Analyzing the Opportunity
“Portfolio characterization” simply means grouping properties or leases within the portfolio by common characteristics so standardized strategies can be developed for certain types of leases. These strategies are aligned with the likelihood of a successful negotiation and thus are realistic and achievable. Portfolio characteristics that can be used to identify specific green leasing strategies are as follows:
Size of Leases as percent of Total Rentable Space in Building – The size of the lease in relation to the total building size is indicative of the amount of influence a single tenant is likely to have in decisions about building retrofits and operation and maintenance issues. In these instances – where the tenant is the majority tenant of the building - the greening opportunity is greatest and the most stringent criteria should be used in establishing green objectives.
Lease Term – The longer the lease term the more feasible investments in building upgrades become due to the ability for the investor to recoup their initial capital costs. Many green building upgrades related to core and shell improvements have higher payback periods than interior upgrades (lights and controls), and thus are typically only attractive to tenants and landlords who take more of a life cycle cost approach. Instances where leases have terms longer than 10 years are potential candidates for more comprehensive sustainability options.
Year Building was Placed In-Service – The vintage of a building is a general indicator of energy and water efficiency. Depending on the landlord’s maintenance practices, older buildings would likely have more greening opportunities and thus should have specific criteria related to commissioning and technology upgrades when developing specific goals and objectives for these sites.
Lease Structure – Lease structure, or the type of operating expense clause, is an important indicator of the type of green leasing strategy that should be undertaken. As discussed earlier in this paper, the lease’s structure defines the responsibilities for paying the operating expenses, including utilities.
- A gross lease is one in which the landlord is responsible for providing and paying for all the operating expenses including the utilities. The utility costs are part of the lease payment. The relevance of this type of lease for green leasing is that energy-savings (i.e. lower utility bills) that may result from efficiency upgrades will benefit the landlord directly, and will only benefit the tenant if the gross rent is reduced. Gross or full service leases also do not provide incentive for tenants to invest in efficiency measures within their own interior space due to the fact that other tenants in the building will benefit from the decreased operating expenses. The landlord should be extremely motivated to reduce operating costs in these types of leases.
- A net lease, is a lease in which the tenant is responsible for paying the utilities. Net leases present a major split-incentive problem for landlords because although the landlord may wish to upgrade building systems, the tenant would benefit from any subsequent lower utility bills. It should also be noted that net leases do not present issues of split incentives if the tenant pays for the costs of the efficiency upgrades, and although it is unlikely that this would occur for major building systems (HVAC and plumbing systems) smaller investments within the tenant’s build out, such as lighting fixtures and sensors, should be reviewed by the tenant in net lease. It should also be noted that most leases allow landlords to amortize the capital costs of energy efficiency equipment if the upgrade results in lowered total operating costs. Green minded tenants who are in net leases should develop aggressive goals regarding energy efficiency.
Single-Tenant vs. Multi-Tenant – From both the tenant and landlord viewpoint, there is greater flexibility to implement green programs when there is a single building occupant, due to the simpler negotiation process.