today will have a competitive advantage over those that wait for regulation to compel action.

Last Friday, President Obama addressed the United Nations Climate Change Conference in Copenhagen. During his short speech to the plenary session, the President reiterated the commitment of the United States to reduce greenhouse gas (GHG) emissions. As expected, the President specifically stated his GHG emission reduction goals of 17% by 2020 and over 80% by 2050 from 2005 levels. President Obama also expressed his disappointment with the lack of progress at the conference toward forming a legally binding climate change treaty while also reaffirming his conviction that, "America is going to continue on this course of action to mitigate our emissions and to move towards a clean energy economy, no matter what happens here in Copenhagen."

As was widely expected, the Copenhagen conference ultimately fell short of delivering a binding international climate change treaty. However, due in large part to President Obama's direct negotiations with China, India and several other key developing and industrialized countries, the conference did produce an interim climate change accord that received nearly unanimous approval by the attending nations and kept the possibility of a future legally binding treaty alive.

Although certainly not as strong as a legally binding international treaty, the Copenhagen Accord will likely influence climate change legislation in the US simply because China, India and many other developing countries have made a commitment to reduce their own GHG emissions. China's previous reluctance to commit to reducing the carbon intensity of its economy was an especially large barrier to US climate change legislation. By accepting the Copenhagen Accord, China has certainly made it easier for sponsors of US climate change legislation to gather the sixty votes necessary to break a filibuster and pass climate legislation in the Senate. As long as developing countries continue to show a commitment to reduce their own emissions and as long as the Environmental Protection Agency's (EPA) regulation of GHG emissions through the Clean Air Act remains a real possibility, climate change legislation will likely become law within the next two years.

In contrast to the uncertainty surrounding the timeframe and structure of federal climate change legislation, large organizations will likely be affected immediately by the EPA's Mandatory GHG Reporting rule or by one of the increasing number of state and local energy and environmental laws. The EPA's Mandatory GHG Reporting rule and other proposed regulations will directly affect organizations with carbon intensive facilities. At the state level, California continues to lead the way with legislation to track and reduce GHG emissions and energy use in facilities. At the local government level, cities are competing for the title of "Greenest City" by enacting tough energy standards in building codes and requiring large public and private buildings to monitor and report on energy use. The City of New York recently enacted a series of bills to reduce energy use in public and commercial buildings. These measures include more stringent building codes and periodic energy audits and retrocommissioning for large buildings. This trend towards legislation that addresses GHG emissions and energy use in existing buildings is certain to spread to more cities in the near future.

Each new energy and GHG law that is enacted will make it more expensive for organizations to ignore their own energy use and carbon emissions. In order to effectively comply with the multitude of current and planned energy and GHG laws and make cost effective improvements to reduce environmental impact, large organizations require environmental sustainability software to track and manage carbon emissions, energy use and environmental impact.

Beginning January 1, 2010, organizations will be required to track and report on greenhouse gas (GHG) emissions from those facilities that fall within the EPA Mandatory GHG Reporting guidelines. The EPA Mandatory GHG Reporting rule is just the first step to actually regulating GHG emissions. The EPA has taken the next step with the signing of the Endangerment Finding that officially places GHG emissions under the regulatory authority of the Clean Air Act. The EPA has also recently proposed a rule that would require carbon intensive facilities to implement "best practices and technologies" to minimize GHG emissions. In addition, both houses of Congress have proposed GHG regulation to significantly reduce emissions over the next several decades. Finally, President Obama is expected to address the United Nations Climate Conference in Copenhagen on December 18th and formally announce a non-binding GHG reduction commitment for the United States that aligns with the reduction levels proposed by Congress.

As with the EPA Mandatory GHG Reporting rule, the GHG regulations being proposed would directly affect large emitters of GHG. Facilities that fall under the EPA Mandatory GHG Reporting rule would most likely also have to comply with any GHG regulation. In total, somewhere between 10,000 and 14,000 facilities would fall under the proposed GHG regulations. For these facilities, there will be a direct cost to emit GHG. A recent study by Trucost and the IRRC Institute found that carbon intensive industries could experience a reduction in EBITDA (earnings before interest, tax, depreciation, and amortization) of between 1 and 117 percent as a result of proposed GHG legislation. These carbon intensive organizations need to look beyond mandatory reporting of GHG emissions and begin to implement programs to reduce the carbon intensity of facilities and processes. In order to accomplish GHG reduction in a cost effective manner, organizations need tools to identify carbon intensive facilities and pinpoint opportunities to reduce emissions. With the right decision support system in place, industrial facilities have an enormous opportunity to reduce energy use and carbon emissions.

All of the proposed GHG reduction regulation is designed to place a cost on carbon for those organizations that directly emit large amounts of GHG. This means that most organizations will not have facilities that fall under the GHG regulations. However, all organizations will be affected through increased energy prices and increased prices for carbon intensive inputs. GHG regulation with reduction targets in line with what Congress and President Obama propose could increase electricity prices by 30 percent over the next five years. Given the increased probability of GHG regulation, organizations must prepare for significantly increased energy costs in the near term. The good news is that there are many cost effective strategies that organizations can implement to reduce energy costs and environmental impact. The bad news is that few organizations have the tools to gather the energy and environmental information necessary to optimize capital and resource allocation to the projects with the highest financial and environmental return.

Whether your organization is directly or indirectly affected by GHG regulation, the time to prepare is now. Organizations that proactively prepare for GHG regulation will be positioned to capitalize on opportunities to reduce energy use and improve environmental performance.

