Why New Federal Leasing Rules are Good for Green Business

Why New Federal Leasing Rules are Good for Green Business

An early New Year's resolution from the federal government is laying the foundation for job growth, taxpayer savings and a more energy efficient commercial building stock in 2011 and beyond.

New green leasing requirements (pdf) that kicked in on Dec. 19, 2010, require federal agencies to sign leases only in energy efficient buildings as designated by the U.S. Environmental Protection Agency's Energy Star program, which rates the energy performance of buildings and identifies the nation's top performers. Where a small number of exemptions apply, federal agencies must directly negotiate cost-effective energy efficiency improvements to its space with the landlord.

The requirements, which passed Congress in the Energy Independence and Security Act (EISA) of 2007, will ring loudly in the commercial real estate market. The federal government is by far the nation's largest commercial tenant, leasing about 370 million square feet of space. Put in other terms, that's enough space to fill more than 142 Empire State buildings, or roughly the equivalent of every Target, Best Buy, Costco and Barnes & Noble store in the United States added together.

On top of its sheer size, the federal government is courted aggressively by landlords who prize its creditworthiness and stability as a tenant, increasing the likelihood that the leasing requirements will motivate energy efficiency competition and real change in the market.

Politically and economically, the timing of the leasing measure could not be better. We are entering a new period of fiscal austerity that threatens energy reform and job creation efforts. Yet, the federal government now has an enormous opportunity to demonstrate that fiscal responsibility, energy efficiency and job creation go hand in hand.

Federal agencies paid more than $24.5 billion in energy costs in 2008, including $6 billion on electricity. Leasing in energy efficient buildings can save the government millions of taxpayer dollars that otherwise finance wasted energy every day of every year. That should resonate with fiscal hawks and environmental groups alike.

As landlords increase the efficiency of their buildings to compete for government leases, small businesses and other tenants will also see their energy bills decrease. In some cases, landlords can directly capitalize energy cost savings into their operating budgets, increasing their profit margins. In turn, demand for energy efficient buildings will create jobs in the hard-hit construction sector, as well as for building engineers and operators, facilities managers, auditors and architects.

Similar government leasing requirements in Australia had powerful market transformation effects, helping set de facto energy efficiency standards in private commercial buildings. To achieve comparable success in the United States, the federal government must work with private landlords to ensure a smooth implementation and ongoing compliance.

Signs so far are good: The government's choice of the Energy Star program dovetails with established building energy rating practices in the private sector, and the General Services Administration, the agency that handles leasing and property matters for most federal agencies, issued internal guidance on the new leasing requirements months ago and has begun educating property stakeholders on how to comply.

The Institute for Market Transformation is supporting the government's energy efficiency leasing requirements in a variety of ways. We've discussed the new leasing measures in presentations to leading property trade groups, such as the Building Owners and Managers Association International and the Real Estate Roundtable. We work directly with states and cities including California, New York City, Washington, DC, and Seattle on policies to rate the energy performance of commercial buildings using Energy Star, which ultimately helps landlords get a head start on complying with the new leasing measures. Our energy efficiency finance work is focused on helping owners access financing mechanisms and incentives for energy retrofits and value efficiency improvements in appraisals and transactions.

Much work remains, but the federal government deserves credit for taking a bold first step on energy efficiency that's good for business, good for jobs and good for taxpayers.

Image CC licensed by Flickr user TheTruthAbout.