Energy Efficiency Lease Guidance

Issue Paper

November 2011

Energy Efficiency

Lease Guidance

Center for Market Innovation

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Energy Efficiency Lease Guidance

About NRDC

The Natural Resources Defense Council (NRDC) is a national nonprofit environmental organization with more

than 1.3 million members and online activists. Since 1970, our lawyers, scientists, and other environmental

specialists have worked to protect the world’s natural resources, public health, and the environment. NRDC has

offices in New York City, Washington, D.C., Los Angeles, San Francisco, Chicago, Montana, and Beijing. Visit

us at www.nrdc.org.

About CMI

NRDC’s Center for Market Innovation (CMI) works to harness the power of markets to create positive and

profitable environmental change. The marketplace has already demonstrated that environmentally sound

practices and economic vitality can go hand-in-hand. CMI takes that proven equation further, by designing new

financing mechanisms and mobilizing capital to advance the solutions we need to disarm the toughest ecological

challenges. CMI strives to articulate and help implement value propositions that will lead to sustainable

outcomes through rational, economic decision-making. We also engage markets to design, develop, and

implement policies that will direct investment toward clean, sustainable technologies. In sum, CMI is helping

finance the shift to the green economy.

Acknowledgments

NRDC wants to thank Cycle-7 and HR&A Advisors, who helped develop this guide, and the New York State

Energy Research and Development Authority (NYSERDA), the City University of New York (CUNY) Building

Performance Lab, and the Rocky Mountain Institute (RMI) for their financial support of this initiative. NRDC

also wants to acknowledge all of the landlords, tenants, attorneys, brokers, engineers, environmental advocates,

and government officials for their participation in the three day lease forum in New York City, which led to the

publication of this guidance.

NRDC Director of Communications: Phil Gutis

NRDC Deputy Director of Communications: Lisa Goredi

NRDC Publications Director: Alexandra Kennaugh

NRDC Publications Editor: Carlita Salazar

Production: Tanja Bos

The report is also available online at www.nrdc.org/policy.

This report is printed on paper that is 100 percent post-consumer recycled fiber, processed chlorine free.

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Energy Efficiency Lease Guidance

Table of Contents

Energy Efficiency Lease Guidance Introduction 1

How to Use This Document 2

Step 1: Operating the Building as Efficiently as Possible 3

Step 2: Redressing the Split Incentive 8

Step 3: Making Consumption and Demand for Resources Throughout the Building 12

Measurable and Transparent

Appendix A: Retro-Commissioning 14

Appendix B: Measurement and Verification 15

Appendix C: Tenant Fit-Out Guidelines 16

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Energy Efficiency Lease Guidance

xisting commercial buildings offer substantial opportunities to save energy and

money, and reduce carbon emissions. Yet, landlords often defer opportunities

to invest in commercial building retrofits that appear to generate reasonable

financial returns, because their underlying leases divide those returns between

landlord and tenants, dramatically reducing the economic benefit to the landlord.

This split incentive for operating efficiency is a result of standard leasing practices

that share operating and capital expense responsibilities between landlord and tenant,

diminishing the landlord’s recovery of capital invested in efficiency. The result is

usually inaction, even in the face of rising energy prices and other pressures to improve

the sustainability of buildings.

NRDC recently convened a forum including a number of New York City’s leading landlords, tenants, attorneys,

brokers, engineers, environmental advocates, utilities and government officials to address the specific opportunities

presented by the commercial leasing process for landlords and tenants to collaborate to optimize the energy

efficiency of commercial office buildings. The forum included a major focus on the barrier posed by the split

incentive to reducing energy use. As a result of the forum, the following guidance was developed—for both

owners and tenants—to help the parties negotiate lease provisions that will overcome the split incentive and, more

broadly, establish a framework within which building owners and occupants can maximize the energy efficiency of

their operations. The guidance includes a set of principles and detailed instructions for fulfilling them. This guide

is intended to facilitate investment in energy efficiency, rather than address all of the sustainability considerations

that may be desirable in a green building, and might be thought of as a patch to address the split incentive

contained in many commercial leases. Without addressing the split incentive, the cards will remain stacked against

landlords and tenants who want to make major energy-saving investments in commercial buildings.

The benefits for landlords of using this guidance include:

n Tying capital cost recovery to associated savings

n Imposing controls on rising tenant demand for electric service (high Watts/sf)

n Separating energy expenses from other operating costs for better tracking and expense recovery

n Attributing energy consumption to tenants more accurately

The benefits for tenants of using this guidance include:

n Greater assurance of efﬁcient operations and control over operating costs

n Ability to measure energy consumption, including submetering wherever possible

n Better measurement of base building energy use for accurate allocation of operating expenditures

n Efﬁciency standards for major equipment replacement

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Energy Efficiency Lease Guidance

How to Use This Document

he purpose of this guide is to provide direction for negotiating commercial

leases that enable resource efficiency. By highlighting three principles—

intended to be reflective of a general understanding between landlords

and tenants seeking to invest in energy efficiency—this guide addresses the major

barrier to more efficient buildings in a way that makes energy efficiency a shared

objective between landlord and tenant. It also provides an accurate explanation of the

incentives, so that landlord and tenant have sufficient information, as well as sufficient

economic motivation, to make the most energy efficient choices.

