DOE Releases Green Lease Website, and More Musings on the Split Incentive "Problem"

The Department of Energy and several interesting partners (both BOMA and NRDC, for example) have launched a website consolidating green lease resources.  It is available here.  A number of public agency versions of leases, as well as some guidance documents are included.

Much is made of green leases, and the "split incentive problem" that is seen as a barrier to green building, and which green leases are designed to address.  The frequently cited example of the split incentive problem is where the tenant pays for utilities, as in a triple-net lease.  The landlord does not have an incentive to invest in energy efficient or green capital improvements because they will not see the benefits of the energy savings. Another example is which party will be responsible for maintaining green featuress of tenant space.

My feeling on this topic has always been that it is illusory. 

All lease negotiations, at some level, address the conflicting interests of landlords and tenants.  If energy and/or sustainability was an important enough issue, the parties will negotiate a solution. 

In other words, put lawyers in a room with enough diet coke, and there will be a drafting solution to the split-incentive problem. Indeed, the varied resources on the DOE site are a testament to the fact that enough diet coke exists to solve the green lease issue in several different ways.

So, I think the "split incentive" problem is really one of priority.  Energy costs represent about $1 per square foot, in a $150+ per square foot lease.  Thus, they will not rise to the top of the make-or-break lease terms. 

This is not to discount the value of the resource that DOE has put together, but rather to put it into context.  The green lease resources reduce the transaction costs associated with including green/energy efficiency terms in a standard lease.  If the poor lawyers don't have to draft the provisions from scratch, and the parties do not have to negotiate from a blank slate,  they are more likely to be included. 

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Stephen Del Percio - March 29, 2012 2:06 PM

I agree with you that energy costs are, typically, a relatively small slice of the commercial tenant's overall cost of doing business. But - at least here in NYC, and for what it's worth - 60 percent of building owners in a survey promulgated by the Mayor's Office identified the split incentive as a barrier to implementing energy-related capital improvement programs.

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