Energy Investments for Tenants: Real Opportunities to Reduce the Cost of Occupancy

by Jim Newman — Energy and water use reduction is important to building owners and users right now, especially if you own your building and can control all of the building systems and users. But what do you do if you are leasing space? How can you get the advantages of reduced energy and water use and reduce your total cost of occupancy?

Tools for reducing the environmental impacts of leased office buildings are finally cropping up in the profession. While architects have been working to create new low energy buildings and to upgrade the performance of existing buildings, and investors are asking about the environmental performance of real estate portfolios and potential investment properties, tenant organizations, for their part, are still struggling to meet their environmental commitments in leased space. Many forces are coming together to drive the search for ways to reduce environmental impacts that benefit all parties. One of the biggest problems in the drive for higher performing office buildings is the way risks and rewards are shared among building owners, tenants, and funders. The path to equitable distribution of risks, costs, and benefits associated with higher environmental performance of office buildings is neither well worn nor well defined.

Goals for high performance office buildings are financial, social, and environmental, but the risks are primarily financial. High performance buildings are defined by their energy efficiency, low water use, reduced waste generation, and low-impact landscapes. Tenant organizations are also interested in healthy workspaces, reductions in employee travel of all sorts, and things that will enhance employee productivity. Owners and tenants are both interested in lower operating costs and taking on as little risk as possible, including the risks of energy cost fluctuations and unmet performance expectations.

The Tenant’s Perspective

The tenant building management professional has many reasons to care about high performance work space. Companies and institutions are increasingly looking to their owned and leased space to help meet their stated environmental goals. Take, for example, the General Services Administration’s (GSA) decision to require new leases to be in LEED Silver certified buildings, when possible. Like many organizations, the GSA has determined that reaching their stated goals will require specific levels of environmental performance in their leased space. Energy efficiency and solid waste reduction are also some of a small number of ways that managers can affect tenant occupancy costs, after a lease is set.

Tenant Actions to Reduce Resource Use and Cost

There are a number of actions that tenants can take to both reduce their resource use and reduce occupancy costs. Changes in equipment and behavior can have significant effects on energy use and solid waste, reducing building use costs for the building manager.

• Switching to Energy Star rated computer and printing equipment and turning off devices when not in use
• Centralizing printing to a few efficient printing stations
• Providing low-energy task lighting
• Setting up a paper and cardboard recycling program
• Setting up rewards for lower-energy employee transportation options
• Video conferencing instead of some business travel

Most tenant organizations have already taken these steps because they are easy, the cost savings are clear, and in many cases, they create better work places. The next step up the chain of resource efficiency is to consider changes to the built-in office infrastructure, without affecting the overall building shell and systems. The value to a tenant organization of making infrastructure changes (such as lighting upgrades) depends on the structure of their lease. Tenants with a long triple net lease have every incentive to invest in efficient lighting and internal systems. On the other hand, tenants who pay an allocated amount of total building energy and water use have almost no incentive to invest in efficiency. In between, are the majority of leases in which the tenant pays a base energy and water fee with an additional fee for overage. This structure provides some incentive to negotiate a lower base fee (or “stop”) in exchange for investing in efficiency.

Possible Infrastructure Upgrades

• Upgrade to more efficient lighting. This is an easy and obvious investment, with a very fast payback.
• Occupancy and daylight lighting sensors. This is an easy upgrade that works best when combined with office layout changes to enhance daylight penetration.
• Centralized printing spaces with ventilation. This both saves energy and enhances indoor air quality.
• Layout changes to enhance daylight penetration. This is especially effective combined with lighting controls that automatically dim or turn off lights.
• Sub-metering of tenant space. This can provide the documentation to support a reduced base utility fee. This can have a relatively fast payback. Sub-metering also allows the tenant building management staff to track actual energy use and savings, which enhances their ability to continue to reduce energy demand.
• Low VOC and formaldehyde-free interior materials. This can be a no-cost substitution and can have a large impact on interior air quality.
• Low water use fixtures in kitchens and bathroom. These can be low or no-cost substitutes, but payback can be hard to capture.