For motivated negotiators, the three principles presented in this guide are designed to be the basis for lease

negotiations and on-going conversations regarding energy efficiency and the split incentive. The principles, which

need not appear in the lease itself, but which do have a series of legal implications, are as follows:

n Landlords should operate the building, and Tenants—their premises—as efﬁciently as is feasible.

n For any given system, installation, or piece of equipment, responsibility for capital expense and beneﬁt of

savings should reside with the same entity.

Alternative: All of the savings achieved by virtue of a system improvement should be available to pay for the

improvement.

n To the extent feasible, both consumption and demand for resources throughout the Building should be

measurable and transparent to both the Landlord and Tenant.

For each principle we have outlined a series of important steps—some required, others simply preferred—to take

in order to fulfill the corresponding principle. Also, we have highlighted various points of negotiation, which the

landlord and tenant may want to consider when preparing to implement the principles (the outcome of which will

not affect fulfillment of the applicable principle information). Lastly, we have provided explanations of the types

of lease provisions that typically need to be revised to satisfy each particular principle.

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This principle is intended to commit both the landlord and tenant to resource efficiency as an objective of both

landlord and tenant activity in a building. The provisions below provide substantive content to that commitment

by addressing the absence in commercial leases of:

n Guidelines for ensuring resource-efficient building operations that recognize that all buildings are different,

and that therefore no single standard can be applied;

n Efficiency standards for new installations, replacements and maintenance;

n Provisions that limit growth in standby demand on the electrical grid and over-sizing of mechanical systems; and

n Requirements for benchmarking energy use which would provide a baseline that is essential for measuring

progress toward reducing the use of resources in a Building.

Lease amendments/revisions to accommodate the provisions described with respect to Principle 1 may be required

in sections typically labeled Landlord Services, Repair, Condition of Premises, Maintenance and Repairs, and/or

Services and Utilities.

REQUIRED COMPONENTS:

1.1 Landlord must benchmark energy use for the Building annually, using Energystar Portfolio

Manager (EPA PM) or a measurement tool that interfaces with EPA PM—such as the New

York State Energy Research and Development Authority’s (NYSERDA) Focus on Commercial

Real Estate tool (if building is in New York). Landlord should maintain records of the

normative score, energy use intensity, and carbon intensity.

1.2 Landlord and Tenant must agree that:

A. Occupied temperature of the building should not be lower than ___ in the summer or higher than ___ in the

winter; unoccupied temperature of the building should not be lower than ___ in the summer or higher than ___

in the winter.

Recommendation: The landlord and tenant should agree on reasonable temperatures based on system

capacities such that the building does not require overheating or overcooling in order to satisfy a single,

more restrictive lease. See the American Society of Heating, Refrigerating and Air-Conditioning Engineers’

(ASHRAE) Standard 55-2004 Thermal Environmental Conditions for Human Occupancy.

Sample temperatures might be:

n Summer occupied: 72° F at 60 percent relative humidity

n Winter occupied: 68° F

n Summer unoccupied: 82° F

n Winter unoccupied: 60° F

The Landlord Should Operate the

Building—and the Tenant, the

Premises—as Efficiently as Possible

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Energy Efficiency Lease Guidance

If a building has the capacity to maintain 50 percent relative humidity, it may be possible to operate the

building at 75° (summer occupied). Most buildings do not have independent humidity control, however.

Landlords should consistently negotiate for the highest summer temperature and the coolest winter

temperatures consistent with system capacities and tenant comfort.

B. Chilled water provided to Tenant should not be colder than __.

Recommendation: 50° F in the winter; 44° F in the summer.

Speciﬁcations of tenant or landlord equipment may require adjustment of the recommended temperatures.

The tenant and landlord should consider whether an upper bound is necessary.

C. Condenser water provided to the Tenant should be permitted to drop as low as ___ in the winter and to rise as

high as high as ___ in the summer.

Recommendation: 65° F in the winter; and 85° F in the summer.

Modulating condenser water temperature can offer substantial energy savings. When outdoor air conditions

permit, many—but not all—systems can handle a lower condenser water temperature and operate much

more efficiently. Investigation of building systems should ascertain whether the recommended temperatures

can be effectively applied in a given building.

