New Leasing Languages - How Green Leasing Programs Can Help Overcome the Split Incentive

New Leasing Languages - How Green Leasing Programs Can Help Overcome the Split Incentive

ABSTRACT

Approximately fifty-two percent of commercial building space in the United States is leased, representing nearly thirty-five billion square feet. Unfortunately, typical leases often create a split incentive between building owners and tenants where the cost of investing in energy and water efficiency improvements is borne by one party while the other experiences the benefit of reduced utility costs resulting from those improvements. Overcoming this split incentive presents a significant hurdle for improving energy efficiency in leased space, but also a tremendous opportunity. Estimates of utility cost savings from green leasing range from zero point twenty-six to zero point fifty-one dollars per square foot in office space. With these savings figures applied to all leased space, up to seventeen point eighty-five billion dollars in potential energy cost savings may be available. We need to dramatically transform the way leases are structured, particularly in the pandemic recovery period when cost-sensitive tenants drive negotiations and cities unveil increasingly stringent building codes and performance standards in pursuit of climate mitigation targets.

The Green Lease Leaders program promotes and incentivizes green leasing practices that equitably align the costs and benefits of utility efficiency investments for both parties. Since launching in twenty fourteen, it has recognized landlords, tenants, and their partners for industry-leading leasing efforts across nearly three billion square feet of building space. The twenty twenty Green Lease Leaders represent over one billion square feet and a diverse range of buildings from large and small commercial offices to industrial buildings to data centers, city government buildings, and coworking spaces. This paper will explore the impact of green leasing programs, tenant engagement, opportunities for expanding leasing programs to new space types, and potential solutions for improving the efficiency of leased space.

Introduction

The Leasing Challenge and Opportunity

The Electric Power Research Institute estimates that up to sixteen percent of United States electricity consumption could be reduced over the next twenty years using currently available efficiency technologies. Further, there have been numerous academic and market studies in recent years showing a positive correlation between green building certifications and rents. In spite of the substantial and demonstrable environmental and economic benefits of pursuing energy efficiency, investment is still hampered by other market factors. Chief among these is the split incentive between landlords and tenants where one party receives the utility bill benefits from an efficiency investment made by the other party, or situations where the payback period of a project is likely to exceed the property owner's holding period. This split incentive represents a significant problem when it comes to energy efficiency and greenhouse gas reduction efforts, because approximately fifty-two percent of commercial building space in the United States is leased, representing roughly thirty-five billion square feet.

Fortunately, a potential solution exists in the form of green leases. Green leases, also known as "high-performance", "energy-aligned", or "smart" leases, help to overcome the split incentive by creating win-win agreements for building owners and tenants that equitably align the costs and benefits of energy and water efficiency investments for both parties. In twenty fourteen, the United States Department of Energy and the Institute for Market Transformation launched the Green Lease Leaders program. Green Lease Leaders is the premiere industry recognition program. It sets national standards for what constitutes a green lease and provides a platform for recognizing leaders in the field. Each year's class of Green Lease Leaders represent firms that effectively modernize their leases to spur collaborative action on energy efficiency and sustainability in buildings and actively use their leasing practices as a tool to drive greater investment in high-performance buildings and facilitate energy and resource savings.

The United States Department of Energy's Better Buildings Initiative launched in twenty eleven with the goal of making buildings twenty percent more energy efficient over the next decade. Since the start of the program, more than sixty organizations have met one or more of their energy goals. However, to keep the possibility of limiting global warming to one point five degrees in sight, global greenhouse gas emissions need to drop by fifty-five percent by twenty thirty. Typical commercial lease cycles between twenty twenty and twenty thirty only allow for one or two opportunities to influence leasing transactions. Programs like Green Lease Leaders are essential for making progress toward these targets and promoting and assessing their adoption is a necessary step to ensuring that we are taking action toward a more energy efficient economy.