Mitsui & Co. will enter into a joint venture with Transcend Equity, which says it has come up with a way to rewrite the rules on retrofitting commercial buildings.

Terms were not disclosed and neither were many details. But it's potentially a big boost for Transcend, a company that only started popping up on the radar a few months ago. It's also another example of how large conglomerates are combing Startup Land for interesting, novel ideas.

We wrote a feature on Transcend's business plan and its founders in April. In case you missed it, here it is:

An excessive utility bill is a capital asset, according to Steve Gossett Jr.

Transcend Equity, founded by Gossett and his father, has come up with a novel technique for improving the energy efficiency of commercial real estate that in many ways eliminates the uncertainties and complexities surrounding performance-based contracting, PACE and ESCO (energy service company) agreements.

A big part of the appeal is the simplicity. Transcend will pay the utility bills for a building -- literally writing the check on behalf of the owners or tenants. In exchange, the owner or tenant must pay Transcend a fee, typically less than what they would ordinarily pay for gas and electricity.

The owners and tenants also have to give Transcend the right to install things like new air conditioners and building management systems. Ideally, the monthly cost of the capital improvements (minus utility incentives) will be less than the utility bills.

At the end of the eight- to ten-year agreement, title to the improvements then passes to the owner. In the end, the owner gets an enhanced property, the tenant enjoys lower expenses, Transcend earns a profit, utilities meet their efficiency goals, and we burn less coal. Everybody’s happy.

On average, the company can lower utility costs by around 30 percent. In some cases, like the 1025 Elm Street building in Dallas, utility bills dropped by 40 percent with about $10 million in capital improvements. If you are in New York, go check out 125 Maiden Lane, where Transcend will replace the building controls system, ancient electric motors and other equipment.

To date, Transcend has entered into 30 projects and invested over $30 million in capital in its projects. Six million square feet in total have been improved. (It’s also the latest in a line of father-son companies -- like Rivertop Renewables, Silver Spring Networks and Hycrete -- in green.)

Again, simplicity is the key. Under ESCO contracts, ESCOs will typically install equipment and share the savings on future utility bills with the owner. But how much of the savings can be attributed to the improvements? How large are the ESCO’s up-front fee? What constitutes a breach of an ongoing performance contract? It becomes an ongoing relationship subject to negotiation.

Gossett, who worked in the industry and is an avowed critic, also claims that ESCOs don’t disclose as much information as they could about the cost or benefits of their improvements.

“It’s a big black box. There is no cost transparency,” he argued. “I hated [working at an ESCO] with a passion.”

PACE, similarly, adds complexity by adding a security interest.  Under PACE, improvements are paid for by an additional tax lien; that wrinkle has made effectively put PACE in deep freeze.

By contrast, Transcend’s MESA (managed energy service agreement) platform lets it function like a property developer that focuses on air conditioners instead of raw land. They install equipment on their own dime and then sell energy efficiency as a service. Clients also get to see their utility bills so they can get a full understanding of the results of the improvements.

“We raise debt to fund projects. [...] We book assets on our balance sheet,” he said. “We are open source.”

Startups Metrus Energy and Skyline Innovations operate in a similar fashion -- installing assets and selling the results as energy efficiency servicers -- but with slightly different shading. Metrus works with ESCOs. Skyline, meanwhile, largely now concentrates on solar hot water heaters as a service and does not yet offer a full menu of technology. Recurve says it one day could sell home (not commercial) retrofits as a form of efficiency to utilities. Another technology-specific example of this: utilities giving away ice air conditioners to reduce peak power.

Like nearly everyone else in the efficiency business, Gossett notes that efficiency provides more benefits for less money in less time than renewable energy assets like solar panels. Unfortunately, it’s also tough to sell. Customers still tend to be skeptical about the seeming paradox of paying for savings versus something physical and magnificent like a wind turbine.

Politicians like getting their picture taken at solar farms.

“How do you take a picture next to nothing?” he asked rhetorically.

To protect itself, Transcend typically will only do deals where 25 percent or more can be shaved off of an electricity bill. Thus, most of the work today has focused on older buildings. The actual age of 1025 Elm in Dallas, for instance, can’t be ascertained with exact certainty.

The monthly fees will also vary under pre-set bounds to account for changes in use, increases in utility bills and/or increases in the number of employees. Clients can get true fixed fees, but like a mortgage, that kind of security adds a premium to the fees. Gossett argues that variables actually reduce the overall price.

Some clients, he added, are mostly interested in reducing operational costs. Others are more concerned with the actual improvements.

What technology works best? Surprisingly, Gossett doesn’t say air conditioning. Instead, building management systems give the best bang for the buck. A building management system might take up 20 percent of the overall improvement budget but deliver 50 percent of the benefit.

“Many buildings are still controlled by pneumatic systems, technology invented in the nineteenth century,” he said.

Do these transactions pass IRS muster? The evolving “as a service” model for capital assets and improvements will take regulatory adjustment. Carpet giant Interface, for instance, wants to sell carpet as a service, but it actually still has to pass title to the carpet to its customers. 

Two large accounting firms have already signed off on Transcend’s idea and more opinions are on the way, he said.

Tags: building controls, building management, energy efficiency, honeywell, hvac, johnson controls, mitsui, transcend equity