APPROACH AND METHODOLOGY
NRDC, OLTPS, DCBID and their supporting partner organizations will work to persuade major owners, tenants and property owners to incorporate energy efficiency into the commercial office leasing process. These industry leaders will pledge to address energy efficiency during the lease negotiation process, in order to overcome the 'split incentive' and maximize their opportunity to retrofit, build-out, operate, and maintain their respective buildings and leased premises in a highly efficient manner.
To date, the commitment makers have been able to secure the pledges of a number of leading building owners, tenants, and property managers, and they will continue to work with their supporting partner organizations to convince additional industry leaders to join the commitment to implement energy-aligned leases, and then to go beyond the commitment by completing whole building retrofits and high performance build-outs. By mobilizing early adopters and drawing attention to their successes, the partners aim to develop and demonstrate a replicable process for other buildings to follow.
In this approach to energy efficiency retrofits, each type of company - the owners, tenants, and property managers - have a specific set of responsibilities and rewards.
Empire State Building Company, Malkin Holdings is the first of what is intended to be at least 15 owners who have joined the commitment by pledging to:
-Address energy efficiency (EE) and indoor environmental quality (IEQ) of base building and tenant spaces with tenants during lease negotiations, incorporating an energy-aligned provision in new and renewal leases where feasible;
-Incorporate, as feasible, tenant sub-metering and other cost effective energy conservation measures into the ongoing operation and maintenance of their buildings; and
-Incorporate EE, IEQ and life cycle cost analysis into long term capital replacement plans, and indentify potential candidate buildings for comprehensive base building central system retrofits.
By the completion of this commitment, the Partners hope to have at least 15 owners make the same pledge and collaborate in this effort.
The tenant approach differs slightly from the owner approach, although the principles remain. So far Bloomberg, L.P., Deutsch Bank, Johnson Controls, Inc., and Jones Lang LaSalle have joined the commitment by pledging to:
-Address EE and IEQ of base building & leased premises with building owner during lease negotiations, and consider accepting energy aligned lease provision where possible, to encourage owners to implement central system energy efficiency retrofits;
-Include potential EE and IEQ as material considerations in site selection; and
-Execute high performance build-outs/retrofits wherever feasible when executing new leases and lease renewals since tenants benefit substantially from energy savings.
By the completion of this commitment, the Partners hope to have at least 20 tenants make the same pledge and collaborate in this effort.
Major property managers in the targeted areas are also crucial to these efforts. Jones Lang LaSalle has joined the commitment by pledging to:
-Educate internal staff (leasing brokers and client reps) regarding the split incentive issue and potential solutions, and opportunities for owners and tenants to collaborate to optimize EE and energy management in multi-tenant office properties; and
-Encourage clients (both owners and tenants) to collaborate with each other during lease negotiations to address EE and IEQ, including the adoption of energy-aligned leases when possible, by incorporating cost effective energy conservation measures into tenant space build-outs, and by implementing cost effective energy efficiency retrofits of base building central systems.
The commitment makers will work to engage the other major property managers in both New York City and the District of Columbia.
Finally, OLTPS, with support from NRDC, Environmental Defense Fund, Cycle-7, and HR&A , has developed a set of resources to help owners and tenants overcome the split incentive (the 'Energy-Aligned Lease Resource Package'), including:
-Model energy-aligned lease provision with narrative;
-Excel modeling tool analyzing the costs and benefits to owners and tenants of various EE retrofit scenarios, assuming adoption of the energy aligned lease provision; and
PowerPoint presentation highlighting modeling tool results
OLTPS is formally launching the Energy-Aligned Lease Resource Package as part of this Commitment.
IMPLEMENTATION, TIMELINE, AND DELIVERABLES
NRDC, OLTPS and the DCBID have compiled a list of the largest commercial property owners, tenants and managers in New York City and Washington DC. In the first phase of this commitment, the partners will target these parties to sign a pledge to address energy efficiency in their respective lease negotiations, building renovations, and tenant space build-outs. So far 5 leading owners, tenants, and property managers have committed to signing the pledge. The commitment makers expect this effort to spread rapidly as these first movers demonstrate its strengths and competitive advantages. NRDC will utilize its Real Estate Network for Energy and Climate Policy, with support from co-sponsor U.S. Green Building Council (USGBC), and its collaborative partnership with the Greenprint Foundation to add to the roster of participating property owners, tenants and managers. The first phase will extend for approximately six months, and success will be measured by the number of organizations signing on to each pledge.
In a parallel effort, OLTPS will work with DCBID, NRDC and certain other task force members, including Environmental Defense Fund and Cycle-7, to broadly disseminate the Energy-Aligned Lease Resource Package to industry participants (including all of the owners, tenants and managers signing on to the pledge). This effort will overlap the first phase, running for twelve months from the Commitment date, and success will be measured by the number of organizations that become familiar with the Energy-Aligned Lease Resource Package.
In the second phase of the commitment, NRDC and DCBID will encourage the owners and tenants themselves to execute energy-aligned leases, and to identify appropriate properties at which to execute high performance build-outs and central building system retrofits. This phase will run for two years from the Commitment date, and success will be measured by the number of energy-aligned leases executed, and the respective number of high performance build-outs and central building system retrofits completed.
Based on research by the Intergovernmental Panel on Climate Change, to prevent the most catastrophic impacts of climate change the United States must achieve an 80 percent reduction in greenhouse gas emissions below 1990 levels by 2050. With 40 percent of total US carbon emissions stemming from the building sector, addressing building efficiency is essential to mitigation of climate change. In order to meet the emission reductions target, the real estate sector must be at or near net-zero emissions by the mid-twenty first century. Given that roughly two-thirds of the buildings projected to exist in 2050 already exist today, we must execute deep energy efficiency (EE) retrofits throughout the current built environment.
The commercial sector is responsible for 19 percent of the total annual energy consumption and 37 percent of total electricity consumption, primarily due to the lighting, heating, and cooling of commercial buildings. To meet our national emission reduction goals, efforts on energy efficiency must go well beyond simple lighting replacements and instead pursue deep retrofits. This will require a staged approach - a series of energy retrofits over time, integrated into each building's capital plan.
Achieving this level of energy savings from office buildings also demands a collaborative and integrated approach between owners and occupiers. In the multitenant office sector, approximately 55 percent to 65 percent of a building's energy usage comes from within tenant spaces. Tenant demand can also play a crucial role in driving building owners to undertake EE retrofits of their buildings' central systems (e.g., building envelope, HVAC central plant, elevators, and common area lighting). But this collaborative approach is hindered by the 'split incentive' issue: under the prevailing lease structure in the New York and Washington D.C. markets, the costs and benefits of energy efficiency retrofits are usually misaligned - the initial capital cost of a retrofit is borne by the landlord, while the resulting energy savings flow through to the tenants. As a result, landlords have little incentive to install the retrofits in the first place.
Facts to be considered:
In Manhattan, the commercial office sector is heavily concentrated with large leases. There are more than a million buildings in New York City, but the largest two percent of them (about 22,000 buildings) account for approximately 50 percent of the total square footage. The majority of these buildings are in the commercial office sector, where the 10 largest property owners control a total of 146.9 million square feet, and the 15 largest tenants occupy approximately 40 million square feet.
This concentrated ownership and occupancy in the New York City commercial real estate market, which is mirrored to a lesser extent in the Washington D.C. market, provides an opportunity to achieve substantial reductions in energy usage through impacting the behavior of a modest number of the largest owners and tenants. The current stage of the real estate cycle enhances this opportunity, as a significant amount of leased space in New York City and Washington D.C. is approaching expiration within the next five years.