Sustainability is making its mark in the rise of green leasing. But for many, the split incentive, or cost and benefits divide between owners and tenants, is still one of the biggest roadblocks for achieving its benefits. In fact, “60% of surveyed commercial property owners state that the split incentive problem stops them from undertaking energy retrofits,” according to King Energy. The key to overcoming these challenges is practicing frequent and early engagement between the tenant and owner, according to Brenna Walraven, Former Chairman & Chief Elected Officer of BOMA and Executive Strategic Advisor of RE Tech Advisors.
In this discussion, Walraven covers the elements for implementing green leasing language and achieving win-win sustainability solutions. Read below to learn more:
First of all, what is green leasing and what are its benefits?
The Green Building Alliance’s definition is that “green leases (also called aligned leases, high-performance leases, or energy-efficient leases) are rental agreements in which tenants commit to or gain incentives by participating in water/energy conservation, waste reduction and recycling, use of nonhazardous cleaning products, or other sustainable actions.” According to Walraven, what green leasing really comes down to is an alignment of interests. “The landlord and tenant discuss needs for aligning interests and outcomes in a lease – not just about rent and square footage, but also about the sustainability or efficiency performance of a property,” Walraven says. The IMT webinar, Green Leasing 101, outlines the benefits to green leases, such as their savings through reduced energy costs, higher building occupancy rates and improved occupant health and comfort. By implementing these green leasing practices, this in turn helps resolve the split incentive issue and promotes a culture of sustainability across all building sectors.
What are some of the biggest challenges of green leasing?
Data access and compliance are the biggest challenges today for green leasing. “Compliance requirements are only growing,” Walraven says. “There’s north of 40 jurisdictions that have energy benchmarking and disclosure requirements. In addition, there are building performance standards (BPS), where, again, 14 jurisdictions that have them in place and another 35 have committed to BPS implementation (thus far) – and the fines are meaningful, potentially exceeding a million dollars. Because BPS focuses on energy or emissions intensity performance, this means property owners will need to have utility data.” And, Walraven added, one of the challenges of compliance requirements is not all utilities currently provide whole building data. Complying with energy benchmarking and BPS requirements can be difficult when the tenant controls the energy data, as is typically the case with industrial distribution warehouse, retail, mixed use and some corporate properties. However, BOMA is focused on working with utilities to share this data so real estate professionals can get access (you can view IMT’s Model Utility Data Access Law, a tool to encourage legislators to establish pathways for building owners to acquire whole building utility data.) Kara Kokernak, speaker from the IMT webinar, Senior Director, ULI Randall Lewis Center for Sustainability in Real Estate, expands on the challenges of data collection. “If there’s a large portfolio and the owner has multiple buildings across the region, it could be confusing to know who is responsible for collecting this data, whether it’s the property manager or the tenant,” Kokernak says. “Most companies unfortunately start by manually looking at utility bills or asking tenants for utility bills which is incredibly time consuming.” Overall, delaying net zero goals isn’t recommended according to JLL’s article, How carbon commitments are transforming leasing markets, as the potential risks for delays result in “more expensive leases, higher capital costs and missed opportunities to partner with building owners.” Not to mention, as Walraven mentions, building owners that are unable to acquire this data are vulnerable to expensive fines.
How can landlords best achieve win-win sustainability solutions?
For the best results, be as specific as possible in your leases, Walraven advises. “It’s all about the engagement and messaging in green leases,” Walraven says. “Property professionals should be intentional with their language [to] engage the tenant to help them understand the value proposition and business case. For instance, if you are a property owner that currently has an ENERGY STAR certification, including lease language not just the explains the goal of maintaining this certification over the lease term, but also explain how ENERGY STAR and sustainable practices for the building can provide better air quality via enhanced filtration, and enhanced efficiency will result in lower operating costs and thus the costs for these efforts will be included in the expenses. We have regularly found that the savings from sustainability attributes exceed costs, driving a meaningful business case.” Walraven also mentioned that it’s important for landlords to market and summarize the benefits of sustainability and certifications, so the tenant understands that this not only improves the efficiency of the building but also these efforts lower operating costs, removes toxic chemicals (through green cleaning and integrated pest management practices), improves air quality, reduces waste to enhance occupant comfort and promote a healthier, safer environment. This will not only strengthen the sustainability practices of the building but will eliminate the common split incentive dilemma. “At the end of the day,” Walraven says. “Data access and compliance are the challenges and engagement [are] the key – which includes communicating with the tenant directly early and often.”
At BOMA, we recommend you review our Green Leasing Guide which provides recommended language when you create your green lease. In addition, you can apply to become a Green Lease Leader, a program developed by IMT with support from the U.S. Department of Energy's Better Buildings Alliance, to receive strategies for integrating environmental efficiency into leasing practices. Want to take decarbonization a step further? Check out our BOMA Best Sustainable certification program or showcase the industry’s decarbonization commitments by join the BOMA International Carbon Reduction Challenge at www.boma.org/carbon, “Sign up.”