Authors Zhu and Carr point out that approximately 20 percent of all energy in the United States is consumed by commercial buildings. With tenants occupying around 50 percent of commercial building space, a 20 percent reduction in tenant energy use would save roughly US$5 billion in annual energy costs. Technologies exists to make that reduction a reality. Unfortunately, existing leases often discourage both landlords and tenants from investing in energy efficiency. This two-part offering tackles the typical barriers to implementation by outlining energy-aligned leasing practices (i.e. green leases) and identifying their value. PART I, by Justine Burt, discusses how green leases are structured and provides examples of how they can be deployed in support of net-zero energy (NZE) buildings, addressing issues such as lease components, economics and negotiation strategies. PART II, by Cindy Zhu and Holly Carr, describes the Green Lease Leaders program, developed by the Institute for Market Transformation (IMT) with support from the U.S. Department of Energy’s (DOE) Better Buildings Alliance. — Eric Teicholz, IFMA Fellow and Chair of IFMA’s ESUS Community PART I BY JUSTINE BURT Using a Green Lease to Drive Net-Zero Energy A major barrier for tenants who want greener commercial office space is the historic split incentive. Tenants would like to reduce their energy bill, but prefer the property owner invest in energy-efficiency upgrades for the building. Commercial property owners may not feel incentivized to invest in energy efficiency when the tenant pays the energy bill. This split incentive slows progress on upgrading electrical and mechanical systems to be as energy efficient as the latest technologies will allow. The time for tenants to ask for energy-efficiency upgrades is during lease negotiations. Overcoming the split incentive involves splitting the costs and benefits between landlord and tenant. Since lease negotiations lock down terms for years, tenants should consider asking for ambitious energy-efficiency goals like net-zero energy (NZE). NZE buildings generate as much onsite renewable energy as they use. The process of retrofitting for NZE involves taking the baseline energy use of the building, then downsizing the heating, ventilation and air-conditioning (HVAC) system, replacing lighting and installing controls for lighting and plug loads. Contractors then install enough onsite solar and/or heat pumps to meet the building’s energy demand. The economics of NZE buildings can be attractive to the property owner, as well as the tenant. For example, in Sunnyvale, California, USA, the NZE building at 435 Indio Way was renovated to optimize daylight harvesting, refresh interior air each night and control plug loads so that the amount of solar photovoltaic systems installed would allow the property to zero out its energy bill each month. Prospective tenants were so impressed with the space, the unit was bid up 20 percent above market rates and rented in three months instead of the usual 18. The developer, Sharp Development Co., invested an additional US$49.84 per square foot for innovative lighting, HVAC, plug-load controls and solar that would make the space NZE. This extra upfront investment resulted in an additional net value of US$100.29 per square foot from: • reduced operating costs; • a 20 percent rent premium; • additional rent due to early lease up; and • additional leasable square footage (insulation installed on the outside of the building). The property also has lower reserve requirements of US$29.85 per square foot due to lower costs for HVAC replacement and other tenant improvements. Given such attractive financial benefits, you may wonder why more commercial property owners are not retrofitting their spaces for NZE. Part of the reason is that the risks and capital outlays fall to the commercial property owner, while the tenant enjoys many of the benefits of retrofitting for NZE. Property owners have many legitimate concerns about taking on NZE; some of the challenges they face include: • final total costs and benefits • lack of experience working on NZE projects • NZE is not currently required for commercial buildings • debt financing needed for capital costs • managing mortgage holder’s concern about whether the prime mortgage or NZE debt financing will be subordinated • buy-in from real estate investors • lien on the property These challenges are surmountable, and looking to the hundreds of NZE projects that have been certified to date will help determine the best path forward. From the tenant’s perspective, several benefits will accrue, such as: • reduced energy bills • improved employee productivity • attraction and retention of top talent • improved employee engagement • enhanced green branding Tenants who want the benefits of green office spaces should continue to ask for NZE commercial office space. The more people ask for it, the more commercial property owners will offer it. NEGOTIATING A GREEN LEASE When the landlord and tenant are ready to negotiate the lease, this is the opportunity to create an understanding about what investments will be made into greening the property and how the building should be operated. Using a green lease will align incentives of both parties toward the conservation of resources. An energy budget may be spelled out in the green lease with penalties