Buying Greener Leases for Government Facilities Tuesday, June 11, 2013 2:45 pm 4:00 pm, Garden Salon Two, 2nd Fl. Presented by: Adam Sledd, Program Manager, Institute for Market Transformation Investment Commission This session will examine how state governments can save on operating costs and improve the energy performance of leased facilities by changing the lease documents. The presenters will review existing efforts by the federal government and Washington state as well as useful lease guidance from the private sector. ABOUT THE SPEAKER ADAM SLEDD is the Program Manager of Green Leasing and Federal Buildings at the Institute for Market Transformation. Adam works with commercial real estate stakeholders to improve energy efficiency through leasing and tenant engagement practices. He helps individual companies and government agencies create energy savings by solving the split incentive and other lease issues. Adam speaks regularly on energy efficiency to industry groups, and has developed several widely-used lease guidance documents. He also manages the www.greenleaselibrary.com website as part of a collaboration with the Department of Energy. As a founding partner at Sledd Properties LLC, Adam brings almost a decade of commercial real estate management experience to IMT. Adam received his bachelor s degree in media studies from Pitzer College and is currently working toward his MBA at American University. NOTES:
Greener Leases For Government Facilities Adam Sledd Institute for Market Transformation June 11th 2013 1
With Additional Materials From Cycle 7 2
Learning Objectives 1. Clearly define Green Leasing as a concept. 2. Explain how green leases are used in the marketplace. 3. Show how green lease concepts are currently being applied to state leasing efforts. 4. Explain how GSA has implemented green lease concepts. 5. Provide resources and next steps. 3
Facilities Administrator s Problem: How do I save energy without spending more money? 4
Defining Green Leasing A lease in which landlord and tenant agree to include sustainability concepts and assign costs and benefits of sustainability improvements. The goal is to align incentives to minimize split incentive problem. 5
Green Leasing Means More Than LEED Energy Efficient LEED is great, but leasing space in a LEED building does not ensure energy efficiency or a green lease. 6
Why Do Landlords And Tenants Care About Changing The Lease? 7
The short answer: Fix the split incentive problem and maximize potential for energy efficiency improvements. Ensure that the lease helps each side meet sustainability goals. Anticipate lease issues caused by new or potential policies and regulations. 8
External Forces Driving Sustainability in Commercial Real Estate Institutional Investors Financial Institutions Regulation Portfolio Owner/ Manager Rivalry Among Competitors Tenants 9
Several Factors Are Creating Tenant Demand For Green Buildings Reasons behind rising tenant demand include: 1. Large corporations (representing both office and retail tenants) are increasingly considering sustainability as part of their corporate agenda. 2. Several studies (like this one) show that the younger generation of workers vastly prefer to work for firms that are environmentally friendly. 3. Consumer studies show an increasing preference for companies and products that they consider socially responsible (see here and here). This should have a growing effect on retail sales moving forward. 4. Initial research efforts show significant productivity gains from employees working in green buildings, including very high dollar figures for LEED certified PNC bank branches. 10
Efficient Operations Improve Tenant Comfort Temperature New technologies allow better control over temperature Fewer hot/cold calls Systems Integration New central building systems allow integration with tenant systems for smoother operations Ventilation Fixing inadequate building ventilation improving fresh air flow and tenant health 11
Brighter, More Comfortable Space = Higher Employee Productivity From World Green Business Council s The Business Case For Green Building Report 12
Building Energy Efficiency Matters Washington, DC GHG Emissions 13
Efficient Buildings Are Valuable Buildings 14
Eventually Everyone Wants On The Efficiency Bandwagon 15
Sounds great but it s the landlord s building. The landlord should just upgrade it, right? 16
Most Energy Use Comes From Central Systems Ventilation Conveying 13% 5% Lighting 23% Efficient Building Core Building 50% 60% Tenant Lighting 13% Cooling 17% Heating ± 10% 15% depends on tenant cooling Plug ins (computers, Plug Ins appliances, 27% etc) 27% Tenant Lighting 10% Inefficient Building (30% + greater) Core Building 59% 69% Plug Ins 21% ± 10% depends on tenant cooling 17
Multiple Fixes For Inefficient Buildings Controls Mechanical Direct digital control and sequencing of major systems Scheduling, setpoint and setback optimization Demand controlled ventilation Constant to variable primary/secondary chilled water Controls, valves, variable frequency drives (VFDs) Power factor correction capacitors HVAC Constant to variable air volume with VFDs Automation of terminal units High efficiency boilers and chillers Lighting High efficiency lighting Controls, scheduling 18
Improving Systems Has A Measurable $ Impact. 19
But There s An Obstacle-- The Split Incentive Problem Building ownership entity Capital outlay for new building systems Resulting savings 20
