1. © 2010 AirAdvice, Inc. Walk a Mile in a Building Owner’s Shoes

2. © 2010 AirAdvice, Inc. “Seek first to understand, then to be understood” Stephen Covey The Seven Habits of Highly Effective People

3. © 2010 AirAdvice, Inc. Agenda Energy demographics and commercial building markets Ownership structures and motivations How to make (or not make) money in commercial real estate –Property valuation –Economic drivers Lease types and the behaviors they drive Events that create action Strategies for success

4. © 2010 AirAdvice, Inc. 4 98% 58% Energy Demographics Source: Commercial Buildings Energy Consumption Survey (CBECS)

5. © 2010 AirAdvice, Inc. Commercial Buildings Markets Source: Commercial Buildings Energy Consumption Survey (CBECS)

6. © 2010 AirAdvice, Inc. % of Total Floorspace Source: Commercial Buildings Energy Consumption Survey (CBECS)

7. © 2010 AirAdvice, Inc. Ownership Structures 1.Owner occupied Employees of company owning the building occupy the space Examples: –Corporate campuses, education, public Company views property as an asset –May benefit from capital appreciation, but not primary motivation –Typically longer term view Primary motivation –Profitability of business –Reduce costs associated with facilities

8. © 2010 AirAdvice, Inc. Ownership Structures 2.Investor Owned Building owner leases space to other companies, who occupy the space Company views property as a “box of leases” –Return on investment is primary motivation –May have very short term investment horizon Examples: –Office buildings, warehouses, retail

9. © 2010 AirAdvice, Inc. How to Make Money in Commercial Real Estate Equity Debt $ Buy Building Purchase Price Sell Building Equity Debt Sell Price Profit on Sale

10. © 2010 AirAdvice, Inc. How Not to Make Money Equity Debt $ Buy Building Purchase Price Sell Building Equity Debt Sell Price Negative Equity

11. © 2010 AirAdvice, Inc. Even More Problematic…Refinancing $ Equity Debt Buy Building Purchase Price Refinance Loan Equity Debt Market Value Cash Required for Refinance Max Loan

12. © 2010 AirAdvice, Inc. Example IDS Center –1.4 million sf, 57-story office tower –Bought in 2006 for $278 million –Successfully refinanced property in January 2010 $125 million loan to replace previous $161 loan Financing package required $36 million of additional equity Term of loan: 2 years, with option to extend to 3 rd year Property 98% leased

13. © 2010 AirAdvice, Inc. Distressed Commercial Properties Between 2010 and 2014, $770 billion in commercial loans will be on properties in a negative equity position Source: Foresight Analytics

14. © 2010 AirAdvice, Inc. How Buildings Valuation is Determined Commercial real estate is valued on the risk adjusted rate of return, or capitalization rate Property Value = Net Operating Income Cap Rate

15. © 2010 AirAdvice, Inc. How is the Cap Rate Determined? By comparing NOI and sale price from recent sales of similar buildings, i.e comparable sales Cap rates will vary greatly: Over time By geographical market By building type

16. © 2010 AirAdvice, Inc. Net Operating Income Net Operating Income = Revenue – Operating Expenses Revenue  Lease payments  Other fees Operating Expenses  Management / leasing fees  Insurance  Janitorial  Taxes  Utilities

17. © 2010 AirAdvice, Inc. Where We’re Headed… “Energy use is the single largest operating expense in commercial office buildings, representing approximately one-third of typical operating budgets”

18. © 2010 AirAdvice, Inc. Energy Savings Drive Higher Asset Value 20% lower utilities $3.4 million higher asset value

19. © 2010 AirAdvice, Inc. Turn Price Pressure into Gain Example: 100,000 sf building $2 per sf in energy costs $10,000 cost of PM agreement Scenario 2 10% Reduction Energy Costs 50% Increase in PM Price Scenario 1 10% Reduction in PM Price

20. © 2010 AirAdvice, Inc. Economic Challenge for Building Owners Declining occupancy… Increases competition for tenants which drives lease rates down… Which reduces NOI… Which investors see as increased risk, increasing cap rates… Which results in lower asset values… Which limits access to capital. But it all starts with OCCUPANCY

21. © 2010 AirAdvice, Inc. Common Lease Types Lease TypeDescriptionImpact of Operating Expenses on NOI Gross or full service Landlord pays all capital and operating expenses Lower operating expenses result in higher NOI NetLandlord pays capital expenses Tenant pays operating expenses No direct impact on NOI Full service w/ base year expenses Landlord pays capital expenses and operating expenses up to “base year” amount Tenant pays operating expenses above base year amount If operating expenses near base year, lower operating expenses can result in higher NOI

22. © 2010 AirAdvice, Inc. Behaviors Determined by Lease Type Gross Lease Year 1Year 2 $2.00 per sf $1.50 per sf $0.50 to Landlord Net Lease Year 1Year 2 $2.00 per sf $1.50 per sf $0.50 to Tenant Gross Lease w/ Base Year Year 1Year 2 $2.00 per sf $1.50 per sf $1.90 Base Year $0.10 to Tenant $0.40 to Landlord Landlord generally motivated to reduce operating expenses Landlord may not be motivated to reduce operating expenses Motivation depends on relationship of current expenses to base year

