GREEN BUILDINGS

Challenges

Solving the financial puzzle – green leasing economic challenges

There are several significant barriers to green leasing:

ECONOMIC CHALLENGES

First Costs
The initial capital outlay required to implement energy efficiency measures continues to be a significant barrier for both public and private organizations. Depending on the availability of capital at reasonable terms, investors with a long-term perspective can choose to make investments and expect to earn the anticipated returns over time. However, investors that typically hold assets for relatively short terms may not expect to recover such incremental investments and are thus reluctant to make these types of investments. Public agencies are most disadvantaged, since many are still operating under municipal budgetary constraints that do not recognize life cycle costs and benefits. The first cost challenge has deepened for both public and private entities, exacerbated by the nation’s economic challenges and the global credit crisis.

“Split Incentives”
Split incentives arise when the flow of investments and benefits are not properly rationed among the parties to a transaction. In leasing, there are two primary types of split incentives:

Gross Leases – Tenants pay a single lease amount that includes a pro rata share of building ownership costs (utilities and other operating costs, taxes and insurance). A tenant has little economic incentive to invest in energy efficiency if an allocated share of the energy savings will accrue to other tenants.

Net Leases – One or more expense categories are assigned directly to the tenant (e.g., the costs of utilities, taxes and/or insurance). If the tenant is paying the utility bills, energy efficiency investments will decrease the tenant’s operating costs. The landlord thus has no economic incentive to invest in energy efficiency.

LEASING CHALLENGES

Lack of Standardization
Each lease negotiation is a unique transaction.

Time and Complexity. A typical real estate manager or leasing agent may manage dozens of leases at any one time with a wide range of lease structures under strict time constraints. Since each lease structure results in a different balance of benefits and burdens between the landlord and tenant, the issues of cost responsibilities need to be resolved separately for each lease.

What is “green”? While certification programs such as LEED® have helped to standardize terms and specifications, (a) LEED® is not yet the universal standard, and (b) too few market participants understand it.

Limitations of Existing Standards
LEED® takes a very broad perspective to green but does not emphasize energy, a high priority for California, while ENERGY STAR focuses primarily on energy efficiency. LEED® and ENERGY STAR are most powerful in combination.

Limited Inventory of Qualified Properties
Less than 10% of California’s office buildings are LEED® certified or ENERGY STAR rated.

Benefits

The total discounted cost of owning, operating, maintaining, and disposing of a building or other type of long-lived asset.

Green Tenant Guide

More and more, property managers and owners are seeking green building certification for their leased office spaces. But making an investment in sustainability without considering a tenant’s behavior can undo some of the benefits of a green building. How do property managers and organizations ensure that their tenants and employees make the most of their green space?

One of the most challenging aspects of a sustainability program is encouraging good employee behavior. This challenge is often related to poor communication, lack of motivation, and barriers within the employee environment. In order to overcome these issues, property managers and organizations can implement a few best practices to encourage their tenants and employees to embrace green actions.

The Alliance has developed a set of tools to help guide organizations through the process of greening their operations and staff behaviors. Intended to be an ongoing reference, the Green Tenant Guide aims to walk organizations through planning and implementing their sustainability program. Readers will learn how to work with organization leadership, property managers, and staff to set clear and feasible goals, establish buy-in and excitement among employees, define metrics, and measure and communicate results.

Click to explore the Green Tenant Guide.

Barometer

The commercial sector in California presently consumes a whopping 38% of the state’s total electricity and 25% of its natural gas resources. Office buildings alone consume 10% and 6% of the state's electricity and natural gas resources respectively.

California has set some of the most aggressive green building policies in the nation, and to help track the state’s progress the Alliance has launched a Green Building Barometer, which will report the percentage of rentable building area certified green through LEED® or ENERGY STAR®. California is already making substantial progress: in April 2009, 35% of Class A commercial buildings were certified some level of “green” – whether LEED® or ENERGY STAR® – in CoStar Group’s real estate market database. One year later, this number jumped to 43%, meaning nearly 188 million square feet of rentable building area (RBA) in Class A commercial buildings in California is now certified “green”. Progress was substantial in Class B and C properties as well; but, there is much more to be done in those sectors, as less than 5% of the state’s 916 million square feet of RBA in Class B and C properties was certified green as of April 2010.

Some energy industry practitioners point to Assembly Bill 1103, which triggers the disclosure of a building’s energy performance under certain circumstances, as the catalyst for some of this increase in activity.