Beginning January 1, 2010, organizations will be required to track and report on greenhouse gas (GHG) emissions from those facilities that fall within the EPA Mandatory GHG Reporting guidelines. As is often the case with federal environmental legislation, the EPA has followed California’s lead in developing the federal Mandatory GHG Reporting rule. California enacted its own Mandatory GHG Reporting Rule in 2008. Similar to the EPA Mandatory GHG Reporting rule, the California rule requires carbon intensive facilities to track and report annual GHG emissions.

June 2009 was the deadline for the more than 500 California facilities that fell within the rule to report on their 2008 emissions. The types of facilities represented in the California rule closely match the EPA rule. Similar to the EPA estimate of facilities covered, facilities with over 25,000 metric tons of emissions from stationary combustion sources accounted for 35 percent of the total reporting facilities. These facilities represented a range of industries and organizations including food processing, pharmaceutical, higher education, airports, and a wide variety of manufacturing sectors. Many of these facilities have cogeneration plants that directly exceed the 25,000 metric tons threshold. However, for the majority of facilities under the stationary combustion source category, emissions were from manufacturing equipment and other stationary combustion sources.

In total, California facilities reported almost 175.5 million metric tons of GHG emissions. Our analysis shows this equates to the same GHG emissions from driving 33.5 million passenger cars annually or sequestered by 4.5 billion tree seedlings grown for 10 years. Only 11% of the total emissions came from the 180 California facilities that exceed the stationary combustion threshold. This is due to the fact that, on average, the stationary combustion facilities are much less carbon intensive.

As discussed in previous TRIRIGA Insights, facilities that fall under the stationary combustion source category have an enormous opportunity to save energy costs, cut carbon emissions, and potentially remove the mandatory reporting. Organizations with large complex facilities require a system to help measure energy and carbon emissions and pinpoint the most cost effective opportunities for improvement.

Beginning January 1, 2010, organizations will be required to track and report on greenhouse gas (GHG) emissions from those facilities that fall within the EPA Mandatory GHG Reporting guidelines. For the first three months of 2010 the EPA will allow organizations to estimate GHG emissions using "best available monitoring methods" that are less stringent than the EPA requirements. Starting April 1, 2010 organizations must create, document and implement a GHG Monitoring Plan that meets the full requirements of the EPA Mandatory GHG Reporting rule.

According to the EPA, the purpose of the GHG Monitoring Plan is to "document the process and procedures for collecting and reviewing the data needed to estimate annual GHG emissions." Every facility covered under the EPA Mandatory GHG Reporting rule will be required to create and maintain a GHG Monitoring Plan. Each plan will include the following information:

1. Identification of the job functions that will be responsible for the collection of emission data.
2. Explanation of the processes and methods used to collect the necessary data for the GHG emissions calculation.
3. Description of the procedures that are used for quality assurance, maintenance and repair of all monitoring equipment used to provide data for the GHG emissions reported.

Although the GHG Monitoring Plans are not submitted to the EPA, the plans must be readily available for the EPA to review. The EPA will use the plan during facility audits to verify that emission collection procedures and reporting rules are followed.

Organizations with multiple facilities covered by the EPA rule will benefit from a system with the capability to centrally manage GHG Monitoring Plans.

Beginning January 1, 2010, organizations will be required to track and report on greenhouse gas (GHG) emissions from those facilities that fall within the EPA Mandatory GHG Reporting guidelines. The EPA estimates that more than 10,000 facilities will have to report carbon emissions under this rule and approximately 30,000 facilities will need to invest time and money to evaluate their carbon emissions to determine whether they are required to report to the EPA.

Although the majority of these facilities will be large industrial plants, many facilities that are not engaged in heavy industry still exceed the EPA threshold of 25,000 metric tons of CO2 equivalent (CO2e) emitted per year. As previously discussed, many of the facilities covered by the EPA rule will fall under the stationary combustion provisions; meaning they produce a large amount of carbon emissions from stationary combustion equipment such as boilers, process heaters, and central plants. Although it is unlikely that a single commercial building would exceed this threshold, the combined GHG emissions from all the buildings on a campus property could. This is an important detail since the EPA’s definition of a facility includes campus properties owned or controlled by a single entity.

"Facility means any physical property, plant, building, structure, source, or stationary equipment located on one or more contiguous or adjacent properties in actual physical contact or separated solely by a public roadway or other public right-of-way and under common ownership or common control, that emits or may emit any greenhouse gas." - EPA Mandatory Reporting of Greenhouse Gas Rule

A campus with an on-site central plant that produces electricity, steam, or hot water may exceed the EPA threshold for GHG emissions from stationary combustion (especially if the central plant burns coal or an equally carbon intensive fuel). Facility types that could fall into this group include: universities, hospitals, government entities, resorts, and other public and private organizations that control large campus properties. These large campus properties will need to perform a thorough evaluation of on-site stationary combustion to determine whether they must report carbon emissions to the EPA. At a high level, this evaluation can be can be conducted by answering two questions. First, is the combined maximum rated heat input capacity from all stationary fuel combustion sources at least 30 million Btus per hour? Second, do the combined GHG emissions from stationary combustion equipment meet or exceed the threshold of 25,000 metric tons of CO2e per year? If the answer to both of these questions is "Yes", then your facility must report GHG emissions to the EPA.

