When it comes to energy conservation in rented office buildings, one of the oft-overlooked keys is the actual type of rental agreement.
In a piece written in the Tenant Advocate, broker Benjamin Osgood pointed out that there are three basic types of leasehold structures, with the most common of these giving tenants little incentive to actually save on energy use.
In a Triple Net agreement, for instance, the tenant pays base rent and covers the cost of utilities, among other expenses such as maintenance fees, insurance and property taxes, separately.
Similarly, in an Industrial Gross agreement, the tenant covers utilities and janitorial services separately, while many of the other incidental costs in a Triple Net agreement are rolled into the rental rates.
A Full-Service lease also sees the tenant charged for utilities, which are included in the rental rate. Increases in energy costs are passed on to tenants through “additional rent” expenses.
The latter of these leasehold structures, which is the most common in office settings, is also the most problematic. Whereas Triple Net and Industrial Gross leaseholders tend to see their energy consumption in the form of actual energy bills, Full-Service leases do not offer the same incentives.
“In a Full-Service lease, the landlord is not incentivized to implement energy-saving measures since they’re passing all increases through to the tenant,” Osgood wrote. “And the tenant has no reason to try and save energy because doing so won’t reduce their monthly rent.”
Osgood said the most sensible solution would be to meter rental units individually to ensure tenants pay for the energy they consume and are given ample reason to conserve. He noted, however, that most Class A buildings are not designed to allow for easy sub-metering and that “most tenants do not have the necessary leverage to get the landlord to agree to pull them off the Full-Service lease.”
This is important, as research by commercial real estate firm CB Richard Ellis showed that in buildings where units were metered separately, energy costs were lowered by an average of 21 per cent.
In lieu of individual metering, Osgood recommends tenants looking for space should give priority to those with an Industrial Gross lease. This way, he wrote, tenants can take on a sense of agency in ensuring they are using energy responsibly and will be suitably rewarded for doing so.
Published on 07 January 2013