Overcoming Landlord-Tenant Barriers Leads to Greater Energy Efficiency

By: Jordan Hall

When discussing energy efficiency retrofits in buildings, there have been long ongoing debates on the best way to get landlords and tenants to agree on an energy efficiency strategy.  To date, conversations around energy efficiency between tenants and landlords have been emphasized on the fact that the landlords have to pay for upgrades, but tenants will receive the immediate benefits.  Does this seem fair?  Should both parties be able to reap the benefits?  How can you structure an agreement so that both parties will benefit in the end?

Below I have summarized an article from Greenbiz.com that will discuss these questions and will focus on overcoming landlord and tenant barriers in order to achieve greater energy efficiency.

A recent survey published by the Institute for Building Efficiency indicated that one of the top barriers to capturing energy savings in buildings is the conflict between landlords and tenants stemming from “split incentives” to install upgrades.

Karen Penafiel, Vice President with BOMA (Building Owners and Managers Association International) said that “energy efficiency retrofits will be most successfully implemented when the building owner, manager, and tenants work together as partners in the project, and have a shared sustainability goal for the building”.

The structure of commercial leases usually makes the building owner responsible for consuming the cost for all capital upgrades.  Energy costs and routine operating expenses are paid by the tenants.  This is the main issue.  This makes the owner responsible for spending the money to improve the energy efficiency of the building with the tenant being the sole beneficiary of reduced operating expenses.  Let’s step back for a minute.  Wouldn’t this problem be solved by making the owner responsible for all energy costs? If only it was that easy.  If the owner becomes responsible for all energy costs, the tenants will have no incentive to reduce their consumption. Hmm, another road block.

The Empire State Building is a good example of a leased building that succeeded with its energy retrofit because of tenant participation.  The Empire State Building recently completed a large energy retrofit which is estimated to reduce energy consumption by 38% with a three-year payback.   Without tenant participation in the energy program, such as saving plug load energy and lighting, the building upgrade wouldn’t have been successful.  In this example, the energy retrofit attracted new tenants including the company LinkedIn and retained existing occupants.

Green leases also help to overcome the split incentives barrier by sharing the costs of energy efficiency project between the owner and the tenant.  However, a green lease is not an entirely sufficient solution on its own.  When owners, tenants and occupants aim for collaborative participation in sustainability programs, the missing ingredient that can be the key to bringing them together is a small reward, or something as simple as congregating over free breakfast.

The following is a 5 step guide of best practices for owner and tenant collaboration to help promote sustainability in buildings and break down the barriers to achieve greater energy efficiency:

  1. Make Energy Costs and Use More Transparent– Although collecting data has a cost, the cost has steadily decreased as utilities and technologies have made a greater amount of data more accessible.  Owners and tenants should access and share data, and structure their relationship around the building’s underlying energy performance.
  2. Engage Building Occupants in Saving Energy– Occupants control a significant portion of the energy consumption of a building.  However, their equipment use, attitudes and schedules are rarely considered in energy efficiency efforts.  Multiple studies have realized 10 percent energy savings just from informing tenants of their energy use.  Organizing community-based programs or holding competitions can go a long way in achieving significant energy savings.
  3. Incorporate Energy Efficiency in Tenant Fit-outs– Owners and tenants can help shape the process of finding and customizing a leased space by using green letters of intent and creating plans for efficient tenant fit-outs.  The use of a third party focused on sustainability can help improve negotiations between both parties early on in the process.
  4. Plan Ahead for Deep Energy Retrofits– Deep energy retrofits achieve larger energy savings at a similar cost.  They drive significantly larger savings than conventional retrofits, create value for both the tenant and the owner, and when implemented at the right time are most cost-effective.  Triggers such as major tenant turnover or major equipment replacements allow deep retrofit practitioners to find cost-effective solutions for the entire building.  This delivers much greater energy savings along with other non-energy benefits, but requires a greater upfront investment in design, analysis and communication between the owner and tenants. 
  5. Structure Agreements to Benefit Both Parties– The RMI/BOMA guide provides you with guidance on working together to create an effective green lease.  Owners and tenants can use basic principles for sustainability (provided by BOMA’s Green Lease Guide) in an amendment to an existing lease, a separate letter agreement, or a new green lease.  Many of the key mechanisms to creating a collaborative and effective environment involve “reward substitution”.  Reward substitution involves using incentives, even small or unrelated rewards, to help drive participation in efforts that don’t always inspire action due to being more beneficial to society over the individual.

Sustainability competitions, building scorecards, benchmarking, along with other mechanisms create additional and compelling reasons for owners and tenants to improve their building’s energy performance.

Getting people excited and on the same page can help energy efficiency programs be implemented successfully.  By using the right approach, untapped values and deep savings are achievable for both the owners and tenants.

Jordan Hall is an enthusiastic marketing professional and is responsible for marketing strategies at Energy Advantage Inc

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