DALLAS-Locally based Transcend Equity Development Corp. has
opened talks with hedge funds to expand its green plan for older office
buildings. In the past four years, 2.5 million sf for a Mid-Atlantic REIT
and a handful of one-off projects in Texas have served as the proving
ground.
Transcend Equity founders J. Stephen Gossett Jr. and his father, J.
Stephen Gossett Sr., caught hedge funds' eyes for developing an
innovative program to make older buildings more energy efficient at
no cost property owners. The Owings Mills, MD-based Corporate Office
Properties Trust has had 24 buildings completed in its 44-building
portfolio and has 18 more waiting in line for the six-year-old firm to
tackle. Among the local projects that's been done for another owner is
the 46-year-old Bank of America building at 500 W. 7th St. in
Downtown Fort Worth.
To date, Transcend Equity has used private capital plus a variety of
loans and credit facilities to fund the rollout, pooling several buildings
into one financing vehicle. The junior Gossett says hedge funds are
circling to set up a large revolving facility that would streamline the
capital process and allow Transcend to expand.
The nuts and bolts of the system rely on a "management energy
service agreement." Under the agreement, Transcend Equity
completes and pays for energy-efficient upgrades in exchange for a
10-year payback equal to the historical electricity and natural gas
costs for buildings "before" they are retooled. "If rates go up or down,
we will pass the relative impact on to the customer," the elder Gossett
says, adding the actual incurred cost is all that's passed along.
For the test REIT, the Gossetts tell GlobeSt.com that they achieved a
25% to 30% average reduction in electricity and natural gas bills for
buildings averaging 18 years old. With the dust settled, they say the
REIT has saved $500,000 to date and $12 million of recurring cap-ex
on its line-item budget.
"It's extremely unique to the market. We know we're the only ones
who do this now," says the junior Gossett, who is Transcend's vice
president. "But, we believe in five years there will be several
companies doing what we do."
The business plan targets energy-efficient upgrades that many owners
wouldn't undertake in older buildings due to cost and lease passthrough
provisions. "There is an economic disincentive that keeps
them from investing [into energy-saving upgrades]," the younger
Gossett explains. "We came to realize this is a vastly under-served
market."
The plan started with a REIT because "it's the highest barrier to entry,
but obviously the most lucrative," the junior Gossett says. "Before we
could talk to other REITs, we really needed to demonstrate that it
worked." They've now opened talks with several REITs in the northeast
about their vintage office portfolios.
Transcend's retooled buildings won't merit LEED-certification, but the
Gossetts say their next step is to achieve LEED-qualified status with
older office buildings. The elder Gossett, the company president, says
several of the test REIT's "least efficient" buildings were tackled to
determine the extent of the savings that could be achieved. He says it
was "a dramatic improvement," but not enough to hit Energy Star
levels.
Transcend's upgrades target mechanical systems, air and heat
distribution and temperature control. The father-son team says it's not
about locking thermostats or renegotiating utility contracts.
The younger Gossett also points out that attacking "the energy pigs" in
an office portfolio decreases the amount of time maintenance staffs
spend answering tenants' calls in buildings. He claims a 25-year-old,
fully leased multi-tenant building belonging to the Maryland REIT had
its monthly number of hot-cold calls from tenants drop 90% after
mechanical upgrades.
"It's not just about that a building is improved. It's about how much
improvement is made," the junior Gossett stresses. "A building can be
well located and have the right rent, but if it doesn't have good
comfort and can provide a measure of reliability, it becomes a [lease]
renewal issue."