Check back here for periodic updates on the Green Building Barometer, as well as for information about policies and programs that appear to be driving green building growth in various regions of the state. In addition, watch out for timely marketing insights from the Alliance’s Advisory Committees and other key market participants.

Green Building Features

Explore the drawing below to find out what features make this building green -
and to view resources on how to green your own building.

Illustration by Fuscoe Engineering, 2008

Green Leases Toolkit

Green Leases Toolkit 2.0

The Green Leases Toolkit 2.0 is a comprehensive package of tools designed to help building owners and tenants develop approaches for minimizing the energy, water and waste impacts of existing commercial building space.

Developed by the Alliance in consultation with the Alliance’s Green Building Advisory Committee, a key objective of the Green Leases Toolkit 2.0 is to create a meaningful dialogue between tenants and landlords that ultimately leads to implementing cost-effective green building measures.

The Toolkit contains a suite of leasing guidelines and templates designed to facilitate an effective dialogue between owners and tenants to better define each party’s goals and objectives around environmental sustainability, as well as create more transparency throughout the process.

These tools and templates incorporate all aspects of the leasing process, from establishment of leasing criteria to final lease terms, and include sample policies, goals, checklists, tools and techniques to help owners and tenants establish a strong dialogue and commence the path to green leasing.

Click to explore the Green Leases Toolkit 2.0.

Office space maximizing natural daylighting

Green Leasing Report

In May 2009, the Alliance released the results of a study examining the current state of green commercial buildings in California and challenges and opportunities for the accelerated adoption of green leasing in California’s existing office space.

Titled Greening California’s Leased Office Space: Challenges and Opportunities, the report provides information to policymakers and market participants about the pivotal role green leasing plays in achieving the resource efficiency, environmental, and societal benefits of green buildings. The report outlines the constraints on green leasing and recommends changes that need to be made to policies, programs, and practices in order to establish green leasing as standard practice in California.

Challenges

90% of California’s commercial office space is leased, and the greening of this space is constrained by several challenges, notably:

Real estate owners not economically motivated to invest in building retrofits as the financial benefits flow to tenants;
Tenants may be less inclined to adopt conservation measures as financial benefits can accrue to other tenants and/or the building owner;
Imbalanced benefit distribution or ‘split incentives’ on core and shell retrofits, between the building owner and tenant. These retrofits (usually the responsibility of the owner) often have long financial payback periods. These costs, if they cannot be passed to tenants, discourage the building owner from making such capital investments; and
The ever-growing range of standards, concepts and protocols requires negotiating a unique balance of benefits and burdens for each leased property, which consequently adds time and complexity to the lease transaction.

Opportunities

Green leasing can be a key strategy for greening existing office space. In order to boost the market adoption of green leasing, the report concludes that owners and tenants who are motivated to find mutual benefits can collaborate to significantly improve the resource and environmental performance of California’s existing building stock.

The Alliance, in consultation with its Green Building Advisory Committee, recommends a broad range of strategies for accelerating green leasing in California – from establishing consistent statewide standards and definitions of “green”, to documenting and publicizing the costs and benefits of green buildings (also known as the green building value proposition), implementing building labeling, and modifying state and local policies, ordinances and utility programs to recognize the different needs and interests of landlords and tenants under various types of lease structures.

Green buildings are a growing segment of California’s overall building stock. In late 2008, LEED® and ENERGY STAR rated buildings accounted for 10% of California’s total office space. 6 months later, they comprised 13% of the state’s total office space – a 30% increase. They feature prominently in class A buildings (35% of all class A buildings in California), but implementation in lower grade properties is more limited (class B and C, at 3.6% and 0.2% respectively).

To download the full report, click here.

Image source: Thomas Properties Group

Videos

The Competitive Edge: Commercial Green Building in California

The Alliance’s Green Building program has created several videos explaining issues surrounding green building in California and demonstrating the green building value proposition. Select one of the videos below to start watching:

The Competitive Edge	The Competitive Edge: Commercial Green Building in California – Featuring case studies from Adobe Systems and Thomas Properties Group, this video explains green building concepts, highlights the types of green building measures that are most effective in California, and illustrates the green building value proposition.
Alliance Advisors	Alliance Advisors Discuss Green Building – In this video, members of the Alliance's Green Building Advisory Committee share their thoughts and perspectives on green building.
Rosario Marin	The California Green Building Initiative – At the 2008 Sustainability Showcase Awards, Keynote Speaker Rosario Marin, former Secretary of the California State and Consumer Services Agency, chair of Governor Schwarzenegger’s Green Action Team, and U.S. Secretary of the Treasury, discusses transforming the market through implementation of California's Green Building Initiative.

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