Green Leasing Strategies Examined In New Report

A new study from the Institute for Market Transformation (IMT) reports that green leases have the potential to save the U.S. office market $3.3 billion annually—cutting energy consumption by up to 22%. “Green leases address energy saving problems by aligning landlord and tenants incentives so that both win when the building is upgraded to be more efficient,” said Cliff Majersik, Executive Director of IMT, a nonprofit based in Washington, DC that focuses on improving energy efficiency in buildings. “This report quantifies the billions of dollars in energy costs that can be saved every year when America’s landlords and tenants are on the same page and working towards a mutual sustainability goal.”IMT_green_lease

The report, “What’s in a Green Lease? Measuring the Potential Impact of Green Leases in the U.S. Office Sector”, provides evidence that energy-aligned leases, or green leases, can open the floodgates for energy efficiency solutions in America’s largest energy users—buildings. The report analyzes low-cost and low-risk steps to slash utility expenses through the signing of green leases, and explains how all lease types can benefit from adding various energy saving clauses that cut costs, improve comfort, and productivity, and reduce carbon emissions.

How Green Leases Work
Traditional standard leases typically discourage both landlords and tenants from investing in building improvements by separating costs in a way that creates a “split incentive”—a problem frequently cited by property owners as the primary roadblock to energy efficiency projects. This problem occurs most frequently in leases where tenants pay for energy usage but the landlord is wholly responsible for capital improvements. In these cases, landlords have little incentive to improve energy efficiency while tenants bear the brunt of poorly performing systems.

Green or energy-aligned leases address the split incentive problem by linking financial incentives with sustainability actions to increase a building’s performance. By including a handful of new or modified clauses in a traditional commercial lease, both owners and tenants can better realize the benefits of investing in energy efficiency.

green_lease_flag“There’s great potential for green leases to catalyze energy efficiency measures, and for owners to transition their entire real estate portfolios to green leases,” said Andrew Feierman, program associate for IMT’s Commercial Real Estate Engagement program and report author. “Saving 50 cents per square foot quickly becomes a substantial sum when executed across a set of buildings—and although this study only quantifies the potential savings in leased office buildings, most of the ideas still apply to retail and other building uses.”

Key Lease Clauses Highlighted In IMT’s Report
Savings Pass-Through: Landlords can choose to avoid amortization and other payback mechanisms in favor of adopting lease language that allows the landlord to recoup all operational savings resulting from energy efficiency improvements.

Energy-Efficient Tenant Buildout: Requiring tenants to meet basic sustainability guidelines through the lease or building rules can ensure that  their spaces are high performing and efficient as core building spaces.

ENERGY STAR Appliances: ENERGY STAR–rated appliances save an average of 20% over conventional appliances, and can be easily required through a tenant lease.

Plug Loads: The efficiency of tenant spaces can be improved by allowing half of the traditional tenant plug load without any disruption to the tenant experience.

Submetering: A straightforward way for landlords to make tenants aware of their utility bills and energy consumption and align incentives to install submeters in tenant spaces, and bill tenants according to actual energy use.

In addition, the report asserts that green clauses share similar concepts with popular green rating systems such as LEED and ENERGY STAR, and these can help expedite the process of obtaining the credits needed for these certifications.

The full report can be downloaded from the IMT website.

On May 27, 2015, IMT and the Department of Energy’s Better Building Alliance will recognize its latest Green Lease Leaders at the Better Buildings Summit in Washington, DC.  Green Lease Leaders is a designation created to recognize companies or brokerage teams that successfully implement green lease language into new or existing leases.