Last week I wrote about how small businesses are going green by taking steps that reduce waste and energy use. While personal convictions may drive many business owners to reduce their environmental impact, most still make decisions based on a model that requires a quick return on such an investment.

Unfortunately, the business case for major building retrofits, those that provide the biggest impact on energy use, just didn’t add up for many of the small-business owners I interviewed. Why? Because they lease their properties rather than own them. As tenants, they typically lack any incentive to invest in the buildings’ heating or cooling equipment because it is purchased and maintained by the building’s owner.

But incentives to make energy efficiency improvements can be equally elusive for building owners, according to Sean Neill, a principal at Cycle-7, a sustainability consulting firm based in New York City.

“In most commercial leases the tenants pay a prorated portion of the building’s operating costs, while the owner pays for capital improvements,” he said in a telephone interview. This means that the owner could pay for a new, energy-efficient heating and cooling system, but the benefit of lower energy bills would go to the tenants.

Commonly referred to as the “split incentive,” this conflict continually blocks more widespread adoption of energy efficiency measures in commercial buildings, Mr. Neill said. His firm advises clients like real estate developers and managers on how to address this conflict by adding sustainability clauses to existing leases.

Mr. Neill favors a shared incentive approach where the tenants divide the savings with the landlord, and those savings in turn are used to pay for new equipment or building upgrades. “Let the landlord recover the savings to pay for the project,” he said. “Otherwise, there’s no incentive for the landlord to lower operating costs for the tenants, and certainly not to spend capital to do it.”
It’s still early days for these sustainability clauses, which some call “green leases,” so it’s difficult to quantify the interest in these types of lease amendments. Still, Mr. Neill expects awareness to grow because “landlords are coming under increasing pressure to green their spaces and become more environmentally sound.”

Certainly all levels of government are setting ambitious goals to reduce the amount of energy used by commercial buildings, currently estimated at about 20 percent of all energy consumed in this country.

Last week, President Obama announced plans for a Better Buildings Initiative, a proposal to make commercial building space in the country 20 percent more energy efficient by 2020. Part of this proposal would sweeten existing tax incentives for building owners who make their properties more energy efficient.

At the state level, starting this year, California will require owners of non-residential buildings to input data on energy consumption and other building functions into the Environmental Protection Agency’s Energy Star Portfolio Manager system. The system will generate an energy efficiency rating for the building, and the data will be available to prospective buyers, lenders and tenants.

In New York City, where buildings contribute an estimated 75 percent of total carbon dioxide emissions, the city’s sustainability office is promoting its Greener, Greater Buildings Plan. The plan brings together several laws pertaining to energy performance requirements for all new and many renovated buildings.

Parts of the plan, like the requirement to sub-meter tenant spaces, will certainly spur changes to existing commercial leases in New York believes Mr. Neill. He has been working with the city’s sustainability office to develop model language for lease amendments to address the split incentive problem. “If we can fix the incentive for the landlord to fix the energy systems,” he said, “that will have a massive impact on the city’s overall goals.”

Read it here: http://green.blogs.nytimes.com