IMT Study: Green Leases Can Save U.S. Office Market $3.3 Billion Annually

Green leases have the potential to save the U.S. office market $3.3 billion annually, cutting energy consumption by up to 22 percent in leased buildings, according to a study released by the Institute for Market Transformation (IMT).

“Green leases address energy-saving problems by aligning landlord and tenants incentives so that both win when the building is upgraded to be more efficient,” says Cliff Majersik, executive director of IMT, a nonprofit based in Washington, D.C. that focuses on improving energy efficiency in buildings. “This report quantifies the billions of dollars in energy costs that can be saved every year when America’s landlords and tenants are on the same page and working towards a mutual sustainability goal.”

The report, “What’s in a Green Lease? Measuring the Potential Impact of Green Leases in the U.S. Office Sector“, provides substantial evidence that energy-aligned leases, or green leases, can open the floodgates for energy-efficiency solutions in America’s largest energy users—buildings. The report analyzes low-cost and low-risk steps to slash utility expenses through the signing of green leases, and explains how all lease types can benefit from adding various energy-saving clauses that cut costs, improve comfort and productivity, and reduce carbon emissions.

Traditional standard leases typically discourage both landlords and tenants from investing in building improvements by separating costs in a way that creates a “split incentive”—a problem that’s frequently cited by property owners as the number one roadblock to energy-efficiency projects. This problem occurs most frequently in leases where tenants pay for energy usage but the landlord is wholly responsible for capital improvements. In these cases, landlords have little incentive to improve a building’s energy efficiency while tenants bear the brunt of poor-performing systems.

Green or energy-aligned leases address the split incentive problem by linking financial incentives with sustainability actions to increase a building’s performance. By including a handful of new or modified clauses in a traditional commercial lease, both owners and tenants can better realize the benefits of investing in energy efficiency.

“There’s great potential for green leases to catalyze energy efficiency measures, and for owners to transition their entire real estate portfolios to green leases,” says Andrew Feierman, program associate for IMT’s Commercial Real Estate Engagement program and report author. “Saving 50 cents per square foot quickly becomes a substantial sum when executed across a set of buildings—and although this study only quantifies the potential savings in leased office buildings, most of the ideas still apply to retail and other building uses.”

Key examples of green clauses highlighted in the report:

  • Savings Pass-through: Landlords can choose to avoid amortization and other payback mechanisms in favor of adopting lease language that allows the landlord to recoup all operational savings resulting from energy efficiency improvements.
  • Energy-efficient Tenant Buildout: Requiring tenants to meet basic sustainability guidelines through the lease or building rules can ensure that their spaces are high-performing and efficient as core building spaces.
  • ENERGY STAR Appliances: ENERGY STAR-rated appliances save an average of 20 percent over conventional appliances, and can be easily required through a tenant lease.
  • Plug Load: The efficiency of tenant spaces can be improved by allowing half of the traditional tenant plug load without any disruption to the tenant experience.
  • Submetering: A straightforward way for landlords to make tenants aware of their utility bills and energy consumption and align incentives to install submeters in tenant spaces, and bill tenants according to actual energy use.

In addition, the report asserts that green clauses share similar concepts with popular green rating systems such as LEED and ENERGY STAR, and they can help expedite the process of obtaining the credits needed for these certifications.

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