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. 

A Funny Thing Happened On The Way To The Mortgage: The Sad Tale Of PACE "Greenlining"

The Natural Resources Defense Council (NRDC) sued the Feds today to reinstate the PACE program.  The PACE program was a component of ARRA (the Stimulus Bill for those of you non-lawyer geeky types who still choose to read my blog) which allowed the upfront costs of property owners’ clean energy and energy efficiency projects to be financed by local governments, and paid back by homeowners as an increase in  their property taxes. 

The concept behind the PACE program is that the energy savings from energy efficiency and clean energy projects would outstrip the costs over time, but that the upfront costs were a barrier to many people in implementing the badly needed changes. 

Several municipalities and states had implemented these programs, and it sounded like such a good idea that $150 million in the ARRA was dedicated to support them.

Homeowners are able to do the energy upgrades, local governments can take action to ameliorate climate change and the Federal government will help with the financing.  Everybody's happy, right?

Not so fast. The Federal Housing Finance Agency, which regulates government sponsored mortgage buyers Fannie Mae and Freddie Mac, and the Office of the Comptroller of the Currency, which regulates national banks stopped the PACE programs in their tracks.  According to the NRDC's complaint, available here, the Defendants refused to issue mortgages that had a PACE loan in first priority. 

According to the NRDC press release summary of the claims:

NRDC is suing the agencies for halting the programs without justification, and for doing so without following the proper protocol as required by law. This includes failing to conduct a review of the environmental impacts and to provide the public an opportunity to comment before taking this action.

The objections to the actions on PACE have mainly to do with statutory procedural requirements for administrative agency action, the suit serves to shed a light on what is essentially "greenlining"--a modern day equivalent of "redlining."    

 In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners' Loan Corporation (HOLC) to look at 239 cities and create "residential security maps" to indicate the level of security for real-estate investments in each surveyed city. Such maps defined many minority neighborhoods in cities as ineligible to receive financing. The maps were based on assumptions about the community, not accurate assessments of an individual's or household's ability to satisfy standard lending criteria. Since African-Americans were unwelcome in white neighborhoods, which frequently instituted racial restrictive covenants to keep them out, the policy effectively meant that blacks could not secure mortgage loans at all.

The foreclosure crisis that stemmed from complicated financial instruments legitimately scared the wits out of the Federally backed mortgage entities.  But now they are too scared to even do the right thing and support a new financial model that has the possibility of allowing millons of homeowners to make their homes more energy efficient--which will, in turn, create demand for green products and people to manufacture them and install them, which will enable those people their mortgages.

Stimulating Smart Growth--Advancing the Anti-Sprawl Agenda

Kaid Benfield and the Smart Growth group at the NRDC introduced a neat visual tool for reimagining sprawl development into multi-purpose places. Using photo-editing software,

the visionaries of Urban Advantage have transformed pictures of communities from all over the country to show how they could become more pleasant, walkable neighborhoods.

There are reimagined designs for 70 communities nationwide available for browsing.

The new tool and conversations I have been watching on Twitter got me to thinking about how Obama can use the stimulus plan to stimulate smart growth development.

1. Invest in transit--One conversation on Twitter was discussing whether Detroit can be retooled to produce mass transit instead of single occupancy vehicles. While I think this might be a stretch, before WWII, the United States retooled many of its plants to make the articles for war very quickly.  I would love to hear more comments about this idea.

2. Invest in cities--The stimulus money should be invested in our urban centers, making them safer through improved infrastructure, more beautiful and sustainable through urban greening projects and more livable through pedestrian and bicycle improvements.  Beyond the built environment, Obama could also invest in schools and libraries, making these amenities rival their suburban counterparts.  This would not only make for smarter growth, but also provide jobs for women and minorities not directly benefitting from the green jobs major sectors like construction and engineering.

3. Invest in planning-- New Urban News has a great idea. Obama should invest in planning projects which would support jobs now and plan for smart growth into the future.

Some federal dollars presently used for transportation and other purposes could pay for regional planning that promotes tight-knit development and preserves open land.

4. Invest in smart code drafting--Redrafting building and zonign codes is an expensive and labor intensive process.  But, by reforming codes to make them more energy efficient and smarter, like investing in planning it would support jobs now and plan for smart growth into the future, not to mention creating a more green built environment.