D. Ventilation should meet or exceed the most recent ASHRAE standard for indoor air quality.

Recommendation: Standard 62.1—2004 Ventilation for Acceptable Indoor Air Quality. Alternative

compliance through demand controlled ventilation is preferred.

1.3 Landlords should perform a retro-commissioning study of base building systems that

consume energy or water every ____ years.

Retro-commissioning is a process of ensuring that base building systems function in accordance with their

design specifications. A detailed description of retro-commissioning and a retro-commissioning study, as

well as guidelines and references, appear in Appendix A. Given the wide variation in building types and

systems, no single set of guidelines for efficient building operations is feasible.

The retro-commissioning study should identify improvements of three types:

n No cost improvements: Improvements that require a change in practice or redeployment of existing

resources such that neither the Landlord nor Tenant incur additional out-of-pocket expenditure;

n System recalibration: System adjustments that may require modest out-of-pocket expenditure by the

Landlord or Tenant rather than substantial new installations; and

n System upgrades: New installations that may have signiﬁcant associated expenses.

The retro-commissioning study should produce a systems manual for building operations that identifies the

principal operational requirements for optimizing efficiency and tenant comfort.

The “Base Building” may not be defined in the lease. Amendment may require a definition, such as “the

structure and shell of the Building, the common, public, service, and utility portions of the Building and each

building system up to the point at which it connects to facilities the responsibility for the operation and cost of

which is borne by any tenant.”

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Energy Efficiency Lease Guidance

1.4 Tenant has a reciprocal obligation to retro-commission its space every____ years.

Recommendation: Three years between retro-commissioning studies is optimal; ﬁve years the outer limit.

(A program of Enhanced or Ongoing Commissioning—see Appendix A—is preferred.) A basic energy and

operational audit of lighting, plug loads, data centers, and supplemental HVAC may be a better alternative

to retro-commissioning in tenant-leased space, particularly for smaller tenants.

Before completing a retro-commission, the following points should be considered by

both the Tenant and Landlord:

A. e interval between retro-commissioning studies vs. enhanced commissioning.

B. Responsibility for the cost of the base building study.

Recommendation: This expense is best considered a cost of operations and treated as such in the lease. The

tenant and landlord may also prefer to amortize the cost of retro-commissioning over multiple years, e.g. the

interval between retro-commissionings in which case the amortized cost may be included in the calculation

of the base year for new tenants, an increment that should be outweighed by operating savings resulting

from the study itself.

C. Qualiﬁcations and independence of the retro-commissioning provider.

Recommendation: Employ a retro-commissioning provider accredited by the Associated Air Balance

Council (AABC) Commissioning Group (ACG), American Society of Heating, Refrigerating and Air-

Conditioning Engineers (ASHRAE), the Association of Energy Engineers (AEE), Building Commissioning

Association (BCA), or NYSERDA (if building is in New York).

The value placed by tenant on the building’s (or landlord’s) engineer accreditation may outweigh the

respective concerns regarding the independent analysis.

D. Sharing of the base-building study with the Tenant, and the Tenant’s system study with the Landlord.

Recommendation: The landlord and tenant should share their results. The landlord, however, may

reasonably wish to redact portions of the study.

E. Performance of the Tenant systems study by the same retro-commissioning provider that performed the base

building study

Recommendation: Performance of whole building retro-commissioning—tenant and base building

together—is preferred.

1.5 Within an agreed upon timeframe, Landlord and Tenant should implement

recommendations identified by the retro-commissioning study that have no cost.

The landlord and tenant may have to agree on what constitutes no cost. Items that can be performed in house

with existing staff may reasonably be considered no net cost. The landlord and tenant will need to agree how

to handle modest adjustments, e.g. to a building management system that requires utilization of a controls

contractor.

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Energy Efficiency Lease Guidance

1.6 All installations of resource-consuming equipment or systems in the Base Building and in

Tenant space should meet ______standard whether they are installed by Tenant or Landlord.

This provision should apply to fit-out of new space as well as replacements in currently

leased space.

Recommendation: The most recent update of the ASHRAE 90.1 standard, issued in 2007, is preferred.

Prescriptive standards issued by NYSERDA are also a good reference.

1.7 Landlord and Tenant agree that Tenant space should have access to _____ Watts/sf of

electric service.

Recommendation: Commercial office space should be presumed to require not more than 3 Watts/sf of

demand (not connected load).

This provision and provision 1.8 are intended to limit the oversupply of electric service to a building.

The greater the service, the higher the standby requirements on the electric grid and the resulting demand

for peak power supply. Further, the larger the potential electric load available to the tenant, the larger the

Base Building HVAC system required to cool tenant systems, resulting in increased construction costs.

Depending upon the circumstances, oversized HVAC systems may operate less efficiently under part-load

conditions, leading to higher operating expenses.

