Green Leases: Solving the Owner-Tenant Split Incentive Issue

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In order for a building to be truly energy efficient, the interests of both the owner and tenants must be aligned in favor of sustainability. Unfortunately, traditional lease arrangements often do the opposite, and skew the interests of both parties. For instance, if a lease includes fixed utility costs, the tenant has no financial incentive to use sustainable practices; if the lease dictates that the tenant pays for utilities, the owner has less incentive to pay for energy efficiency improvements in tenant spaces because he or she will not be able to take advantage of the subsequent financial benefits.

 

In the past few years, the Green Lease has been developed as a solution to this conundrum. Also known as High Performance Leases or Energy Efficient Leases, these agreements aim to foster cooperation between owners and tenants to achieve efficiency in the operation of the building, despite differing financial interests. As a part of these agreements, tenants and owners choose a building rating system and committ to a philosophical agreement towards continuing sustainability. In addition, both parties are provided with other substantive benefits: As a part of the negotiation process, Tenants can demand efficiency improvements for the building’s heating and cooling systems, in addition to shell upgrades, which lower utility costs and provide a better environment. Owners can demand that tenants use sustainable materials and efficient practices, allowing the owner to meet social responsibility requirements and market a truly sustainable building, providing the opportunity for higher rental income and occupancy rates.  

To accomplish this, green leases require an Energy Management Plan to dictate how each party uses energy, and to maintain a target level of operation. Additionally, all utilities servicing each tenant space, as well as common areas, are metered and tracked to allow for the ever-important monitoring and management of energy and water use. Representatives from the owner and tenants are needed to implement and oversee this plan. 

At WegoWise, we have been a vital participant of many successful green leases by providing automated tracking of both tenant and owner utility meters, and facilitating total transparency of utility use through our sharing feature. Below is a graph that details one of the ways WegoWise software visualizes and compares the energy use of multiple tenants in one place, allowing for effective supervision. Shown here is the electricity use of multiple tenants as well as a common area meter, displayed in kilowatt-hours per square foot over time:

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If you're an owner or tenant considering green leasing, check out the Green Lease Library for more resources.