Assuming your organization has accurate data regarding each piece of stationary combustion equipment on site, answering these questions should be relatively straight forward. However, As Lisa Campbell discussed in the recent TRIRIGA "Learn from the Leaders" webinar, Get Ready for Mandatory Reporting of GHG Emissions, many organizations lack complete and reliable data necessary to accurately evaluate their facilities.

Organizations lacking the necessary information about stationary combustion equipment will need to quickly gather this data and determine which carbon calculation method is required for each piece of equipment. For many organizations, this effort will be costly and time consuming. According to the EPA, the cost to comply with the mandatory reporting rule will be more than $7,000 per facility per year. However, the cost of not complying could be much worse. Under the power of the Clean Air Act, the EPA can pursue administrative, civil, and criminal penalties against organizations that fail to comply with the EPA Mandatory Reporting of GHG rule. These penalties include a $37,500 per day per violation fine for organizations that blatantly violate the rule. Organizations with large campus properties will require a system that reduces the time and effort necessary to gather data and provides tools to help determine whether a particular facility should be included in the EPA Mandatory GHG Reporting rule.

Beginning January 1, 2010, organizations will be required to track and report on greenhouse gas emissions from those facilities that fall within the EPA Mandatory GHG Reporting rule. The EPA estimates that approximately 10,000 facilities will have to report carbon emissions under this rule and approximately 30,000 facilities will need to invest time and money to evaluate their carbon emissions to determine whether they are required to report to the EPA.

As Lisa Campbell outlined in the recent TRIRIGA Learn from the Leaders webinar, Get Ready for Mandatory Reporting of GHG Emissions, many of the facilities covered by the EPA rule will be large manufacturing plants that produce carbon emissions from stationary combustions equipment such as boilers, process heaters, and central plants. For these facilities, the cost of complying with EPA Mandatory GHG Reporting rule adds an additional incentive to implement energy reduction projects that will eliminate this burden. Furthermore, although the industrial sector has made tremendous energy efficiency gains over the years, there is still a huge opportunity for industrial facilities to improve energy and environmental performance.

According to the National Association of Manufacturers (NAM) the industrial sector on average has increased energy efficiency by over 50 percent since 1970. Even with this significant improvement, NAM estimates that almost 60 percent of energy used today by industrial facilities is wasted. According to NAM, a 10 percent energy efficiency improvement across the U.S. manufacturing sector would equate to reduced energy costs of over $10 billion per year. This equates to: almost 917 million metric tons of carbon emissions avoided, or the carbon emissions from almost 10 million homes. In addition, NAM estimates the average simple payback for energy efficiency projects at industrial facilities is 2.3 years. And, when non-energy benefits such as reduced resource use and improved equipment performance were factored in, the simple payback was reduced to 1.4 years on average.

In addition to these savings, the EPA Mandatory GHG Reporting rule provides another incentive for industrial organizations to implement energy and carbon reduction measures. Facilities that reduce their annual 2010 carbon emissions below the 25,000 metric ton threshold set by the EPA will not have to report to the EPA in any year until they exceed the threshold. For future reporting years, facilities covered by the EPA rule that can reduce their emissions below 25,000 metric tons for five consecutive years, or below 15,000 metric tons for three consecutive years, will no longer be required to report carbon emissions to the EPA as long as emission remain below the threshold in subsequent years. Based on EPA estimates, facilities that eliminate their EPA carbon reporting burden will reduce environmental compliance costs by approximately $8,000 per year.

Although the potential for reducing energy use and carbon emissions in the industrial sector is substantial, facilities in this sector face challenges that facilities in other commercial sectors do not. Often, energy efficiency opportunities in industrial facilities are closely tied to production processes that are designed to operate unchanged for years. In order to effectively plan and manage energy efficiency projects in industrial facilities, managers must have an understanding of the timeline in which production processes can be upgraded with more energy efficient equipment. To effectively track and manage opportunities to reduce energy and carbon, organizations in the industrial sector require a decision support system with the tools necessary to evaluate and plan projects based on the financial and environmental return as well as the optimal timing of a particular improvement opportunity. Such a system will allow your organization to optimize the limited capital and employee hours allocated to implementing energy efficiency projects in industrial facilities.

Beginning January 1, 2010, organizations will be required to track and report on greenhouse gas (GHG) emissions from those facilities that fall within the U.S. Environmental Protection Agency (EPA) Mandatory GHG Reporting rule. As Lisa Campbell from ERM outlined in the recent TRIRIGA “Learn from the Leaders” webinar, Get Ready for Mandatory Reporting of GHG Emissions, many organizations are unprepared to meet the requirements of the EPA’s rule. The longer organizations wait to assess their facilities to determine whether they fall within the EPA’s reporting thresholds, the more difficult it will be to put the necessary procedures and tools in place to begin tracking carbon emissions.

The need to understand your organization’s exposure to carbon legislation will only become more critical as congress and the EPA move closer to regulating GHG emissions. The EPA has already taken the first steps towards GHG regulation based on their authority under the Clean Air Act. In April the EPA submitted an Endangerment Finding outlining the risk to public health and welfare posed by the current atmospheric concentration of the six major greenhouse gases. This step gives the EPA authority to regulate greenhouse gases under the Clean Air Act. In late September, the EPA took two more steps towards GHG regulation. First, the EPA and the Department of Transportation published proposed regulation to limit certain greenhouse gas emissions from light-duty vehicles. Second, following this announcement, the EPA proposed a rule that would require any facility that emits at least 25,000 metric tons of CO2 (or an equivalent amount of other GHG) to obtain a permit from the state environmental agency. In order to obtain a permit, a facility would need to demonstrate that best practices and technologies are being used to minimize GHG emissions. The EPA estimates that 14,000 facilities would need to obtain permits under this rule. This rule will soon be published in the Federal Registry and will likely go into effect in 2010 unless congressional legislation overrides the rule.