Amendments/revisions to accommodate the provisions described here may be required in lease sections

typically labeled Condition of Premises, Electricity, or Electric Service.

1.8 Option 1 — After a year of occupancy, Tenant should lose __ percent of unused service.

For example, a Tenant actually using 2.5 Watts/sf may be dropped from a lease stipulated

6 Watts/sf to 3 Watts/sf (to cushion for future growth).

Option 2 — Landlord should have the right to charge Tenant for unused capacity. For every

Watt/sf reserved for Tenant, but in excess of the maximum usage of Tenant in a given year,

the Landlord should assess a fee.

Recommendation: Consider provision of future increases of electric service for tenants that increase

the density of employees and space usage, a more efficient use of space and resources that should be

encouraged. It may also be necessary to provide for increases if the Tenant opts to sublet space. Tenants will

be reluctant to surrender service if it diminishes the prospects for subletting.

There may be other solutions to this particularly complex challenge, part of which begins at the

construction of the building rather than with the negotiation of a lease. Rising tenant demand can,

however, affect equipment sizing in a retrofit scenario or compel the need for installation of additional

cooling systems. Rising tenant demand for electricity has follow-on effects on mechanical systems and the

electrical grid that must be addressed. A payment to the landlord for unused electric service can be justified

by the cost associated with over-sizing of HVAC systems (see notes above). The amount of the fee could be

calibrated to the cost of the excess cooling capacity and reduced pro rata from the charges to other tenants.

Note that a submeter is required to utilize either of these options.

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Energy Efficiency Lease Guidance

Before deciding upon 1.7, 1.8 (Options 1 and 2), both Landlord and Tenant should consider:

A. The method of measurement of demand/unused capacity.

Recommendation: Interval meter measurement at the submeter is the preferred method of establishing

peak usage.

B. Unused capacity fees ($/Watt).

C. Degree of precision (e.g. 1 Watt, 0.1 Watt).

PREFERRED COMPONENTS:

1.9 Tenant should share operational requirements and preferences, concerns, and interests with

Landlord’s contractors engaged to improve efficiency in the Building.

The tenant’s preferences do not create additional lease obligations for the landlord.

1.10 Within an agreed upon timeframe, the Landlord should implement the recommendations

of the retro-commissioning study that cumulatively do not exceed an agreed upon dollar

value so long as the recommendations do not violate the terms of any other existing lease

obligations.

The aim of retro-commissioning is to improve calibration, operation, and synchronization of existing

systems, not to call for the installation of new ones. A relatively low number, under $1/sf (in 2009) is

reasonable for the cost of implementation.

1.11 The Tenant has a reciprocal obligation to implement recommendations of the retro-

commissioning study up to an agreed upon cumulative dollar value.

Just as the requirement that the landlord implement retro-commissioning is trumped by the landlord’s other

lease obligations, tenant’s obligation is trumped by the requirements of tenant’s business operations.

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Energy Efficiency Lease Guidance

This principle is intended to redress the chief cause of the split incentive—the operating expense pass-through

clause. Leases without operating expense pass-through clauses are inherently greener, because they place all

incentives for resource efficiency in the hands of the single entity for whom it is practical to make resource

efficiency investments—the landlord.

2.1 The Landlord should assume responsibility for all base building operating expenses,

increasing rent annually to account for rising operations costs.

Recommendation: The proposed language is intended to supplant the operating expense pass-through

clause, which is the fundamental source of the split incentive in commercial real estate.

Amendments/revisions to accommodate the provisions described here may be required in lease subsections

typically labeled Additional Rent, Operating Expenses, or Operating Expense Escalation.

A. Annual rate of increase.

Typical methods for accounting for rising operating costs in a non-operating expense clause lease include

an increase in rent tied to the Consumer Price Index (CPI) or a fixed percentage (often between 2 percent

and 3 percent). The tenant should expect the landlord to secure a rate of increase sufficient to insulate the

landlord from price spikes in a given service or commodity.

Principal 2 Alternative: All, or a substantial portion, of the savings achieved by virtue of a

system improvement should be available to pay for the improvement.

In the event that elimination of operating expense escalation in favor of a fixed annual increase is not desired

by the landlord and/or tenant, the guidance offered below is intended to address shortcomings typical in

commercial leasing that limit capital cost recovery by the landlord, such that the full value of resource savings

are not available to pay for the associated improvements.

The Landlord should have the right to pass through capital expense based upon the

(Projected/Actual) dollar savings.

The provision should apply to individual and “packages” of efficiency improvements, such that an

improvement with a faster payback period can improve the economics of improvements with longer

payback periods.

