Split incentives are a significant barrier to greening multifamily housing.
Split incentives are a significant barrier to greening multifamily housing.

Although there are substantial opportunities for reducing water and energy consumption and improving sustainability of California’s multifamily housing, there are also several significant barriers.

First Costs

The most frequently cited barrier to energy efficiency adoption is “first costs.” First costs” refers to the initial investment for improvements and can include energy audits and assessments, equipment procurement, systems design and construction, testing and other activities needed to identify and implement efficiency improvements. Utility incentives such as rebates for energy efficient equipment may help reduce out of pocket costs and financing programs can help to spread those costs over the life of the improvement.

Higher Costs of Retrofits

It is generally true that the cost of retrofitting existing buildings is higher on a per measure basis than new construction. However, the benchmark should be “cost effectiveness” – i.e., will a measure pay for itself? The cost-effectiveness threshold varies, depending on the length of time that any property owner tends to hold a building. Increasingly, real estate investors are including consideration of the green profile of a building’s market value, since energy efficiency and other types of “green” and sustainable measures have the potential to increase tenancy and reduce vacancies, thereby reducing holding costs; reduce energy, water and other operating costs; and attract socially conscious tenants and investors.

Split Incentives

Multifamily housing is characterized by a mix of common spaces and tenant spaces. A significant barrier known as “split incentives” arises when the costs of energy efficiency improvements are paid by the building’s owner while the economic benefits of the energy savings largely benefit the tenants. The extent to which split incentives become a barrier for any particular multi-family property depends on the lease structure between the owner and the tenants. Where utilities costs are included in rents, the incentive to make an investment in energy efficiency improvements resides with the property owner. Otherwise, the incentive to make an investment in energy efficiency resides with the tenant, but only to the extent that energy efficiency benefits are expected to be realized through reduced energy costs within the term of the tenant’s lease.