for exceeding a defined limit. Procedures and protocols around temperature, indoor air quality, recycling and green cleaning products can also be defined. Three resources for green leases offer proven approaches to consider and sample language. Consider visiting online resources like the Green Lease Library. The U.S. Department of Energy’s Better Buildings Solution Center and the General Services Administration’s sample lease language also provide language to make it easier to craft a lease that splits the costs and benefits equitably between the landlord and the tenant. While the risks and challenges for the landlord may seem daunting; ultimately, investing in NZE upgrades will yield a more valuable building. Meanwhile, tenants play a key role in building a sustainable future when they ask for and negotiate leases for NZE office space rather than just accepting what is available in the marketplace. The benefits of reduced operating costs, enhanced employee engagement and green branding are worth the effort to research and apply sample green lease language. JUSTINE BURT is the founder and CEO of Appraccel, a sustainability consulting firm. Appraccel embeds part-time sustainability managers in organizations to implement energy efficiency, renewable energy, water conservation, waste prevention, alternative transit and green team projects, with the goal to help organizations benefit from reduced operating costs, employee engagement and green branding. PART II BY CINDY ZHU AND HOLLY CARR Recognizing Energy Efficiency in Tenant Spaces Commercial buildings consume approximately 20 percent of all energy in the United States, and tenants occupy roughly 50 percent of commercial building space. A 20 percent reduction in tenant energy use that is feasible with existing technologies would also save US$5 billion in annual energy costs.1 However, conventional leasing practices often hinder both landlords and tenants from investing in energy efficiency. Energy-aligned leasing practices, also called green leases, allow tenants and landlords to save energy, reduce costs and achieve organizational sustainability goals. GREEN LEASE LEADERS RECOGNITION Established in 2013, Green Lease Leaders is a resource and recognition program led by the Institute for Market Transformation (IMT), with support from the U.S. Department of Energy (DOE). Green Lease Leaders has helped to define best practices in green leasing and offers annual recognition to market-leading property owners, tenants and brokerage firms that put these practices into action. The 2017 cohort of recognized Green Lease Leaders are: • Boston Properties • California Department of General Services • Principal Real Estate Investors • Rocky Mountain Institute • Washington REIT • Welltower Team transaction awards were presented to TD Bank with CBRE, Crown Realty Partners, OPTrust, and Tower Companies with NIKA. The 2017 recognized organizations have combined portfolios of nearly 200 million square feet of commercial building space in North America, and bring the total square footage of building space owned, managed or occupied by Green Lease Leaders to more than 1.3 billion square feet. BUILDING EFFICIENCY INTO THE LEASE The lease document itself is at the heart of advancing tenant energy-efficiency opportunities. Adjustments to lease clauses addressing tenant fit-outs, office equipment, sub-metering and benchmarking can result in agreements that incentivize both landlords and tenants to pursue efficiency measures. The Green Lease Library is an online collection of commercial green leasing resources supporting landlords and tenants in their efforts to develop, negotiate and implement green leases. ENHANCEMENTS TO GREEN LEASE LEADERS Several enhancements to the Green Lease Leaders program will debut later this year to align with evolving best practices. These enhancements include the following minimum fit-out requirements for tenant fit-outs: • sub-meter tenant energy use • install energy-efficient lighting • share energy use with the building owner annually • purchase efficient products and equipment Green Lease Leaders will also offer two levels of recognition for foundational policy development and implementation of green leases, as well as a new website, resources and technical assistance to support tenants and landlords in updating their leasing practices. Visit www.greenleaseleaders.com to complete an online green lease check-up, join as a participant or apply for recognition. REFERENCE 1) Energy Efficiency in Separate Tenant Spaces – A Feasibility Study. U.S. Department of Energy. April 2016. CINDY ZHU is a fellow in the Building Technologies Office of the U.S. Department of Energy (DOE), where she works with commercial real estate partners in the Better Buildings Challenge and Alliance programs. She also leads efforts aimed at properly valuing energy-efficient technologies and high-performance buildings in the real estate market. HOLLY CARR is an energy technology program specialist at the DOE, where she manages the Better Buildings Alliance — a voluntary energy-efficiency partnership involving more than 200 organizations and more than 11 billion square feet of U.S. building spaces. Carr also manages the DOE’s Market Solutions work, addressing energy factors in appraisals, mortgage underwriting and leased space.
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