The provision should ensure that items of shorter lifespan that are coupled with items of longer lifespan

are replaced with items of comparable efficiency for the entire lifespan of the item with a longer lifespan,

for example, lighting that produces savings necessary to support a chiller investment must be replaced with

comparably efficient lighting during the useful life of the chiller. Comprehensive energy efficiency projects

should be treated in the aggregate as a single improvement.

For Any Given System, Installation, or

Piece of Equipment, Responsibility for

Capital Expense and Benefit of Savings

Should Reside with the Same Entity

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Energy Efficiency Lease Guidance

The recommended provisions are explicitly intended to supersede useful life, required by Generally

Accepted Accounting Principles (GAAP) provisions and other comparable amortization concepts, which

typically require that capital investment be amortized over each piece of equipment’s useful life or some period

relating to accounting or tax depreciation methodologies. A green lease pass-through provision should require

amortization of comprehensive packages of retrofit investments based on the resulting energy savings.

To the extent that incentives associated with carbon emissions reductions become available, they should be

applied to the capital expenditure and reduce the amortization proportionately.

Amendments/revisions to accommodate the provisions described may be required in lease sections typically

labeled Additional Rent, Adjustments of Rent, Operating Expenses, or Operating Expense Escalation.

CONSIDERATIONS FOR IMPLEMENTATION:

A. Projected vs. actual dollar savings.

If the landlord has agreed to benchmark usage (1.1 above) and annual reporting (3.5 below), the tenant

will have some capacity to assess the value of the improvements, mitigating the need to measure actuals. If

the landlord performs a retro-commissioning study (1.3 above) and has agreed to share it, the tenant will

have additional context for assessing the value of a given improvement, and the need for actuals is further

mitigated.

B. Rigor of measurement of actual savings.

Measurement of actual savings, or reduction in the rate of increase in actual expenses, is preferred.

ASHRAE Guideline 14 should be used for measuring savings. Accurate measurement of a major retrofit

requires the development of a counterfactual model to represent what would have happened had the

improvements not been made, accounting for interactivity of building systems, and changes in weather,

occupancy and other factors (See Appendix B).

Neither party should insist on actual measurement if the expense of the measurement itself is more than a

modest fraction (between 5 and 10 percent) of the expected savings.

C. Reporting of actual savings, if required

On an annual basis, the landlord will report the actual reductions in Operating Expenses achieved.

D. Entity responsible for monitoring and verification of savings, if required.

Landlord and tenant should agree up front on the identity of the entity that will monitor and verify savings.

E. Responsibility for the cost of measurement and verification, if required.

It may be simplest to consider measurement and verification an operating cost subject to normal provisions

for operating costs in the existing lease.

F. Update: NYC’s Energy Aligned Lease Provision.

The NYC Mayor’s Office of Long Term Planning and Sustainability (OLTPS) recently released a specific

model lease provision—called the “energy aligned lease provision”—which embodies one method of

addressing the split incentive issue. The model energy aligned lease provision was developed by a working

group of major NYC landlords, tenants and property managers convened by OLTPS and led by real

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estate attorney Marc Rauch. A copy of the provision is available here.* The energy aligned lease clause

bases the landlord’s capital expense pass through on projected energy savings, but incorporates a buffer to

protect tenants against the possibility of underperforming retrofit measures. Under the provision, landlord

is entitled to amortize (i.e., pass through to tenant) its retrofit capital expenses to the extent of 80% of

projected annual energy savings, until landlord has recovered the entire capital expense. The energy aligned

lease provision effectively extends landlord’s payback (i.e. capital recovery) period by 25%, and allows

tenants to benefit immediately from any retrofit that delivers actual energy savings that equal or exceed

80% of projected savings. Savings projections are made by an independent energy expert approved by both

landlord and tenant.

2.2 The lease should treat resource consumption expenses separately from other operating

expenses by applying a separate “expense stop” for expenses associated with consumption

of natural resources so long as Tenant is not billed for savings that fall below the Base Year

for that consumption.

Recommendation: This provision can be paired with 2.4 (optional) below to generate a project with shared

savings for the landlord and tenant.

Many leases treat taxes as a distinct operating cost with its own Base Year, and make increases in those

costs distinctly allocable to tenants. Treating resource expenses in this fashion will help to prevent savings

from resource-saving projects from being eclipsed by rising costs in other categories of expenditure (e.g.

insurance, cleaning, etc) and motivate more careful tracking and monitoring of energy use. If actual savings

decrease base building expenses below a tenant’s base year for resources, the tenant should ensure it is not

charged for capital expenditure for those savings below the base year (which accrue to the landlord).

2.3 Base year operating expenses should not include any portion of capital expenditure relating

to energy conservation measures.

This provision removes a disincentive to the landlord to invest in resource-savings capital improvements.

