Overcoming the Split Incentive Problem - Part 2

This is Part 2 of a series on Green Leases. Catch up on Part 1 here

If you’re convinced that Green Leasing could help you solve your split incentive problem, then your next question is “how do I implement?” (If you’re not convinced yet, go back and have a look at Part 1.)

How are they implemented?

When it comes to negotiating expenses among commercial building owners and tenants, both parties often come to the table expecting a zero-sum game of winners and losers. Fortunately, implementing green lease clauses creates a “win-win-win” situation by sharing the benefits between both parties, unlocking gains for building owners, tenants, and the environment. 

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Unlocking these gains does not require you to completely re-write or create a new lease for your tenants. Overcoming the split incentive problem is as easy as agreeing on a few clauses that get added to your existing leases. Companies that are leading the way in adding green lease clauses are recognized every year by the Institute for Market Transformation (IMT) and include Boston Properties, PGIM, and Brandywine Realty Trust.  

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Examples of Lease Language

Brandywine’s cost pass-through provision for retrofits states: 

“Capital expenditures and capital repairs and replacements shall be included as Operating Expenses provided such capital repairs or replacements were necessitated by a change in Law occurring after the date of this Lease or were intended to have cost saving benefits over the Term and amortized costs of same over the useful life of the improvement in accordance with generally accepted accounting principles or with respect to cost savings, over the payback period of such improvement.”

(http://www.imt.org/uploads/resources/files/brandywine_case_study_10-15-12.pdf)

For more examples of green lease language, check out the More Resources” section below. 

After green leases are implemented, Brandywine engages in tenant outreach with a letter explaining the proposed retrofit, its anticipated savings, and each tenant’s share of the costs: 

Dear [tenant], 

We intend to replace the Energy Management System that controls all the mechanical equipment in the building. These improvements include the AC Units on the roof, the VAV boxes, and the electric perimeter heat in your suite. The estimated upfront cost to do this work is approximately $180,000. However it is expected these improvements will reduce the overall electrical expenses for the property by approximately $60,000 per year or$0.65 psf and result in a direct savings to tenants on a pro-rata share basis. 

Rather than wait for the Landlord to be 100% reimbursed for the cost of these improvements before passing the savings to the tenant base, Brandywine has elected to apply only $36,000 ($0.39 psf per year) to all tenants on a pro-rata share basis for the next five years in an effort to help the tenants realize immediate savings. This expense allocation will last for five years beginning January 1, 2011 and end on December 15, 2015. After December 15, 2015, each business will benefit from the full $0.65 psf reduction in electrical expense. 

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Conclusions

If you’re a building owner currently facing a split incentive problem, implementing green leases across your portfolio is a smart way to start reaping the rewards of the energy efficiency opportunities available in your assets. If you’re interested in finding out exactly how much energy efficiency opportunities are available in your assets, email me at frank.hartmann@bractlet.com. I’d like to show you how you can see ALL the energy saving opportunities in your buildings and be able to prioritize them by ROI before you invest. 

More Resources

Institute for Market Transformation 

Green Lease Library 

BOMA - Commercial Lease Guide to Sustainable and Energy Efficient Leasing for High-Performance Buildings

Working Together for Sustainability: The RMI-BOMA Guide for Landlords and Tenants 

PlaNYC - Model Energy Aligned Clause Language

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Frank Hartmann is the Director of Sales at Bractlet and has 20+ years of experience in the commercial real estate industry. Frank understands the challenges owners face with underperforming buildings and wants to help building owners and operators make smart energy efficient investments using the Bractlet platform.