Tapping the Energy Efficiency and Solar Markets within Federal Building Lease Renewals

This article is the second in a series about the potential for private renewable energy companies to access the large (and growing) market for clean energy within the federal government.

The U.S. Market for Energy Efficiency

As I wrote about earlier, the market for solar power and energy efficiency within the federal government is huge and largely untapped. Pursuant to Presidential Executive Order 13423, federal agencies are required to improve energy efficiency and reduce greenhouse gas emissions of the agency, through a substantial reduction in energy usage (up to 30%). Following up on this initial directive, President Obama signed Presidential Executive Order 13514 which stated beginning in 2020 and thereafter, all new federal buildings that enter the planning process will be designed to achieve zero net energy by 2030 and urges federal agencies to manage existing building systems to reduce the consumption of energy, water, and materials, and identify alternatives to renovation that lower a buildings operational cost. Finally, this order requires that all federal agencies establish and implement energy efficient practices for at least 15% of each agency’s building inventory by fiscal year 2015.

In addition to these executive moves, the U.S. General Services Administration (GSA), the federal agency responsible for the management and procurement of most federal office buildings, has pushed itself to the forefront of the green building revolution. GSA has a fiscal year 2011 capital investment program of $1.4 billion to support green building, including $676 million for new construction and $703 million for renovation and alteration.

The GSA Leasing Process

In a typical build-to-suit for the federal government, private developers submit bids to GSA in response to another federal agencies’ request for office space. The winning bidder then signs a 10-20 year lease with the federal government for that office space. Critically, the federal government renews existing leases on procured office space approximately 90% of the time, providing landlords a reliable source of cash flow over an extended period of time.

Importantly, a large portion of the federal government’s office space was built and leased to the government well prior to the energy efficiency requirements of Presidential Executive Orders 13423 and 13514 with a large number of existing leases expiring over the next few years. In fiscal year 2011 (commencing on October 1, 2010), 128 leases expire for 6.1 million square feet; in fiscal year 2012, 107 leases expire for 6.4 million square feet; and in fiscal year 2013, 123 leases expire for 7.2 million square feet.

As stated above, the new government procurements will require energy efficient measures be incorporated into the design of the building requirement from the beginning. But what about the renewal of existing leases? As stated above, President Obama has required that all federal agencies have at least 15% of its inventory incorporate energy efficiency guidelines by fiscal year 2015. How will this impact lease renewals and will the federal government continue to renew existing leases with private landlords if those buildings do not comply with Presidential Executive Orders 13423 and 13514?

Energy Efficient Retrofits and GSA Lease Renewal

GSA has not put out definitive guidance on the matter but within the industry, it looks as if GSA might be using the leverage of lease renewal to force private landlords into energy efficient retrofits to meet federal requirements.

To start, GSA is already beginning to measure its inventory in advance of the 2015 deadline. By December 2010, GSA is scheduled to assess at least 5% of its owned buildings greater than 5,000 gross square feet and at least 5% of its leases greater than 5,000 gross square feet for compliance with federal energy efficiency requirements for the purpose of tracking leased assets that already meet such requirements. GSA has also required additional information on green building and energy efficient measures for all applications for improvements and lease renewals for federal buildings. Finally, GSA has created “Build Green Coordinators” in each of its 11 building regions for the purpose of providing private developers with technical assistance concerning green lease solicitation build-out requirements and LEED certifications.

Undoubtedly, this will have an impact on whether GSA will renew an existing lease with a private landlord. If an existing office building can be retrofitted to be energy efficient, this would be a much simpler and less costly way for GSA and other federal agencies to meet the energy efficient inventory standards. GSA could always elect to re-procure a project but that is costly and more importantly, time consuming. It has been my professional experience that a lease renewal in an existing leased building, even with major modifications such as requiring the building to be LEED certified and incorporating renewable energy systems, can be done by GSA, the agency occupant and the landlord, in just a few months. Whereas, a re-procuring of new space to meet the “sustainability” requirements will take GSA and the agency, several years to develop the new specifications, bid the new specifications, award the lease contract and then actually have the project built and occupied.

Not only does the existing landlord benefit by retaining a AAA lessee at renewal, even with large capital investments in the “green building” mandates, many of the sustainable improvements reduce the operating expenses the landlord is responsible for paying under the gross lease contract.

How to Find Landlords of Expiring GSA Leases

Finding landlords with expiring leases with the U.S. government is not easy but can be found with publicly available resources. First, download GSA’s list of lease building inventory. You will notice that every lease in all 11 of GSA’s regions are listed including information on rentable square feet, annual rent amount, landlord name and lease expiration date. Filter out all of those leases that are not for buildings of 5,000 square feet or more and have lease expirations greater than 5 years. The landlord name should be attached which you can cross reference with the U.S. Small Business Administration to retrieve publicly available contact information which can be a starting point for your lead generation process. Move the middle of the page and enter the landlord’s name under the “Searching for a Specific Profile” to retrieve the available information.

Note of caution: sometimes the name of the landlord as listed on the lease inventory is not complete, so when it’s entered into search box, the landlord’s contact information can not be found. The landlord and other lease information on the GSA lease inventory is entered by GSA personnel.

Finally, as an experienced developer of U.S. government buildings, I would recommend that solar and energy efficiency professionals be prepared to discuss the following with the landlord:

• Is the landlord is aware of the federal requirements for energy efficiency and how GSA is going to enact them on the property owners they lease from? Solar and energy professional must be able to discuss the details of the GSA enforcement program.
• Has GSA has contacted the landlord regarding a renewal or extension of the lease for the their premises? If so, has GSA discussed any new green technology improvements specifically for meeting any new “sustainability” requirements or bringing the building to a certain LEED level certification?
• Be prepared to discuss how solar power and energy efficient improvements can help the landlord comply with the “sustainability” requirements and how the cost of a solar power system or other energy efficient improvements can be incorporated into the tenant improvement package (such costs may vey well be paid for by GSA as a reimbursable tenant improvement expense but there isn’t a clear cut policy on this issue at the moment).
• Be prepared to discuss a range of financing options and how they might impact the owner’s on-going operating expenses.
• When requesting a site visit or face-to-face meeting, be familiar with the layout of the landlord’s property and be prepared to make recommendations at that meeting.

One final note of caution, some of the landlords are going to be experienced developers and construction guys and may know a lot about the federal “sustainability” requirements — even solar power systems. However, there a lot of mom/pop owners out there, particularly with the smaller buildings — between 5000 to 20,000 square feet, who purchased their property via a 1031 exchange that are not knowledgeable about these matters nor can they afford to lose the federal government as a tenant. So it is critically important that you understand the structure of a typical federal government lease and be able to offer solutions that will bring increased value, as opposed to cost, to these building owners.

John Keller Norris is the founder of Del Sol Capital Partners, LLC and is located in La Jolla, CA. Mr. Norris has been actively involved in the bidding, procurement, development and management of office space for the U.S. Government in the western U.S. Included in that process is the research, design and implementation of cost effective energy management systems in U.S. government leasehold facilities. Mr. Norris graduated from the Ohio State University with a B.S. degree in Finance and Accounting and received an MBA from San Diego State University. You may contact Mr. Norris at john@delsolcp.com.