Absent this provision, base year operating costs are inflated, and at the end of the amortization period, the

landlord would incur a net loss in rent, as the reduced operating costs (lower because the amortization pass-

through has been completed) would continue to be compared to the inflated Base Year.

Similarly, no portion of capital expenditures should be included in base year operating expenses or

subsequent years’ pass through expenses with respect to any energy conservation measures placed into

service prior to a given tenant’s lease commencement date. Base year operating expenses may be variously

referred to as the Base Year Operating, Base Year, and the Base Operating Expense.

PREFERRED COMPONENTS:

2.4 Savings associated with a capital investment that exceeds Landlord’s lease obligations

(i.e. beyond what is required to maintain proper functioning of the Building, such as an

innovative resource efficiency project, e.g. cogeneration) should be shared at a ratio of x

percent Landlord/y percent Tenant of (Projected/Actual) dollar savings.

This provision is intended to offer “shared savings” to landlord and tenant. One way to achieve this might

be to allow the landlord to amortize capital costs for all or part of an additional year, beyond the period

necessary to fully cover the upfront cost, as an incentive. For a building where operating expense clauses

predominate, a major efficiency investment can subject a landlord to risk of losses if those savings are not

* http://www.nyc.gov/html/planyc2030/html/about/ggbp.shtml#more

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Energy Efficiency Lease Guidance

achieved, assuming capital sharing is based on actual savings. If projected savings match results, however,

the landlord’s investment of time and capital yields little or no return since cost and savings are shared

among the tenants. This option provides a mechanism whereby the landlord and tenant can negotiate a

sharing of the return on investment.

Amendments/revisions to accommodate the provisions described may be required in lease sections typically

labeled Additional Rent, Adjustments of Rent, Operating Expenses, or Operating Expense Escalation.

2.5 Upon written permission from the Tenant, the Landlord may apply a price per ton of carbon

emissions reduction to the savings from a capital project.

The resulting annual value of the reductions in carbon dioxide emissions should be incorporated into the

operating expense savings from the capital improvement, and the total savings used in determining the

amortization period for the improvements following the guidelines established in 2.1 above.

Tenants with carbon savings goals may be willing to pay additional rent for a carbon-saving project. As

carbon markets evolve, carbon savings goals may be largely covered by the provisions of 2.1 above. As of

this writing, however, tenants with carbon savings goals may wish to negotiate a price per ton of carbon

that exceeds the shadow price of carbon on the nascent carbon markets.

2.6 The Landlord and Tenant agree that the components of operating expenses subject to

vacancy adjustment in the calculation of additional rent are those operating expenses that

vary with occupancy, not those that are fixed [relevant only if the lease allows for vacancy

adjustment].

Variable components of resource consumption expenses are as follows [to be defined by the parties].

Recommendation: While not essential for fulfillment of the alternative principle, this provision is

recommended. It is intended to eliminate an implicit mark-up of energy costs on base building resource use

to the extent that fixed components of resource use are adjusted for vacancy, i.e. if the Building is heated

regardless of its occupancy status, heating expenses are fixed and should not be grossed up. Misapplication

of vacancy adjustments are common and create a disincentive for Landlords to pursue resource-saving

improvements.

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Energy Efficiency Lease Guidance

This principle is fundamental to any serious effort to address resource efficiency. Progress toward environmental

goals is impossible to measure without data.

3.1 Landlords should submeter resource use in Tenant space wherever it is technically feasible

and within reasonable financial parameters.

Submetering of water, gas and steam may not be technically feasible or effective but should be considered

where it is. This provision is principally intended to eliminate the practice of billing tenant electricity

consumption on a flat annual $/sf basis—typically called Electric Rent Inclusion (ERI). Without access to

measurement of electric usage, the tenant cannot assess progress toward resource savings goals. Tenants with

direct meters have already satisfied this provision.

A. Responsibility for the cost of the submeter

The submeter itself affects measurement of energy and motivation to save, but does not directly save energy

for either the landlord or tenant. Therefore, both parties may debate which is the beneficiary of the meter

and should bear the cost. Presumably some of the cost could be covered through the submeter mark-up

itself. For small tenants, the landlord may ask slightly higher rent to compensate for the loss of revenue

typically earned from ERI.

B. Relationship of submeter to actual billing.

Recommendation: It is preferable, from an efficiency perspective, for bills to reflect actual usage so that

energy saving efforts have a direct, measurable impact.

The presence of a submeter need not necessarily eliminate a fixed per square foot charge for tenant electric

(ERI) that landlords may be reluctant to give up. It would mark a meaningful step toward energy efficiency

for the tenant simply to have a meter with which to monitor actual consumption.