Who Pays For Efficiency? Full service gross Modified gross Net lease Owner pays for all core building operating and capital expenses. Most government leases. Owner pays Owner pays for capital and a pool of operating expenses. Tenant pays all increases in the pool after the first year of the lease. Tenant pays base rent and all operating costs defined in the lease, and may or may not pay for capital improvements. Tenant pays 21
Limited Capital Expense Pass Through No capital expense sharing Only operating costs included as Additional Rent Capital expense sharing only for items that save operating Amortized to tenant by useful life (GAAP) 22
Multi-tenant Buildings Offer Further Challenges Tenant s Square Feet A 200,000 B 200,000 C 200,000 D 200,000 E 200,000 Lease Type Lease End Date Capital Expenditure Sharing Modified Gross 1/1/2013 Useful Life Modified Gross 1/1/2015 None Modified Gross 1/1/2017 Useful Life Modified Gross 1/1/2019 None Modified Gross 1/1/2021 Useful Life 23
No Savings For Either Side Without Retrofit X Tenant retains savings Landlord and tenant overpay for inefficient building Project payback>5 years No retrofit occurs Landlord cannot finance project 24
PlaNYC/REBNY Clause Developed in conjunction with New York City Mayor s Office for use in city leases. Landlord recovers cost quickly, tenant nets additional savings after payback. Meant for use with sub or separately metered spaces. 25
How It Works Landlord may include in Operating Expenses a portion of the aggregate costs of such Capital Improvement equivalent to eighty percent (80%) of the Projected Annual Savings Project Cost Projected Savings $2,000,000 $500,000 4 Year Simple Payback Landlord charges 80% X $500,000 or $400,000 26
Pass Through Based On Projected Savings Excess Savings Savings Shortfall Return to tenant through the expense escalation process Paid for by tenant through estimated savings 27
Full service leases used by government administrators provide cost certainty, but 1) All savings go to owner 2) No incentive for building occupants to save energy. 28
What Else Should A Green Lease Do? Landlords and Tenants often have energy or sustainability goals that should be addressed in other lease sections. NRDC Lease Guidance: 29
Sections In Lease Affected By Green Clauses Can extend to most sections, but typically include: Building use Operating Expenses Maintenance & Repairs Alterations & Improvements Utilities & Services Insurance Assignment & Subletting Rules & Regulations Workletter 30
Frequently Cited Obstacles To Green Leasing In The Marketplace Energy efficiency concepts and benefits not well understood by all four stakeholder groups. Even among landlords/tenants with sustainability goals, knowledge is not filtering down to those responsible for leasing efforts. Photo courtesy of Flickr user: Michael W. May Lawyers often negotiate out key points and slow down the process. 31
Why Should My Agency Care? Government can lead by example Provide more comfortable space to client agencies Potentially save money In some cases significant impact on CRE market 32
Elements of Greener Leases For Governments 1: ENERGY STAR/LEED certified building mandate (or preference) 2: Submetering/Separate metering/utility reporting 3: Build-out requirements 4: Building operations requirements 33
ENERGY STAR/LEED Mandate Policy U.S. GSA, Washington State, California DGS among agencies to require leases in Energy Star certified (score of 75+) buildings. Certain exceptions or allowances to help market-- less than 10,000 square feet rented, allowance for vacancy issues. Simple, performance-based requirement. 34
ENERGY STAR/LEED Mandate Policy Cont d Washington state passed a bill requiring leases in Energy Star certified buildings. GSA, California have internal policies. GSA policy includes leased spaces over 10,000 square feet nationally. 35
Metering/ Utility Reporting Requirement U.S. GSA, Maryland DGS, California DGS among agencies requiring landlords to provide information on utility use in tenant space. Without submeters or utility reporting, agency can t report true GHG emissions or energy use. You can t manage what you don t measure. 36
Build-Out Requirements Performance vs. prescriptive based requirements Flexibility is key: success of measures depends on starting point Image from NRDC Li Fung case study 37
Building Operations Requirements Require landlords to retro-commission systems, perform energy audits regularly. GSA lease requires energy-saving renovations if economically feasible. Building operating hours significantly impact energy use. 38
Green Leasing and GSA/Federal Clients In response to EISA 2007 and E.O. 13423, 13514 Website for GSA green lease requirements: http://www.gsa.gov/portal/content/103656 Goal of annual updates to sustainability requirements Full service leases with T.I. built into base rent 39
GSA Tenants and Green Leases Goal to save energy without compromising competitive bidding. New or mostly vacant buildings have 18 months to earn Energy Star label. Future changes to require more utility reporting from landlords, updated lighting requirements. 40
Additional Resources 41
Additional Resources http://www1.eere.energy.gov/seeaction/ 42
What can you do now? 1. Learn more about green leasing at www.greenleaselibrary.com. 2. Look for opportunities to change leasing approaches upcoming renewals, new leases. 3. Get buy-in from clients and contract officers. 4. Contact SEE Action Network team for additional assistance. 43
Thank You. Questions? www.greenleaselibrary.com www.imt.org/green-leasing Email: adam@imt.org 44