Although the timing and specific rules are uncertain, there is little doubt that greenhouse gas regulations are on the way. Organizations that can accurately evaluate greenhouse gas emissions across all facilities will not only be prepared to comply with upcoming regulations, but they will also have the information necessary to make strategic decisions about reducing their exposure to climate change risks.

Beginning January 1, 2010, organizations will be required to track and report on greenhouse gas emissions from those facilities that fall within the EPA Mandatory GHG Reporting rule. According to the EPA, approximately 30,000 facilities will need to conduct an assessment to determine whether their GHG emissions meet the mandatory reporting threshold.

During TRIRIGA's Learn from the Leaders webinar - Get Ready for Mandatory Reporting of GHG Emissions, Lisa Campbell, Director of Climate Change Services for Environmental Resources Management (ERM), presented an overview of the EPA Mandatory GHG Reporting Rule and provided details about activities that organizations need to do today to prepare for this rule. According to Lisa, many organizations are still unprepared to evaluate whether their facilities will need to report. For some organizations, this lack of preparation will prevent them from implementing improvements to reduce carbon emissions below the threshold set by the EPA.

To learn more about the EPA Mandatory GHG Reporting Rule watch last week's Learn from the Leader's webinar with Lisa Campbell.

Alert: Yesterday, President Obama released the anticipated Executive Order requiring Federal agencies to improve "environmental, energy, and economic performance." This Executive Order builds upon and expands the energy reduction and environmental requirements of Executive Order 13423, requiring Federal agencies to "measure, manage, and reduce greenhouse gas emissions."

Impact On Your Agency: As a first step, Federal agencies have 90 days to set a 2020 target for greenhouse gas emissions.

Beginning with fiscal year 2010, Federal agencies will also be required to prepare an annual GHG emission report that includes Scope 1, Scope 2 and specified Scope 3 emissions. In addition, the Executive Order sets guidelines and targets for water use, recycling and waste diversion, regional and integrated planning, green building standards, procurement and environmental management.

How to Prepare: In order to comply with this new mandate, Federal agencies must have tools to access current performance, determine the best course of action for improvement and manage the implementation of a Strategic Sustainability Performance Plan.

A Real Solution: While many agencies will struggle with this Executive Order, the prepared ones understand the need for enterprise-class software to reduce their dependence on energy in order to cut carbon emissions and costs.

Use TREES . (TRIRIGA Real Estate Environmental Sustainability), our environmental sustainability solution, to meet the requirements of this new Executive Order. TREES delivers the software capabilities to measure your agency's carbon intensive facilities, analyze financial and environmental benefits of sustainability investments, and automate carbon reduction actions:

• Comprehensive assessment tools, performance metrics and reports to measure GHG emissions, energy, water, and waste.
• Integrated analysis tools evaluate energy efficiency opportunities to manage the most cost effective GHG improvement opportunities.
• Automated preventive and corrective maintenance procedures reduce GHG emissions and keep facilities operating at peak energy efficiency.

Call TRIRIGA today to learn how TREESTM can help your agency meet the requirements of this new Executive Order.

Too often the conversation about green buildings centers on new buildings, when in fact, the greenest building is the one you don’t build. Efforts to improve existing buildings require fewer resources than starting from scratch, while offering significant environmental and financial benefits. When deployed, many green building technologies can instantly reduce energy costs, with efficient lighting and windows as two key examples. Because of this, an organization can often achieve 100 percent return on investment within a year on every dollar spent on improving a building's efficiency.

One organization leading the charge when it comes to green buildings is Denver Public Schools (DPS). The district recently launched an initiative to renovate its 154 school buildings in ways that will significantly reduce their environmental impact. Using a $454 million bond from the city of Denver – the largest in state history – the district will increase the energy efficiency of its buildings, and it anticipates a return on its investment in the form of lowered operating costs.

“Environmental sustainability is a top consideration for our school system,” said Mr. Michael Thomas, director of purchasing for the Denver Public Schools. “In today’s economy, energy savings leads directly to cost savings.”

The district will use TRIRIGA’s TREES software to measure, manage, and reduce carbon emissions. TREES uses a series a metrics to help identify locations and facilities that are underperforming environmentally, and then uses financial analysis tools to prioritize building retrofits and maintenance projects. Given that buildings account for 48 percent of energy used in the United States – more than industry (25 percent) or transportation (27 percent) – Denver Public Schools– focus on its improving its buildings allows the district to hone in on the single greatest opportunity to improve energy efficiency and reduce operating costs.

“The district is very excited about this new partnership with TRIRIGA to manage the complex intersection of facilities, construction, planning and environment,” said Trena Deane, executive director of facilities.

“Our environmental sustainability project is an exciting new chapter in our long history of improving the quality of life in the communities we serve, and at the same time it helps us manage and reduce the operating expenses of our schools and departments.”

Now that President Obama has allocated $44 billion dollars in stimulus funds for local school districts, other districts may soon follow Denver–s example and launch green building initiatives of their own. The stimulus bill specifies that education funds may be used for school modernization and repair, with energy efficiency projects as one approved use.

In revamping their old buildings, though, many districts will need to do more than just change their approach to facilities management: they will also need to report transparently on the use of all government funds.