If the landlord foregoes the fixed per square foot charge, the landlord and tenant should negotiate the

administrative charge, if any, for management of the submeter bill. A percentage fee (usually between 2 to

12 percent of the submeter bill) is typical. The submeter mark-up is not an element of the split incentive,

i.e. it does not create a disincentive for efficiency for the landlord. In fact, higher submeter mark-ups create

an incentive for tenants to conserve.

3.2 Where submetering of Tenant space is infeasible, the Landlord should submeter the

Building by floor.

Consumption and Demand for Resources

Throughout the Building Should be

Measurable and Transparent to the

Landlord and Tenant, to the Extent Possible

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Energy Efficiency Lease Guidance

3.3 Where submetering is infeasible and the Tenant has ERI, the Tenant may initiate a survey of

equipment and systems. The Landlord should credit the Tenant for demonstrable efforts to

save. Surveys should be performed annually.

Under ERI, the survey is generally intended to justify the landlord’s increase of the ERI Factor (the $/

sf charge for electric). If ERI is to remain in force, the tenant must be given some incentive to conserve.

Therefore, the survey must identify and credit savings efforts.

3.4 Base Building electric usage should be calculated, to the maximum extent feasible, utilizing

submeters to exclude Tenant spaces.

Base building electric usage, frequently called Building Electric Current, is the proportion of the reading of

the master meter (the meter for the whole building) that is attributable to the base building as opposed

to tenant spaces. Most leases with operating expense escalation make a percentage of the base building

electric usage an escalatable cost. Base building electric usage should reflect the proportion of the master

meter electric attributable to the base building only, excluding tenant spaces. Lack of submetering leads to

inaccuracy in determining the base building component of overall electric consumption. If, for example,

occupied tenant spaces that are not submetered are included in the base building electric expense shared

with tenants, the landlord shifts a disproportionate share of base building electric to the tenants and will

have a disincentive to save on base building usage.

3.5 Option 1 — The Landlord should annually report to the Tenant the benchmarked resource

usage of the Building (see 1.1 above) as well as the Tenant’s contribution to the score—by

calculating the difference between the Building score, with and without Tenant usage. The

Landlord should also provide a comparison between Tenant’s proportion of the Building’s

rentable square footage relative to its proportion of the Building’s resource use.

PREFERRED COMPONENTS:

3.5 Option 2 — Landlords should annually report to Tenants the total resource usage of the

Building in terms of kilo-watt hours (kWh) and MMBTUs or, alternatively, in MMBTU

equivalents and in gallons of water. Tenant’s relative consumption should also be reported

as in Option 1.

3.5 Option 3 — Landlords should annually report to Tenants the total carbon emissions of the

Building in tons. The Tenant’s relative consumption should be reported as in Option 1.

Recommendation: Option 1 should be considered a minimum. The preferred approach is to apply the

terms of all three options.

3.6 Tenant should annually report to Landlord any electric, gas, steam, or water usage in Tenant

space that is directly metered by the distributor of the commodity, i.e. that does not flow

through Landlord’s meter.

Natural Resources Defense Council I 14

Energy Efficiency Lease Guidance

Appendix A: Retro-Commissioning

Retro-commissioning: A systematic investigation process for optimizing building performance by identifying and

implementing relatively low-cost operational and maintenance improvements.

Retro-commissioning Study: A Retro-commissioning Study is the result of the Investigation Phase of retro-

Commissioning, as described in “A Retro-Commissioning Guide for Building Owners,” published by the United

States Environmental Protection Agency in 2007, which culminates in a list of findings and recommended retro-

commissioning measures to be implemented.

Resources:

ACG Commissioning Guideline for Building Owners, Design Professionals and Commissioning Service

Providers. AABC Commissioning Group. 2005. http://www.commissioning.org/commissioningguideline/

ACGCommissioningGuideline.pdf

California Commissioning Guide: Existing Buildings. California Commissioning Collaborative. 2006. http://www.

documents.dgs.ca.gov/green/commissionguideexisting.pdf.

Guideline to the Commissioning Process for Existing Buildings, or “Retro-Commissioning.” NYSERDA. 2006. http://

www.documents.dgs.ca.gov/green/commissionguideexisting.pdf

A Retro-Commissioning Guide for Building Owners. United States Environmental Protection Agency. 2007. http://

www.peci.org/Library/EPAguide.pdf.

Enhanced Commissioning

The Continuous Commissioning Guide for Federal Energy Managers. Office of Energy and Renewable Energy of

the Department of Energy. 2002.

http://eber.ed.ornl.gov/commercialproducts/FEMP%20Continuous%20Cx%20Guidebook.pdf

Natural Resources Defense Council I 15

Energy Efficiency Lease Guidance

Appendix B: Measurement and Verification

Leases frequently allow capital expenditure sharing with tenants for items that save operating expenses. However,

in most cases those capital items are still limited to a useful life-based amortization. Allowing capital recovery

to the extent of savings can represent a significant increase in the rate at which landlords recoup expenditure on

upgrades to building energy systems.

