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Owners and Tenants Collaborate on Green Lease Principles

Commercial building owners and corporate tenants alike are focused on sustainability as a way to reduce operational costs and meet their commitment to lessen their environmental impact. Sharing this focus often does not translate into leases that maximize the opportunity to reduce energy and other resources. But a growing number of large-scale owners and tenants are coming together to align their individual interests with their common goals.

Companies want to occupy green space, but these aspirations can often be blocked by questionable ROI.  Some are willing to pay slightly higher rent for greener space because direct access to daylight, better air quality, and adjacency to public transportation helps employee productivity. On the flip side, many expect the cost for environmentally friendly space to be less, since it’s more energy efficient. In the most recent survey of corporate real estate executives conducted by CoreNet Global and Jones Lang LaSalle, 42 percent of companies expect to pay the same or even less for sustainable space, and another 21 percent said they would be willing to pay a higher rent only if it was offset by lower operating costs.

Savvy owners and managers have already implemented low-cost strategies such as energy audits, retrocommissioning and advanced energy management that pay for themselves through lower costs within months and offer a cost advantage thereafter. But the drive to maximize efficiency tends to stall in the attempt to move beyond operating expenses into big-ticket capital expenditures unless the costs of these investments can be passed to occupants or can pay off in marketable asset value.

One problem is a split financial incentive between landlords and tenants. Owners looking for a return on investment do not want to spend millions of dollars only to see the benefit go to tenants in the form of lower operating costs. At the same time, tenants won’t pay a big upfront cost for a long-term benefit with a breakeven point that may be after their lease expiration. Is there some way to incent major green building improvements where costs and benefits are equitably distributed? Do building owners even have access to capital to make the improvements that benefit tenants?

Attention tenants that want landlords to do more:  Financing is a challenge for building owners. Existing debt holders generally don’t want the encumbrance required by most financial structures. Energy savings performance contracts work best in owner-occupied and public-sector buildings, which tend to have fewer financial encumbrances and longer-term occupancy commitments, but have not made strong inroads into multi-tenant office buildings.

Property Assessed Clean Energy (PACE) programs in many states offer a possible solution, whereby energy improvements on homes and commercial properties are funded through bonds repaid by higher taxes over 10 years or longer. The annual energy savings exceeds the incremental tax, so tenants—who typically pay both—come out ahead, although though not as far ahead as if owners had paid for improvements. Only a few states had started to implement PACE in commercial buildings when opposition arose from federal housing authorities on the residential side, stalling most programs. So it remains to be seen whether owners and tenants will embrace the idea or hope for a better deal.

We are seeing progress on this front. Owners and occupants of commercial property are working together to find solutions. One bright spot in our industry that is taking on this challenge is the Greenprint Foundation, a global alliance of leading real estate owners, investors and financial institutions focused on reducing carbon emissions and creating value across the global property industry. Greenprint members are catalysts for change, taking meaningful, immediate and measurable actions to generate solutions that improve energy efficiency and create value in property portfolios, including tackling the challenges of green leases and green finance.

Several Greenprint founders are also members of a coalition of large-scale owners and asset managers, including Beacon, JPMorgan Chase, LaSalle Investment Management and RREEF, who are engaged in a dialogue with large corporate occupiers such as Bank of America, Deutsche Bank and Whirlpool Corporation, to resolve the challenges of energy and sustainability in leased commercial office space. These organizations have signed onto a statement of principles that landlords and tenants should mutually agree to

  • Operate buildings and businesses as sustainably as is commercially feasible;
  • Allocate energy savings achieved through building efficiency improvements for future improvements;
  • Measure energy usage in ways that is transparent to both landlords and tenants.

Backing up the principles is a Green Lease Action Plan, whereby participants agree to

  • Establish and implement a framework for negotiating green leases
  • Ensure that brokers on both sides are aware of green lease concepts and strategies.
  • Communicate key information that enables the other party to act in a sustainable manner. Occupiers agree to establish green site selection criteria and communicate their preferences to current and prospective landlords, and owners agree to disclose key energy and environmental information to existing and prospective tenants.

Both Greenprint Foundation and the Green Lease Action Plan were formed by real estate industry leaders who understand the special challenges of energy efficiency and sustainability in leased space. Both groups believe that carbon reduction strategies must be—and can be—effective and financially feasible at the same time.

Michael Jordan is SVP of Sustainable Strategy at Jones Lang LaSalle.

Michael Jordan
Michael Jordan is SVP of Sustainable Strategy at Jones Lang LaSalle
 
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2 thoughts on “Owners and Tenants Collaborate on Green Lease Principles

  1. Michael, thanks for this great article. You clearly and succinctly identify the benefits and challenges involved in green leases for both the owner and the tenant. There are clearly significant benefits for each party, but the hurdles standing in the way often seem too difficult to overcome and block progress as a result.

    I agree with your assessment that a commercial application of PACE is one way to get past these obstacles. Unfortunately the entire residential PACE program is currently on thin ice, and it is difficult to imagine commercial PACE programs staying around if their residential counterparts fall by the wayside.

    There are two other viable options – on-bill financing and especially feed-in tariffs. Each of these options involve enabling the energy user to finance the cost of energy efficient capital upgrades by paying down the loan cost through energy savings (on-bill financing) or through a tariff applied to the meter(s) to which the energy savings is/are associated. Feed-in tariffs are particularly attractive in a lease situation, as they are affixed to the meter, rather than the tenant. This enabled a tenant to move to another location without carrying the associated costs of the capital upgrade; it is passed onto the next tenant.

    Unfortunately feed-in tariffs require legislative action in most states, whereas on-bill financing can usually be implemented by a utility without legal changes. Hopefully these two financing options become more readily available in the next few years, as I feel they are two keys to helping businesses, especially small businesses, overcome the obstacles to becoming more energy efficient.

    – Tim Kovach,
    Product Coordinator for Energy at COSE
    http://www.cose.org/energy
    http://www.twitter.com/COSEenergy

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