Busting landlord-tenant barriers for greater energy efficiency

To date, conversations around energy efficiency between landlords and tenants have largely revolved around the fact that landlords must pay for upgrades, but tenants receive the immediate benefits.

Though some upgraded buildings perform well with both parties reaping the benefits of more efficient spaces, the availability of new technologies and processes doesn't always result in the implementation of energy efficient strategies -- even where there is a clear positive return on investment and a short payback period.

The conflict between landlords and tenants stemming from “split incentives” to install upgrades has been identified as one of the top barriers to capturing energy savings in buildings, according to an indicator survey published by the Institute for Building Efficiency in 2012. Consequently, leased space has historically lagged behind owner-occupied buildings in pursuing energy efficiency.

“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,” said Karen Penafiel, a vice president with Building Owners and Managers Association International (BOMA).

The most common split incentive issue results from the structure of commercial leases which make the building owner responsible for bearing the cost of all capital upgrades. Energy costs and routine operating expenses are paid by the tenants.

In other words, the owner makes the capital investment to improve the building and the tenant is the sole beneficiary of reduced operating expenses. And if a lease instead makes the owner responsible for all energy costs, tenants have no incentive to reduce their consumption.

But even leased buildings projects can reach major energy savings and increase building value. The Empire State Building, for example, recently completed a deep energy retrofit saving 38 percent of pre-retrofit energy with a three-year payback. Without tenant participation in the program such as saving lighting and plug load energy, the upgrade would not have succeeded. The energy components of the retrofit even attracted new tenants (such as LinkedIn) and supported retention.

Green leases and beyond

Codified by National Resource Defense Council’s Energy Aligned Lease Language, green leases also help to overcome the split incentives barrier by sharing the costs of energy efficiency projects between the owner and the tenant. The document requires a more accurate matching of costs to financial benefits.

However, a green lease is not an entirely sufficient solution. A key principle in behavioral economics is that people are motivated not just by money. Other rewards spur them to act as well. When owners, tenants, and even occupants aim for collaborative participation in sustainability programs, the missing ingredient that can be the key to bring them together is something as simple as congregating over free donuts and coffee.  

RMI and BOMA hypothesize that the human element of energy savings has been underemphasized, and increasing the collaboration between building owners and tenants can help accelerate adoption of efficiency improvements.

In October 2011, the organizations convened a workshop to tackle this very issue.

“Energy efficiency in an office environment must be a collaborative process,” said Penafiel. “BOMA, RMI and the workshop participants were excited to explore the topic of collaboration, as often the barriers to energy efficiency are neither financial nor technological.”

5 best practices for owner and tenant collaboration

The result: A five-step guide that reveals best practices for owner and tenant collaboration to promote sustainability in buildings.

1. Make energy use and costs more transparent

Although collecting data has a cost, that cost has steadily decreased as utilities governments, and technology solutions make a greater amount of data more accessible. Owners and tenants should access and share data, and then structure their relationship around the building’s underlying energy performance.

2. Engage building occupants in saving energy

Occupants control a large (and growing) share of the energy consumption of a building, yet their schedules, equipment use, and attitudes are rarely considered in energy efficiency efforts. Some studies have found 10 percent savings simply from informing tenants of their energy use. Holding competitions or organizing community–based programs can reap even larger savings. Councils such as Jones Lang LaSalle’s use of Tenant Sustainability Boards of Directors allow tenant organizations and occupants to find new efficiency opportunities or multi-tenant programs.

3. Incorporate energy efficiency in tenant fit-outs

Owners and tenants can shape the process of finding and customizing a leased space by using green letters of intent and creating plans for efficient tenant fit-outs. Using a sustainability focused third party can also help improve negotiations between both parties early in the process.

4. Plan ahead for deep energy retrofits

Deep energy retrofits achieve bigger energy savings (sometimes over 50 percent reductions) at similar cost. They drive much larger savings than conventional retrofits, create value for both the owner and the tenant and are most cost-effective when implemented at the right time. Triggers such as a major tenant turnover or major equipment replacement allow deep retrofit practitioners to find cost-effective solutions for the entire building. This approach requires greater upfront investment in design, analysis, and communication between owner and tenants, but delivers much greater energy savings and other non-energy benefits.

5. Structure agreements to benefit both parties

The RMI/BOMA Guide provides 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 a new green lease, an amendment to an existing lease, or a separate letter agreement.

Many of the mechanisms RMI and BOMA determined as key to creating a collaborative and effective environment involve a tactic Dan Ariely, a Duke professor of behavioral economics. Ariely calls this dynamic "reward substitution." Reward substitution involves using incentives -- even small or unrelated rewards -- to 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, and other mechanisms create additional and compelling reasons for owners and tenants to improve their building’s energy performance. One example is of a tenant sustainability council that couldn’t get any involvement from building occupants­ — until they started providing free coffee and donuts.

Getting people excited and on the same page helps get efficiency programs implemented correctly. With the proper approach, deep savings and untapped value are available for both owners and tenants.