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Making Energy Retrofits Work for Tenants and Owners

Tenant engagement is key to achieving energy efficiency and reducing the carbon footprint of multitenant buildings.

June/July 09
For all the discussion of green office buildings in the past few years, very few existing multitenant buildings have undergone a whole-building retrofit specifically to capture the very real benefits of lower energy costs and enhanced occupant well-being and productivity. Although owners and tenants alike can gain from a well-executed retrofit, they remain at a logistical impasse in determining how to shoulder the upfront cost and share the benefits.

Now it appears that a solution - unproven but promising - may come from the Empire State Building in New York City, where a recently announced energy retrofit program relies on an innovative tenant engagement initiative to reach its goal of reducing energy use by 38 percent.

Reduced energy usage will save the building $4.4 million annually at current energy prices, and will reduce CO2 emissions by 105,000 metric tons over the next 15 years.  The retrofit program will also enable the building to achieve an Energy Star score of 90 by 2013, making it among the top 10 percent of buildings in terms of efficiency - a tremendous feat for a building that will then be more than 80 years old.

The driving force behind the retrofit, Empire State Building owner Tony Malkin assembled a team of nonprofit and for-profit organizations to ensure that the reduction targets announced this past April could be reached. The team, consisting of Clinton Climate Initiative, Jones Lang LaSalle, Rocky Mountain Institute, and Johnson Controls, conducted cost and benefit analyses of more than 60 energy strategies to determine which actions would produce the optimal balance of cost and emission reduction. The analytical process used existing and newly created tools to produce projections that the team is highly confident of achieving. The primary variable that could cause the team to fall short of its goal is the level of tenant participation in the program.

Tenants Must Do Their Part
Under the plan, actions taken by tenants are expected to reduce the building's energy use by more than 6 percent, about one-sixth of the total reduction target of 38 percent. These numbers assume that the vast majority of new and renewing tenants will opt into a set of recommended sustainable practices. In creating these tenant engagement guidelines, the Empire State Building team has addressed one of the greatest barriers to sustainability in office buildings.

As much as owners and tenants share a motivation to pursue energy reduction, very few have figured out how to overcome the logistical obstacles to work together to maximize efficiency. Tenants may follow good practices such as turning off lights at night and buying Energy Star computers, but they are unable to measure the results of these strategies. Owners look for cost-effective ways to improve efficiency but lack the financial motivation to invest substantial time and money. Thus, strategies that require cooperation between owners and tenants tend to go unexplored.

The biggest challenge is in the lease structure, whether it is a net lease, wherein energy costs are paid by the tenant, or a gross lease, where these costs are included in the rental rate and paid by the owner. Since gross leases generally allow annual rent adjustments based on fluctuations in operating costs, tenants end up paying energy costs either way.

In most cases, each tenant's share of the total energy cost is based on square footage rather than the actual amount used by that tenant. As a result, there is no financial motivation for a tenant in a multitenant building to reduce usage.

Accurately Measuring Energy Use
Companies that intend to report the size of their carbon footprint often discover that there is no way to accurately measure their base energy use in buildings they lease, let alone the reduction that might result from proactive measures.

There is no shortage of helpful advice for how tenants can reduce energy usage. The U.S. Environmental Protection Agency's Energy Star program for commercial buildings, for example, offers ways to "Bring Your Green to Work," such as powering down computers and office machines when not in use, keeping air vents unblocked, and using energy-saving light bulbs. But for most tenants, measuring the benefit and profiting from the reduction in usage remains an elusive goal.

Meanwhile, office-building owners are directing their property managers to make buildings as energy-efficient as possible, without spending substantial amounts. Here the calculation is not about occupancy cost but on net operating income for the overall asset and return on capital invested in the retrofit. Although studies indicate that green buildings average higher rents and occupancy than traditional buildings, leasing agents report difficulty in getting tenants to pay a large enough premium for energy efficiency to justify the major expense of a whole-building retrofit.

For an energy efficiency program to achieve optimal results in multitenant buildings, owners and tenants must both see financial benefits in proportion to their contribution to the building's reduction in usage. Sub-metering tenant spaces can help identify how much energy is used by each tenant, but electricity sub-metering is much more prevalent in multi-family residential buildings than it is in office buildings.

Whatever method for assessing utility cost is used, it must be stipulated in the lease documentation and not be subject to change during the lease term. Since leases in multitenant buildings expire at different times and new tenants move in on their own schedule, owners cannot expect to make building-wide changes all at once. In addition, leasing agents are hesitant to place unnecessary requirements on tenants during the negotiation process, for fear of losing the tenant to another building.

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