All of the possible infrastructure upgrades are relatively low cost and/or have a very fast payback cycle. However, the tenant needs to have a mechanism to recoup the financial benefits of these investments. Fortunately, building owners have a similar problem recouping the cost of building-wide efficiency investments, and there are a number of models for how to split costs and benefits between owners and tenants that have the potential to make efficiency investments much more valuable to both parties.

Established Methods for Cost and Benefit Sharing of Efficiency Investments

There are a number of methods available to tenant organizations for obtaining the benefits of investments in energy and water efficiency. These methods share the goals of achieving maximum possible efficiency, as well as a reliance on distributing costs and benefits explicitly between owners and tenants. Cost-sharing methods fall roughly into 3 categories: The first category is what is being called “green leases”, which explicitly spell out cost and benefit sharing from the start of a lease. The second method relies on the tenant to negotiate a lower base fee (or stop) in exchange for sub-metering to document efficiency gains. The third type of cost sharing comes from the building owner in the form of a grant to support specific tenant efficiency measures.

Green Leases

The main differences between a “green lease” and a regular lease is that there are specific provisions for how efficiency investment costs get shared between owner and tenant, and how efficiency based operating cost reductions also get shared. As part of the PlaNYC effort by the City of New York to reduce greenhouse gas emissions and energy use by buildings in the city, PlaNYC released “Model Energy Aligned Lease Language” to help owners and tenants develop internal incentives for efficiency investments. The model language, available for inclusion in standard leases, specifies what constitutes an efficiency investment, and more importantly, a cost pass-through structure that allows the owner to pass an amount equal to 80% of the expected energy cost savings through to the tenants in exchange for the tenants receiving all of the actual energy cost savings on an allocated basis. This structure allows building owners to recoup a defined rate of return on their investment in efficiency, and it allows the tenants to gain a percentage of the energy cost savings from an efficiency investment.

The California Sustainability Alliance has also defined a set of lease structures that attempt to provide …”proper calibration of the costs and benefits of green investments through the lease.” These lease structures include the creation of a “Sustainable Facility Manual” by the landlord that describes how the tenant can optimize building performance, lays out potential performance goals for tenants, and defines an example set of lease provisions for specific efficiency upgrades. The California Sustainability Alliance model lease does not specify a method for distributing costs and benefits, but rather, encourages negotiation between landlord and tenant.

Negotiating a Lower Base Utility Fee

During the lease renewal process, tenants are in a good position to modify lease terms to support their own investment in efficiency measures. This tactic has proven to be effective for larger tenants in office properties. The goal is to negotiate a utility fee based on actual usage, in exchange for sub-metering the tenant space. This structure allows the tenant to recoup the costs of investing in efficiency directly through lower utility costs. Lighting upgrades are popular investments for tenants in using this structure, because of the quick payback and non-disruptive nature of the upgrade work. Sub-metered utilities also allow the tenant to see their energy use in real time, which can give the organization an understanding of how they use energy, leading to more ideas about how to save energy and cost.

Owner Grants to Support Efficiency Investments

Malkin Properties, part owner of the Empire State Building and other high profile properties in New York and around the region, has instituted a selective grant program to tenants in their properties. The tenant grants in conjunction with owner-financed whole-building upgrades drive significant energy savings in the buildings. Makin does an analysis of each building in which it is considering this program to determine a portfolio of acceptable upgrades. In exchange for strong tenant performance standards, Malkin will finance upgrades that fit into the portfolio.

Other large property owners are instituting similar programs for their tenants. Such programs help tenants recover their investment costs for tenant space improvements that benefit the building owner through reduced operating costs.

All of these programs and lease structures are aimed at aligning owner or landlord priorities with tenant priorities, to allow both organizations to collaborate on reducing energy and water use and lowering operating costs for commercial office buildings. The “incentive split” between owners and tenants stands between the desire to achieve substantial resource use reductions in commercial office buildings and the financial realities of investment and return. The programs described here are designed to bridge the “split”.

Resources for Tenants

PlaNYC Model Energy Aligned Lease Language
http://www.nyc.gov/html/planyc2030/html/about/ggbp.shtml

California Sustainability Alliance report: Greening California’s Leased Office Space. May, 2009.

“Groundbreaking Empire State Building Energy Saving Program”, Real Estate Investor, Malkin Securities, Winter 2011.