One problem area in energy efficiency is with landlord-tenant situations. The tenant is not motivated to cut back on energy because when the company leaves the space they normally cannot take the change they invested in with them (lights, windows, etc.). On the other hand, landlords are also not motivated to reduce energy usage, as either the tenant pays for its own usage anyway (sub-metered) or it just passes on the cost along whether high or low. Neither side is motivated, this is a lost opportunity. On the other hand, leases that are “green” or aligned with tenant energy usage have the potential to motivate both sides to invest and cost-share in energy efficiency projects.

A green lease addresses this problem by providing financial incentives to both the owner and the tenant to better realize the benefits of investing in energy efficiency.

Some advantages of a green lease include:

• Faster savings for the landlord, who can choose to avoid amortization, allowing the landlord to recoup all operational savings resulting from an energy efficiency project.
• Energy-efficiency tenant goals written in the lease, requiring tenants to meet basic sustainability goals, can ensure that these spaces add value to building.
• Installing submeters is a direct way for a landlord to make tenants aware of their actual energy consumption and bill tenants according to actual energy use. Instead of charging on a per square foot basis, but not knowing what they use, now the landlord can know what each tenant uses and have them pay accordingly. This will resolve disagreements before they get out of control.
• Side story: a mall owner used a single electric meter and charged all of their diverse tenants based on square footage. Nobody knew what was used and everyone was wasteful (air conditioning, leaving on lights and plug load, etc.). Then the manager realized that the two restaurants in the mall were likely using much more electricity than the other tenants given the considerable refrigeration needs and long hours. Meanwhile, the little family accounting law, and insurance offices were only open 9 to 5 and only used certain simple equipment (personal computers, lights, printers) and realized this was not fair. He had a comprehensive energy audit done and changed the rules to require the restaurants to pay more for electricity and the offices less due to usage. Eventually, he installed sub-meters.

Another area where green leases will be important is in New York City, involving enforcement of their Local Law 97 bill, which contains greenhouse gas emission limits. Building owners must meet a limit and pay a high fine for exceeding it. The owner must calculate using total energy usage, including from tenants, even though the owner does not control tenant operations. LL 97 goes into effect in 2024, and many building owners face high fines, in part, due to their tenants’ energy usage. In anticipation of problems, many new leases contain clauses which apportion part of any future potential LL 97 fine on particular tenants or limits their usage or hours of operation. It is unknown how effective this will be to get tenants to cut down on energy usage to help the owner comply with the law.

CCES has the experts to help you determine tenant and common area energy usage in a wide variety of building types. CCES cannot provide legal advice on green leases but can provide technical expertise in reviewing and complying with them. Contact us today at 914-584-6720 or at karell@CCESworld.com.