In revamping their old buildings, though, many districts will need to do more than just change their approach to facilities management: they will also need to report transparently on the use of all government funds.

Today, school districts are in a position to take a leading role in the green building movement. The allocation stimulus funds and the availability of technologies make it easy and practical to pursue environmental improvements. In this challenging economic climate, organizations need to use their facilities as a center for both economic and environmental sustainability. Further, they need to put technology infrastructures in place that take the complexity and confusion out of reporting on projects and how they are funded.

Note: This content was first published on Sustainable Facility, September 1, 2009.

Reach green building performance goals by actively managing building energy and environmental performance

Few would disagree that green building rating systems have elevated the standards for what constitutes a high performing building. However, as with non-green buildings, effective building management is the only way to insure that green buildings perform as expected. Even though the majority of certified green buildings meet the high performance standards expected with respect to energy use and environmental impact, an alarming percentage of buildings constructed to LEED (Leadership in Energy and Environmental Design) and other green building standards fail to meet expectations. A 2008 New Buildings Institute study of the energy performance of LEED for New Construction (LEED-NC) certified buildings found that 40 percent of the 121 buildings surveyed used more energy than expected and 20 percent actually performed worse than the average code compliant building. These statistics are even more troubling considering that only 121 of the 552 LEED certified buildings originally surveyed were able or willing to provide actual energy use data.

This study highlights the fact that energy modeling, although very useful for comparing the energy performance impacts of different design options, is often a poor predictor of actual building energy use. A number of potential factors contribute to the variance between expected and actual energy use including construction defects, unforeseen occupancy habits, or poor building maintenance. Regardless of the reason for the discrepancy, building owners and occupants cannot assume that energy models are an accurate representation of actual energy performance.

In order to verify and improve energy performance, owners must actively track energy use and perform routine building maintenance and inspections to confirm that systems are performing as expected. LEED v3, the latest version of the rating system launched earlier this year, addresses the need to track actual performance against expected performance by requiring that all certified projects provide energy use and water use records to the USGBC for a period of five years after the building is occupied. According to the USGBC's vice president of LEED technical development, Brendan Owens, "This is fundamental to helping us close the performance gap between modeled energy and actual energy use."

Owners of medium to large real estate portfolios require an enterprise class software solution to accurately track energy use and insure that buildings, green or otherwise, are performing as expected.

Our solution, TRIRIGA TREES ®, uniquely delivers the software capabilities required to identify buildings that are underperforming and allocate capital budget to the most effective projects that will improve energy and environmental performance.

A new report from the Carbon Disclosure Project (CDP) finds that although the majority of the world's largest corporations have set carbon reduction targets, most of these targets are not aggressive enough to meet the recommendations of the Intergovernmental Panel on Climate Change (IPCC). According to the report, entitled The Carbon Chasm , 73 percent of the Global 100 has set some form of carbon reduction goal. The average target equates to a 1.9 percent reduction in greenhouse gas (GHG) emissions per year - less than half of the 3.9 percent annual GHG reduction necessary to meet the IPCC's recommended 80 percent reduction in carbon emissions by 2050 required to avoid dangerous climate change.

The primary reason for the "chasm" between the GHG reduction targets of large companies and IPCC recommendations is that most large companies align their carbon reduction goals with business objectives rather than scientific recommendations. Companies set carbon reduction targets in order to save money, address shareholder pressure, mitigate climate change risk, or improve environmental performance. As pending carbon legislation is enacted and the cost to emit carbon increases, companies will undoubtedly increase the pace of carbon reduction targets; possibly to a level approaching the IPCC recommendations.

The CDP report highlights the importance of setting challenging but achievable carbon reduction targets. However, tangible business, environmental, and societal benefits are only realized when carbon emissions are actually reduced. According to Paul Dickinson, CEO of the CDP, "This is a time of huge opportunity for businesses to gain competitive advantage by reducing their own impact on the climate and benefit from associated cost savings".

Despite evidence that climate change risk will quickly transition from a proposal to a business imperative, many companies have not started to abate their carbon emissions and realize the associated cost savings. While companies appreciate the risks, they often lack the tools necessary to address them. In order to seize this opportunity, mid- to large-sized companies require an enterprise sustainability solution. One that not only measures their current carbon footprint, but also manages abatement opportunities, facilitates emissions reduction initiatives and tracks progress and ROI to effectively identify the best opportunities to meet carbon reduction objectives.

As your company evaluates its carbon reduction targets, ask yourself this: do you have the right tools to measurably reduce carbon emissions, or will you let your competitors gain an advantage?

A new study from McKinsey finds that a comprehensive program of cost-effective energy efficiency measures could reduce US annual energy consumption by 23 percent by 2020. This reduction in energy use would require a $520 billion investment but save $1.2 trillion in energy costs (these figures are discounted to present dollars). McKinsey estimates that 65 percent of these savings would come from improvements made to the industrial and commercial sector; the remaining 35 percent would come from residential improvements.

According to the report, these impressive results would require an annual investment of approximately $50 billion in energy efficiency - an increase of 400 to 500 percent over US spending on energy efficiency in 2008. McKinsey recommends a "Holistic Implementation Strategy" to rapidly scale this increase in energy efficiency investment. This strategy requires recognition across all sectors of the economy that energy efficiency is a critical component to meeting the country's energy needs while the United States transitions to low carbon energy sources. The strategy also requires public and private sector support to develop innovative funding vehicles and strengthen national building codes. Finally, all stakeholders in the energy economy will need to align in a common pursuit of increased energy efficiency.

