To date, conversations around energy efficiency between landlords and tenants have largely revolved around the fact that landlords must pay for upgrades, but tenants receive the immediate benefits.
Though some upgraded buildings perform well with both parties reaping the benefits of more efficient spaces, the availability of new technologies and processes doesn't always result in the implementation of energy efficient strategies -- even where there is a clear positive return on investment and a short payback period.
The conflict between landlords and tenants stemming from “split incentives” to install upgrades has been identified as one of the top barriers to capturing energy savings in buildings, according to an indicator survey published by the Institute for Building Efficiency in 2012. Consequently, leased space has historically lagged behind owner-occupied buildings in pursuing energy efficiency.
“Energy efficiency retrofits will be most successfully implemented when the building owner, manager, and tenants work together as partners in the project, and have a shared sustainability goal for the building,” said Karen Penafiel, a vice president with Building Owners and Managers Association International (BOMA).
The most common split incentive issue results from the structure of commercial leases which make the building owner responsible for bearing the cost of all capital upgrades. Energy costs and routine operating expenses are paid by the tenants.
In other words, the owner makes the capital investment to improve the building and the tenant is the sole beneficiary of reduced operating expenses. And if a lease instead makes the owner responsible for all energy costs, tenants have no incentive to reduce their consumption.
But even leased buildings projects can reach major energy savings and increase building value. The Empire State Building, for example, recently completed a deep energy retrofit saving 38 percent of pre-retrofit energy with a three-year payback. Without tenant participation in the program such as saving lighting and plug load energy, the upgrade would not have succeeded. The energy components of the retrofit even attracted new tenants (such as LinkedIn) and supported retention.
Photo of key and house provided by Arkady via Shutterstock
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Here is the Solution! You
Here is the Solution!
You wrote of the NRDC effort in your article. As I lead as six-month outreach effort from the Urban Green Council (the NY Chapter of the USGBC) that lasts into September, I am leveraging that concept in an educational effort in New York City and, to some degree, beyond. The key is to change the conversation from ending at "yeah, but there's the split-incentive problem" to include the kicker - "that can be solved with the Energy Aligned Clause. We should use that."
Though developed in New York City by a working group of real estate professionals, the Energy Aligned Clause applies wherever the split incentive problem exists. It has been used publicly (press conference with New York City Mayor Michael Bloomberg, April 2011). It truly is an effective solution, and I expect in the years to come it will become standard lease language wherever the owner pays for capital expenditures and the tenant pays operating expenses.
Paul Reale
Urban Green Council
http://www.urbangreencouncil.org/EnergyAlignedClause