23. © 2010 AirAdvice, Inc. Must Understand Who Pays and Who Benefits Owner Occupied Space Leased Space Net LeaseGross Lease OwnerTenantOwnerTenant Who Pays: Operating Expenses Capital Expenses XXXXX XXXXX Who Directly Benefits:XXX Benefits Accrue to Owner Benefits Accrue to Owner Benefits Accrue to Tenant

24. © 2010 AirAdvice, Inc. Pass Throughs A common lease clause, even in net leases, allows the building owner to recover capital costs from the tenants for improvements that reduce operating expenses

25. © 2010 AirAdvice, Inc. Events that Drive Action

26. © 2010 AirAdvice, Inc. Lease Renewal Buyer’s market Building owners are willing to invest for the benefit of tenant as a retention tool

27. © 2010 AirAdvice, Inc. Case Study 30,000 sf office building in Kirkland, WA 3,000 sf tenant lease renewal –History of comfort complaints Contractor proposed $30k project –Energy service agreement –Test and balance –Duct insulation Building owner accepted proposal on the spot

28. © 2010 AirAdvice, Inc. Case Study What’s at risk? –3,000 sf x $30 per sf = $90,000 per year in rent –7 year lease = $630,000 of guaranteed revenue If tenant leaves? –Minimum 6 to 9 months of lost rent = $45,000 to $67,500 Building owner’s perspective: $30,000 to solve problem doesn’t seem so bad

29. © 2010 AirAdvice, Inc. Sale or Refinance of Building Building finances will be heavily scrutinized –Revenues –Operating expenses –Cash flow –Condition of systems 1-2 years leading up to event is prime time for action

30. © 2010 AirAdvice, Inc. Property Condition Assessment (PCA) Evaluation of major systems in building –Roof, parking lots, mechanical Lenders may require cash escrow for items found deficient –Immediate lump-sum reserve –Ongoing monthly reserves above NOI line Replacement of major systems prior to refinancing can be cash flow positive

31. © 2010 AirAdvice, Inc. Energy Benchmarking Legislation Legislation requires benchmarking: –Sale of building –Refinancing of building –Lease of building to single tenant Most notable legislation passed in: –State of California –State of Washington –New York City –Washington, DC

32. © 2010 AirAdvice, Inc. Energy Benchmarking Legislation

33. © 2010 AirAdvice, Inc. Key Outcomes in Current Economic Climate 1.Occupancy is critical –Building owner is increasingly willing to invest for the benefit of the tenant –Improve marketability of space 2.Investment horizon is extending –Falling asset values forcing building owners to hold properties longer 3.Vacant space strategies –Building owners pay operating expenses for vacant spaces 4.Cash is king –Maximize asset value –Minimize capital expenditures, unless it can be passed through to tenant

34. © 2010 AirAdvice, Inc. Strategies for Success

35. © 2010 AirAdvice, Inc. Strategies for Success 1.Sell to the right level –Financial decision makers, not building operator When meeting: –Above ground is good –Below ground is bad Bad Good

36. © 2010 AirAdvice, Inc. Tips for Selling to the Right Level Ask financially based questions If your contact doesn’t know the answer, ask them to who would –Gain a warm introduction to financial decision maker

37. © 2010 AirAdvice, Inc. Target the Correct Decision Making Level % of Time Goal PositionWhat Motivates ThemWhy Talk to Them 10%  20% CFO / COO / Controller Overall operating cost and corporate objectives Needed to approve decision Can direct activities 20%  30% VP Finance, VP Operations, VP Facilities Reducing operating costs (management pressure) Decision maker for service (but not final say on capital expenditures) 60%  45% Facilities or Plant Manager / Director or Property Manager Happy tenants Looking good to their owners Can influence decisions Partner with them to go upstairs In the loop w/ current service provider 10%  5% Building Engineer/Operator Minimizing downtime Reduced complaints Close to mechanical equipment Need to win them over May have veto power

38. © 2010 AirAdvice, Inc. Strategies for Success 2.Understand financial drivers –Lease types –Upcoming lease renewals –Investment horizon Sale Refinance –Willingness to pass-through operating expenses and capital expenses

39. © 2010 AirAdvice, Inc. Strategies for Success 3.Change the buying criteria –Offer something different

40. © 2010 AirAdvice, Inc. Change the Buying Criteria Current – Price of maintenance agreement or project New: –Impact to NOI –Impact to asset value –Impact to broader portfolio financial metrics

41. © 2010 AirAdvice, Inc. Strategies for Success 4.Key off action-driving events –Lease renewal –Sale / refinance of building –Energy benchmarking legislation

42. © 2010 AirAdvice, Inc. How To? Energy Services Delivery Model

43. © 2010 AirAdvice, Inc. Walk a Mile in a Building Owner’s Shoes Owner-occupied & investor owned properties are motivated differently #1 priority: Occupancy Different lease types drive different behaviors –Understand who pays and who benefits Events that create action –Lease renewal –Sale or refinance of building –Energy benchmarking Strategies for success 1.Target the right level 2.Understand financial drivers 3.Change the buying criteria 4.Key off action-driving events

44. © 2010 AirAdvice, Inc. Questions ? ? ? ? ? ? ? ?