Unfortunately, since commercial real estate has not received significant “at risk” energy investment (i.e.

investments where the contracts for improvements are subject to savings performance) performance data that

could be used to justify savings estimates is relatively scarce. An engineer’s projections from an energy study can

serve as a good starting point, but may be insufficient to convince a tenant to surrender Additional Rent for a

capital upgrade. For a significant capital expenditure, a tenant would be well advised to ensure a rigorous regime

of measurement and verification (M&V), or in the alternative to negotiate an adequate buffer percentage under an

energy aligned lease clause, as described in 2.1F above.

The first broadly accepted M&V standards emerged in 1997 under the auspices of the US Department of Energy

as the International Performance Measurement and Verification Protocol (IPMVP), later substantially revised and

expanded in 2001. IPMVP provides a general framework of approaches to measurement that command broad

national and international consensus. Then, in 2002, the American Society of Heating Refrigeration and Air-

conditioning Engineers (ASHRAE) released its Guideline 14, a technical document outlining in great detail a set

of measurement methodologies and providing guidance about how to choose among them.

Caution should be taken with IPMVP protocols, which were developed by the Energy Services Company (ESCO)

industry largely to provide a set of tools for measuring itself. The various IPMVP protocols vary widely in terms

of their rigor and validity. IPMVP Protocol C and ASHRAE Guideline 14, to which it is linked, are the optimal

methodologies for a retrofit of significant scope and expense. Landlord and tenant should seek to balance the cost

and effort involved in M&V against the magnitude of the expenditure and the cost sharing.

Requiring more rigorous M&V will, in fact, have a reinforcing effect on the market for energy efficiency in

commercial buildings, yielding data that can be used to make better retrofit choices and for investors to use in

underwriting.

Resources:

Guideline 14 – 2002. Measurement of Energy and Demand Savings. ASHRAE. 2002. 166 pp. ISBN/ISSN: 1046-

8940x. http://resourcecenter.ashrae.org/store/ashrae/newstore.cgi?itemid=9012&view=item.

International Performance Measurement and Verification Protocol. Concepts and Options for Determining Energy and

Water Savings. Volume I. Rev 2. 2002. http://www.evo-world.org/index.php?option=com_content&task=view&id

=272&Itemid=223.

International Performance Measurement and Verification Protocol. Concepts and Practices for Improved Indoor

Environmental Quality. Volume II. Rev March 2002. http://www.evo-world.org/index.php?option=com_content&

task=view&id=272&Itemid=223.

International Performance Measurement and Verification Protocol. Concepts and Practices for Determining Energy

Savings in Renewable Energy Technologies Applications. Volume III. August, 2003. http://www.evo-world.org/index.

php?option=com_content&task=view&id=272&Itemid=223.

Natural Resources Defense Council I 16

Energy Efficiency Lease Guidance

Appendix C: Tenant Fit-Out Guidelines

The many firms and organizations involved in the Energy Efficiency Lease Guidance explicitly chose not to

address tenant fit-outs, as guidelines for green construction have been covered elsewhere. Landlords for the most

part (there are a few notable exceptions) are not comfortable with blanket high performance fit-out requirements,

fearing they might dampen the potential to lease space. However, there is a growing number of landlords that

are looking to gain competitive advantage in today’s challenging leasing environment by offering efficient and

transparent energy management systems that can assist tenants in completing high performance fit-outs..

NRDC’s Center for Market Innovation is currently engaged in a high performance demonstration project which

is intended to move beyond commonly cited barriers to scale demand for high performance fit-outs through

(i) demonstrating live fit-out projects that are achieving strong returns on their efficiency investments, and (ii)

developing and publicizing a process for high performance fit-outs that others can follow. For more information

on CMI’s high performance demonstration project, click here.

We offer a few good references:

Lord, Mychele. Green Office Guide: Integrating LEED into Your Leasing Process. U.S. Green Building Council.

2009. http://www.usgbc.org/Store/PublicationsList_New.aspx?CMSPageID=1518.

See for lighting. ANSI/ASHRAE/IESNA Standard 90.1 – 2007. Energy Standard for Buildings Except Low-Rise

Residential Buildings. ASHRAE. 2007. ISSN 1041-2336.

The New York State Energy Research and Development Authority provides a useful set of standards on the

website for its Existing Facilities Program. http://www.nyserda.org/Programs/Existing_Facilities/default.html.

Creating a High Performance Workspace. G/Rated Tenant Improvement Guide. City of Portland. Office of Sustainable

Development. Version 2. January 2004. http://www.portlandonline.com/shared/cfm/image.cfm?id=112733.

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