New school modernization legislation on its way

On May 14th, 2009, significant new legislation focused on improved education, school modernization and energy efficiency passed through the 111th House of Representatives on its way to becoming law. The 21st Century Green High-Performing Public School Facilities Act (H.R. 2187) is designed to mitigate the hundreds of billions of dollars in funding short-fall required to improve the physical and learning condition of America's schools.

TRIRIGA's own analysis of the bill provides insight into the impact these legislative measures may have on your school district's educational, financial and environmental goals:

• Provides schools with access to $6.4 billion in funding for fiscal 2010, and ensures that school districts will quickly receive funds for approved projects.
• Requires the majority of funds (100 percent by 2015) to be used for projects that meet green building standards.
• Requires school boards to publicly disclose the energy and environmental benefits of projects, without the purchase of carbon offsets.
• Requires grantees' contacting procedures for approved projects to utilize a full and open bidding competition.

Make sure your school district is prepared

Many school districts will struggle with these legislative measures, the prepared ones understand the need for an enterprise sustainability solution to take advantage of the $6.4 billion in funding available within H.R 2187 and increase the energy efficiency of your schools.

The third annual Energy Efficiency Indicator (EEI) survey, released earlier this month by the International Facility Management Association (IFMA) and Johnson Controls, reports that 71 percent of executives and facility managers indicate an increased awareness of energy efficiency this year compared to last. In addition, 58 percent of the 1,422 survey respondents rated energy management as very or extremely important. And, energy efficiency in buildings was most often selected by survey respondents as the top strategy going forward to meet carbon reduction goals.

At the same time, the EEI survey results show that the number of respondents who expect their organization to make investments in energy efficiency improvements in 2009 using capital budget or operating budget declined significantly (10 percent and 6 percent, respectively) from 2008. A majority of respondents, 60 percent, also indicate that they expect their organizations to allocate less than 10 percent of facilities related capital budget to energy efficiency projects.

Clearly, a contradiction exists between the increased importance of, and decreased funding for, energy efficiency. The inconsistency revealed in the EEI survey is understandable considering the capital preservation strategy that many companies are following in order to weather this unusually severe recession. However, companies that place extreme limits on capital spending may overlook cost-effective opportunities to improve energy efficiency. A relatively modest investment in targeted energy efficiency projects can yield reduced energy use and carbon emissions, and a superior risk adjusted return and a quick payback.

According to a recent TRIRIGA survey of 149 organizations, 32 percent of respondents reported that they used a spreadsheet based system to track and manage facility greenhouse gas emissions and energy use. For organizations that simply want to measure the energy consumption and environmental performance of a few facilities, a spreadsheet application may provide the functionality and performance required. However, a spreadsheet will most likely be inadequate for organizations that need to actively manage the environmental performance of even an average size portfolio.

In general, there are four areas where spreadsheets fall short: performance, accuracy, flexibility and accountability.

Performance

Performance encompasses speed, capacity and interoperability. Depending on the size of an organization’s portfolio and the level of facility information collected, the volume of data can quickly grow to a level that severely degrades the response speed and reliability of spreadsheet based systems. In addition, data collection is often the most time intensive step in the energy and environmental management process. When collecting data for a large number of facilities, a software system that can easily interface with other existing systems can significantly improve the efficiency and accuracy of this process.

Accuracy

Since spreadsheets lack the validation and logic necessary to insure data accuracy, collecting energy use and environmental performance data using a spreadsheet is extremely error prone. The risk of accuracy errors increases significantly as organizations attempt to track more facilities at a greater granularity.

Flexibility

For organizations that need the flexibility to set baselines and track performance against dynamic sustainability goals, a spreadsheet based system is probably not adequate. Spreadsheets are also poor reporting tools for organizations that report GHG emissions to multiple carbon registries and/or multiple times throughout the year. Furthermore, spreadsheets are a cumbersome tool for analyzing and comparing opportunities to reduce energy use and improve environmental performance. It is extremely difficult to add logic to spreadsheets to drive action and prioritize green improvements.

Accountability

Although spreadsheet programs allow data edits by multiple people, accountability is significantly diminished as more users access the system. The ability to audit all changes made is especially important for organizations that are required to accurately report on GHG emissions.

A new study from the World Business Council for Sustainable Development (WBCSD) finds that energy use from buildings will need to decrease by 55 percent by 2050, compared to a "Business-as-usual" scenario, in order to bring greenhouse gas emissions to the levels recommended by the UN Intergovernmental Panel on Climate Change (IPCC). This reduction is equivalent to the energy consumed today by the entire transportation sector.

According to the WBCSD, 40 percent of the building energy improvement required could be achieved through cost-effective projects that fall within a five-year discounted payback. Projects with a discounted payback between five and ten years would account for an additional 12 percent of the building energy improvement needed.

Recommended policies will increase energy prices

In order for organizations to increase investment in energy efficiency projects with a longer payback period, there must be a clear signal that energy prices will remain high enough to justify a large capital expense. The WBCSD recommends policies that add a price on carbon emissions to energy prices.

Stringent regulations will encourage energy efficient buildings

In addition to carbon-related regulations, effective rules should be introduced in order to influence increased energy efficiency in building. The WBCSD recommends a combination of more stringent building codes (for new buildings and retrofits) with incentives for exceeding energy efficiency requirements. Other suggestions included mandatory energy ratings for all buildings and subsidies for achieving significant energy efficiency improvements.

