Split Incentive Series: Recap and the Future (V of V)

Written by: Daniel Handal

This is the last blog in our 5-part split-incentive series. Among the key takeaways from this series is that the commercial real estate market has unique, specific and time-sensitive barriers that need to be overcome in order to address the split incentive issue and best implement energy efficiency. Again, these barriers can generally be broken out into three categories. They are detailed below along with best practices we have found.

Market Structure Barriers. These are barriers due to differing motivations and incentives across a range of CRE stakeholders. Suggested best practices are:

  • Determine and align incentives for each stakeholder early in the process, either by targeting buildings with optimal leases, or promoting adoption of a green lease.

  • Developing a comprehensive communication and engagement utility solution similar to our Connect Program and developing the right ECM solutions to be delivered.

Financial Barriers. These are barriers that prevent the investment in energy efficiency due to actual or perceived costs, or externalities associated with assessing or implementing energy efficiency projects. Suggested best practices to address these barriers include:

  • Typical metrics that commercial owners and customers respond to are Energy spend ($)/square foot, simple payback, and ROI. Try to frame benefits in $ values wherever possible.

  • Frame business case for energy efficiency as an aspect of a customer’s core business operation wherever possible.

  • Building owners can work to fund energy efficiency projects by leveraging a variety of financial tools, such as Energy-Aligned (Green) Leases, Anchor Tenant Financing, Property-Assessed Clean Energy (PACE) Bonds, Utility Incentives, and On-bill Financing.

Information and Physical Building Barriers. These are barriers that result from a lack of transparency and information about energy use, costs, benefits, savings, and existing nature of the buildings and improvements needed. Suggested best practices to address include:

  • Recommend installation of an Energy Management System (ideally combined with tenant space meters) to allow owners and tenants to identify and capture energy savings opportunities where possible.

  • Engage incoming tenants at the right time to discuss energy efficiency as a part of the standard tenant improvement (TI) process. While space is vacant between periods, it may be convenient to implement smaller projects such as upgrading the lighting equipment.

  • One of our multi-family clients has employed this for their properties. Our work with Virtu Investments has resulted in execution of energy efficiency projects across their portfolio since 2011.

We believe that the future holds much promise for energy efficiency implementation including the often overlooked energy savings in leased spaces. Recently, President Obama and Congress approved a bill that would establish the Tenant Star Program – a cost-free certification and recognition program to promote energy efficiency during design and occupancy of leased space. Moreover, as stakeholders increasingly become more data-driven in their decision making by using tools such as the Waypoint platform, they will find that energy efficiency is good business!