Commercial real estate owners face a unique energy management dilemma known in the industry as the “split incentive”—a mismatch between owner and tenant incentives to save energy.

The problem is this: If the owner pays the utility bill, tenants have little financial incentive to manage their energy use wisely. If the tenant pays, the building owner may lack a reason to negotiate the best price on energy contracts or invest in energy retrofits (unless they are aware of the potential for higher occupancy rates, lease values and resale values).

Given that 40 percent of all office space in the U.S. is leased,1 this split-incentive issue means a great deal of money is at stake for both building owners and tenants. Some commercial property owners overcome the split-incentive problem by installing submeters, which allow each tenant’s energy use to be metered individually. When they are responsible for their own utility bills, tenants are more apt to use energy wisely. 

This practice is becoming increasingly common as submetering costs drop, and about half of all states have rules in place for the installation of submeters.2 Policies typically address how rates and fees are calculated for submetered customers and what kind of commercial properties can or must offer submetering.

In some cases, it is necessary to seek approval from the state public service commission before installing submeters. Building managers also may use behavioral tactics to encourage tenants to save energy. For example, they might create building-wide competitions, with prizes and recognition given to those who meet specific goals.

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 Consider Green Leases

Green leases, also known as energy-aligned leases, offer another way to overcome the split-incentive problem. In essence, these agreements encourage smart energy management by both the building owner and the tenant.3

Green leases are much like any other rental agreement, except that they include certain clauses to ensure investment in energy efficiency measures, either by the property owner or the tenant. For example, a green lease might include a pass-through clause that lets a building owner recover the cost of an energy efficiency improvement through operational savings.

Another approach is to place certain threshold requirements on tenants if they are “building out” (finishing raw spaces in the building). In this case, the landlord might require, as part of the lease, that the tenant meet certain efficiency standards or operate within a certain kWh budget for electric lighting. Or the green lease might require that tenants use only energy efficient appliances or agree to a lower energy allowance.

Green leases could save 77 million to 152 million MMBtu (million British Thermal Units ) of energy annually if they were used for all leased buildings in the U.S. This would equate to annual utility savings of $1.7 billion to $3.3 billion, according to IMT.4

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 Look to ENERGY STAR and LEED

The good news for owners and managers of commercial real estate is that guideposts and resources exist to help maximize energy savings and increase the value of your commercial real estate. Two well-known programs are ENERGY STAR and LEED. 

Sponsored by the EPA, ENERGY STAR is a voluntary labeling program that works to identify and promote products and buildings that achieve a high level of energy efficiency. The EPA estimates that 25 percent of the most energy-efficient buildings may qualify for the ENERGY STAR label.5

ENERGY STAR offers an online program called Portfolio Manager® to help buildings—or building portfolios— measure and track their energy use and greenhouse gas emissions. Buildings that achieve a Portfolio Manager score of 75 or higher may be eligible for the ENERGY STAR label, though the score must be verified by a certified professional. ENERGY STAR estimates that commercial buildings waste about 30 percent of their energy and that they can easily cut energy use by 10 percent at little or no cost.6 The program offers a range of energy-saving tips that commercial building owners can pursue.

LEED, which stands for Leadership in Energy & Environmental Design, is an environmental designation granted by the U.S. Green Building Council. Buildings win the designation by undertaking specific strategies, using qualifying materials and achieving specific performance standards. LEED offers several certifications; the highest-scoring buildings earn a Platinum rating.

About 13.8 billion square feet of building space now has LEED standing.7 High-end buildings are particularly apt to pursue LEED because they are able to take on the costs of doing so; in fact, 71 percent of projects valued at $50 million reference LEED in their specifications.8

The U.S. Green Building Council offers a guide to help commercial real estate owners understand what they must do to achieve a LEED designation.

Most commercial property owners lack the time and expertise to focus deeply on their energy needs and savings. So a knowledgeable energy provider can be an important part of your energy strategy. An experienced company will craft options and recommendations based on your business objectives and your short- and long-term goals for the property. With proper guidance, you can leverage the right combination of energy supply and services to help maximize your property’s ROI.

Don't let the energy market control you, control your energy. 


1. Institute for Market Transformation, “What’s in a Green Lease?” May 2015
2, National Conference of State Legislatures, “Utility Submetering,” October 27, 2014
3. Institute for Market Transformation, “What’s in a Green Lease?”
4. May 2015
5. National Conference of State Legislatures, “Utility Submetering,”
6. October 27, 2014
7. U.S. Environmental Protection Agency, “Energy Efficiency in Non-Governmental Buildings,” retrieved September 2015
8. ENERGY STAR, “Improve energy use in commercial buildings,” retrieved August 2015
9. U.S. Green Building Council, “Green Building Facts,” February 23, 2015
10. Ibid


Coffe

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