Behavior changes are necessary to meet energy reduction goals

According to the WBCSD, "Significant behavioral changes and improved knowledge are needed to create an energy-aware culture to deliver our ambitious energy targets." This shift in the general attitude towards energy use will help reduce wasteful practices and increase conservation. This transformation alone can dramatically improve energy efficiency in buildings.

The WBCSD study delivers clear evidence that the way we price, regulate and consume energy must change significantly in order to adequately address the climate change risk from anthropogenic greenhouse gas emissions. Considering the high priority given to energy security and climate change in the Obama administration and the current congress, at least some of the changes recommended by the WBCSD will become a reality in the near future. Organizations that effectively abate the risks from increased energy related regulation will gain a competitive advantage and achieve a high return on their investments in energy efficiency.

This week the EPA released their study on the economic impact of the cap and trade program proposed in the Waxman-Markey Energy Bill. The study concluded that carbon will likely be priced somewhere between $13 to $17 (in 2005 dollars) by 2015. Under this scenario, the EPA estimates that electricity prices will increase more than 25 percent in real terms over the next decade, compared to an estimated 6 percent real increase in energy prices under the base case scenario with no price on carbon.

As you can see from the graph below, derived using EPA data, there is a clear correlation between expected carbon price and electricity price.

This conservative scenario is based on a number of assumptions about energy demand, the pace of technology innovation, and the availability and pricing of carbon offsets. Given the added uncertainty of future energy prices in a carbon-constrained economy, organizations must thoroughly evaluate their exposure to energy price increases.

Since buildings are the largest consumer of electricity, organizations need to understand how energy price increases will affect their bottom line. For example, a 30 percent nominal increase in the price of electricity over the next five years, consistent with EPA estimates, equates to increased electricity costs for an average 100,000 square foot office building of approximately $65,000. This cost increase is even more alarming when you multiply it by the total number of buildings in your portfolio.

Thankfully, the risk of steep energy price increases can be significantly abated through increased energy efficiency within your organization's real estate portfolio. Improved energy efficiency and environmental performance can be accomplished with a high return on investment, but it requires the ability to identify and prioritize opportunities across your entire portfolio in a cost effective manner.

Earlier this week, plans were unveiled to dramatically reduce the energy use and carbon footprint of the iconic 79 year old Empire State Building. When work is completed in 2013, this multi-phase retrofit project is expected to reduce energy use by 38 percent and greenhouse gas emissions by over 6500 metric tons per year. This equates to approximately $4.4 million a year in energy cost savings. With a total incremental cost of approximately $13.2 million, the simple payback period for the project will be only 3 years.

Although any reduction in energy use and carbon emissions will ultimately be the result of the specific building improvements implemented, superior financial returns, such as those projected from the Empire State Building retrofit project, are due to adequate time spent in the analysis and planning phase. During this phase it is critical to evaluate the entire building as a system in order to determine the ideal combination of building improvements that will optimize energy efficiency, carbon reduction, and return on investment. In addition, with careful planning, a project team can reduce incremental costs by redesigning scheduled capital projects to make them more energy efficient. Although additional time spent in the planning and analysis phase will add up-front cost, the added improvements in energy efficiency will almost always make up for the investment.

Extensive planning and analysis is especially important for organizations with large real estate portfolios. In order to cost effectively improve the energy and environmental performance at the portfolio level it is critical to have detailed information on the energy use and carbon footprint of each individual building. This is the starting point from which an effective building retrofit plan can be implemented across an entire portfolio.

When President Obama and the 111th Congress passed into law the American Recovery and Reinvestment Act of 2009, they delivered more than $150 billion allocated to infrastructure investment, energy efficiency, healthcare, and education projects focused on short-term economic and environmental goals.

As part of this important legislation, agencies receiving these stimulus funds and those responsible for delivering related capital programs and projects are required to provide an unparalleled level of transparency and accountability back to the Federal government.

Following passage of the bill, the Office of Management and Budget provided specific guidance which included three critical action steps to meet these requirements and to implement the Act effectively:

• The recipients and uses of all funds are transparent to the public, and the public benefits of these funds are reported clearly, accurately, and in a timely manner;
• Projects funded under this Act avoid unnecessary delays and cost overruns;
• Program goals are achieved, including specific program outcomes and improved results on broader economic indicators.

Agencies are also required to report information to the recovery.gov website and will soon have to submit information via automated feeds.

Over the past five years, 55 percent of organizations have established policies to reduce energy consumption. However, only 19 percent of organizations have measurably reduced their energy costs and carbon emissions, according to the Economist.

Organizations fail because more than 77 percent of executives surveyed report challenges in the identification and establishment of meaningful sustainability benchmarks and key performance reports necessary to achieve their reduction goals, according to the same report.

Effective performance metrics must align with the corporate sustainability strategy and any external reporting requirements.

At the highest level, environmental performance metrics divide into three broad categories: Environmental, Financial, and Portfolio.

Environmental Metrics provide critical analysis to evaluate energy consumption, resource use, waste production and greenhouse gases emitted. Within each of these areas, intensity metrics facilitate comparative analysis between facilities. To accurately compare energy performance between facilities, metrics such as total energy used need to be normalized by a factor such as gross square feet or total building occupants.

Financial Metrics provide vital information about the cost and risk associated with an organization's environmental impact. Executives need to know the amount of money spent on energy and the revenue or operating expense available to mitigate pending environmental regulations.

Portfolio Metrics provide crucial insights into the condition of individual facilities across an organization's entire real estate portfolio. Executives use these metrics to prioritize scarce capital resources across environmental improvements.

