Implementing sustainable improvements in tenant-occupied buildings is tough under traditional leases thanks to the split incentive, a phenomenon between owners and tenants in leased buildings where one party makes improvements, but the other reaps all the benefits.
But the growing popularity of green leases stands to address this by creating opportunities for both owners and tenants to benefit from environmentally friendly upgrades.
Roughly 52% of the commercial building space in the U.S. is leased, according to Hannah Debelius, an ORISE Fellow in the U.S. Department of Energy’s Building Technologies Office and a presenter at the 2020 virtual Greenbuild conference. Overcoming the split incentive is a crucial step for greening the existing built environment.
“Green leases equitably align costs and benefits of investments in sustainability across a variety of topics—energy efficiency and beyond,” Debelius explains.
How Do Green Leases Work?
Green leases create win-win agreements for building owners and tenants that align the costs and benefits of energy and water efficiency investments, according to the Institute for Market Transformation. They typically contain several key elements, including:
1. Cost recovery. This concept directly confronts the split incentive by allowing landlords to pursue projects that improve energy performance while recovering costs from tenants. Both parties shoulder the costs and enjoy the benefits.
2. Transparency. Landlords and tenants each have a sustainability contact person at their organizations in case questions come up. Both parties also share performance data for the building or space.
3. Standardizing efficient building operations. The lease includes minimum sustainability standards for fit-outs, requires submetering of tenant spaces and may require purchasing on-site renewable energy and efficient equipment.
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The State of California is a longtime green lease user, winning Green Lease Leader recognition from the Department of Energy in 2017 and 2020. The famously sustainability-conscious state has a detailed list of what it looks for in facilities, according to Patrick Foster, chief of real estate leasing and planning for California’s Department of General Services. California’s requirements include:
Either meeting LEED or having some sustainability practices already in place
A good score from the Smart Location Calculator, a tool from the federal General Services Administration that shows a site’s proximity to public transportation
Agreeing to recycle and salvage construction waste during the fit-out
HVAC systems with high ratings and good filters to ensure good indoor air quality for tenants
WaterSense plumbing fixtures
“It’s a start to finish process. When we go out to the marketplace to look at the facility, we look at the efficiency of the building and the space and try to efficiently deconstruct and construct the facility that will be functional for our tenant,” Foster explains. “It’s really taking a look at every aspect of the facility and reducing as much as you can throughout the process.”
Interested in greening your lease? Check out Green Lease Leaders, a valuable resource for owners and tenants alike. The national recognition program is a partnership between the Institute for Market Transformation, the Landlord-Tenant Energy Partnership and the Department of Energy and features case studies, reference guides and more to transform your lease—and with it, your building.