Why a “Green lease” makes commercial sense for asset managers?
“Green Lease” is a catchy name, but for those interested in the bottom line, an Energy Aligned Lease (EAL) would be more appropriate. An EAL, combined with an energy efficient retrofit, as part of your capital expenditure plan, has the potential to significantly reduce energy consumption and energy-related costs.
The challenge for those with NNN leases is that tenants typically use 70% of your building’s energy, which means they reap the biggest savings from energy efficient improvements.
No one ever wants to renegotiate a lease; however, by augmenting an existing lease with a handful of new or modified clauses, both owners and tenants can better realize the benefits of investing in energy efficient measures. A cost recovery clause added to an EAL is designed to overcome the split-incentive barrier and help owners justify energy-saving capital improvements. The challenge for asset managers is splitting the incentive when the building owner must pay capital expenses to improve a building (e.g. the replacement of HVAC equipment), while tenants receive the benefits of lowered utility bills.
The large investment required for capital projects means that the split incentive often holds up projects that have the greatest potential to reduce energy consumption (and thus save money). The more an owner can share the costs of sustainability measures with tenants, the greater that owner’s return on investment, directly improving the building’s NOI and asset value.
However, the amortization schedule for capital expenditures can have a useful life of multiple decades and is often too long to convince building owners or traditional bank financers that the investment is worthwhile. A C-PACE loan is specifically designed to match the effective useful life of the capital assets being replaced, which makes it possible to pay for capital expenditure with energy savings.
Building Energy Performance can develop a project which includes the augmentation of a lease to more appropriately split the energy savings between owner and tenant. With this change, capital expenditure can pay for itself through energy savings well before an owner would have been repaid through amortization.
We are C-PACE project developers that expertly guide building owners to finance capital expenditure through energy savings. To learn more, contact us for an overview.