Tenants and Landlords Benefit from Energy Aligned Lease Clause

save-billCommercial landlords may balk at implementing energy-efficient upgrades or retrofits because of the perceived and real financial burdens they face for implementation. This may seem an oxymoron because it’s like the adage, “you have to spend money to save money.”  Because savings may not be realized immediately, or they may ultimately benefit solely the tenant, property owners may look to the tenant to defray the costs by amortizing it over the lease term.

There may be a negotiable clause during lease negotiation where you, the tenant, pay a percentage based on square foot of a portion of any energy-efficient upgrades.  Many landlords believe if the tenant benefits from the upgrades such as reducing common area maintenance (CAM) electric charges, then the tenant should contribute to those upgrades.

Another important reason landlords put off implementing energy efficiency upgrade projects is commercial leases don’t align the initial cost of energy efficiency with the energy savings benefits. This “split incentive” is due to standard leasing practices in which tenants typically benefit from the savings as a result of the landlord’s energy efficiency improvements. Energy conservation measures (ECMs) don’t always favor the landlord, but rather the tenant.  The split incentive found in leases works against landlords who wish to make major energy retrofits in commercial buildings because the owner rarely sees the financial benefits since the savings are often passed on to the tenant. So there is no incentive to make the efficiency upgrades.

Engineers predict there can be a +/- 20% savings in energy efficient upgrades. But owner’s want to ensure a payback and tenant’s don’t want to risk paying more if the predicted savings underperform actual savings.

A solution called the Energy Aligned Clause is gaining traction because the landlord and tenant capture the financial rewards from building energy retrofits by creating a 20% Performance Buffer. The buffer limits the owner’s capital expense pass-through to 80% of the predicted savings in any year and tenants are protected from underperformance.  Predicted savings are determined by an energy specialist agreed upon by both landlord and tenant.  Owners are fully paid back and the period is extended by 25%.  Therefore, retrofits save both money by aligning the incentive so it is not a zero sum game between landlord and tenant.

The landlord benefits by:
– Aligning capital costs to the resulting savings
– Controlling tenant’s electrical demand (high Watts/sf )
– Separating out costs for energy from other operating costs to track and expense recovery
– Providing tenants better energy consumption reporting

The tenant benefits by:
– Assurances of aligning energy efficiencies to operating costs
– Measure consumption and submetering
– Base building energy usage monitoring versus allocation of building operating expenses
– Benchmark standards for equipment replacement

See an overview of the clause at http://www.nyc.gov/eac
Great PowerPoint highlighting the advantages: http://issuu.com/urbangreen/docs/eac
For more information on the Energy Aligned Lease Clause, see the National Resources Defense Council http://www.nrdc.org/greenbusiness/cmi/energy-efficiency-leases.asp

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