In a release on March 10th, the Environmental Protection Agency (EPA) announced a proposal that all major sources of U.S. greenhouse gas emissions be reported into a national database.

According to the EPA's release, approximately 13,000 facilities would be covered across the United States. Organizations with energy intensive operations or those with large multi-building campuses will likely be required to report carbon and other greenhouse gas emissions in a new rule under the Clean Air Act.

According to a report published by The Economist, organizations reported significant challenges in achieving their sustainability goals including:

• Establishing meaningful benchmarks or metrics to measure sustainability performance (80 percent)
• Access to reliable internal data (77 percent)
• Tools to monitor global performance e.g. IT, scorecards etc. (79 percent)

Many organizations will struggle with this new rule unless they understand the need to measure and report their greenhouse gas emissions.

Alert: The U.S. Energy Information Administration has forecast increases in the price of energy throughout 2009, and electricity is expected to rise by two (2) percent.

Impact on Your Business: Government programs mandating energy conservation standards will create force energy suppliers to increase the prices they charge consumers.

How to Save: Consumers need to be prepared to handle these price increases, and building efficiency provides a clear and critical opportunity for organizations to save money. A recent study from the California Energy Commission that shows electricity consumption per square foot continues to rise across every industry (see chart below), so electricity savings will deliver considerable cost savings.

These price increases bring increased need to reduce your buildings' dependence on energy in order to reduce costs.

Alert: CFO Research concludes that real estate and facility assets rank among the four highest costs of business within sixty-six percent (66%) of companies. For twenty-two percent (22%), it ranks as their first or second biggest expense.

Impact on Your Business: CFOs now view real estate as a rising priority that must be addressed. They have already extracted savings from sourcing, process redesign and T&E expense management and are now focused on real estate operating and occupancy cost reduction.

How to Save: CFOs also agree that there are three clear steps to improve real estate performance.

• Centralize the real estate function to improve operational effectiveness. A centralized real estate function creates economies of scale to reduce costs.
• Integrate real estate and corporate strategy to ensure alignment with business goals. Integrated strategies control cost of occupancy by removing excess space and locking in leases at reduced costs.
• Implement a real estate lifecycle management system (IWMS) to improve operational efficiency. These systems provide critical date alerts to vacate underperforming locations, embedded payment reconciliation processes and performance management metrics to identify underperforming assets, resources and processes.

In breaking news yesterday, The New York Times reported that the Environmental Protection Agency (EPA) is expected to act for the first time to regulate carbon dioxide and other greenhouse gases. The decision would have a profound impact on how utilities generate power in the future, which will create significant new costs for suppliers and drive prices higher for consumers.

Beyond the negative cost impact, the EPA decision to act over a period of months through regulation could accelerate legislation through Congress as lawmakers and the Obama administration look to work in concert.

The clean air law would subject any organization emitting more than 250 tons of CO2 to regulation, potentially including schools, hospitals, shopping centers, even bakeries.

Today's executives must understand which successful business strategies driven by environmental considerations drive lasting value. The U.S. government concludes that buildings account for a staggering 48 percent of energy consumption and produce the majority of greenhouse gas emissions.

Real estate strategies focused on the reduction of buildings' environmental impact represent the greatest opportunity to reduce costs and generate energy savings.

Over the past five years, 55 percent of organizations have established policies to reduce energy consumption, yet only 19 percent have measurably reduced their carbon emissions, according to a report published by The Economist. Organizations reported significant challenges in achieving their sustainability goals including:

• Establishing meaningful benchmarks or metrics to measure performance (80 percent);
• Access to reliable internal data (77 percent);
• Tools to monitor global performance e.g. IT, scorecards etc. (79 percent);

As a result of these proposed regulations, organizations should accelerate plans to reduce their dependence on energy and mitigate the detrimental impact of escalating energy prices.

As TRIRIGA watches these important developments, look for more Insights on what impact this important development will have on your organization.

"We'll lead a revolution in energy efficiency, modernizing more than 75 percent of federal buildings" it will cut the federal energy bill by a third and save taxpayers $2 billion each year" - President Barack Obama

In 2009, President Obama and the 111th Congress, as well as their state counterparts in the West and Midwest, will deliver significant legislation focused on short-term economic and environmental goals.

American Recovery and Reinvestment Plan

Government-directed spending and tax credits for energy and infrastructure improvements over the next two years will provide more effective stimulus than tax cuts.

With the passing of the American Recovery and Reinvestment Plan, more than $150 billion will be allocated to infrastructure investment, energy efficiency, healthcare, and education projects.

Recent research provides insight into the impact these legislative measures may have on organizations' environmental goals:

• Energy suppliers and consumers will be impacted by programs mandating energy conservation standards, which will create significant new costs.
• To provide the intended economic stimulus the money must be spent quickly, extended Tax Credits and other incentives catalyze private-spending that would otherwise be delayed.
• $6.7 billion for renovations and repairs to federal buildings including at least $6 billion focused on increasing energy efficiency and conservation. Projects are selected based on GSA's ready-to-go priority list.
• $6.9 billion to help state and local governments make investments that make them more energy efficient and reduce carbon emissions.
• Congress includes a series of transparency and accountability provisions such as a Recovery Act Accountability and Transparency Board to provide oversight in the management of recovery dollars. Infrastructure and building efficiency projects that are fully planned, and provide transparent reporting can be expected to receive economic stimulus funding over those that don't.