Taking the Next Step
In my previous post I discussed how IMT started on the right path for a green lease on our new office space. To briefly recap, by outlining some of our sustainability goals in the earliest stages we were able to narrow down our office search to buildings meeting specific criteria. These included:
- LEED certified/Energy Star label
- Ample bike parking
- Landlord’s willingness to submeter our lighting and plug loads (so that we will have a monetary incentive to save energy)
Once we settled on two potential office locations, the next step was to negotiate potential lease terms in a Letter of Intent (LOI).
The LOI outlines many key points that will go into an eventual lease, such as rental rate, the length of the lease, and the scope of work to be done in the tenant space.
Energy Performance Factors
Beyond obvious questions we had about rental rate and term length, our internal focus was on:
- tenant build-out options, and
- language related to passing through energy efficiency improvement costs from landlord to tenant.
Two of those goals are directly related to incentives. Submetering our electricity usage —as opposed to paying a vague pro rata share based on square footage— provides an incentive for IMT to be as efficient as possible in our new space.
Similarly, by creating a method for the owner to recoup any investments in energy saving upgrades, we would help incentivize the owner to continually improve the building systems.
The tenant build out options included things like new floor coverings but also incorporated changes to lighting and other systems in order to make the space more comfortable and efficient. These three issues significantly impact the energy performance of the tenant space and were key determining factors in our office space decision.
Submetering as a billing option for building owners only recently became legal in the District of Columbia, so many owners are not yet familiar with the process.
One of the owners we received a proposal from was much more comfortable than the others in determining how to meter and bill for our future office’s lighting and plug loads, and how much to reduce our operating charges because of the different electricity billing system.
Electricity: Connecting Use With Cost
The ultimate goal was to achieve a highly energy-efficient office space and as in almost all commercial leases, the potential cost of our build-out was a major factor in negotiations.
Each LOI offered a different allowance amount and scope of work, depending on the current condition of the space. Again, since any building that passed the site selection phase would already be considered a “green building,” we would be able to achievea relatively high-performance space without serious construction costs.
Thankfully, the landlords we received proposals from already included language allowing them to pass through energy efficiency improvement costs up to a certain point (usually yearly amortization up to the amount of annual dollar savings). While this language is not as extensive as New York City’s PlaNYC language, we still consider it a major step in the right direction.
Connecting our electricity use with our electricity cost was a priority going into the lease process, so it was a big win to find a landlord who would help us reach that goal.
Overcoming the Split-Incentive Problem
We wanted to encourage the landlord to continue making energy efficiency improvements, and we did this by agreeing to help pay for upgrades that might otherwise be accounted for as capital expenses.
Shifting improvements from capital expenses to operating expenses helps overcome the split-incentive problem, as owners are often able to recoup from tenants costs designated as operating expenses. A standard commercial lease has a section outlining what items may be considered operating expenses and therefore passed on to tenants.
Scope of Work for a Build-Out
Our scope of work for a build-out involved basics like painting and carpets, but could also include changes to lighting fixtures, window blinds, HVAC controls, ceiling tiles, or anything else that impacts comfort or energy use in the space.
Again, one landlord in particular was already in the process of upgrading the building, so the requests for our space could be more narrowly focused items, such as daylighting and occupancy controls for the lights.
By making sure our goals were transparent and aligning our interests with the landlord early on, IMT was able to achieve many of our green lease goals with relative ease. When combined with what we hope will be excellent occupant behavior, our eventual build out should deliver a very energy-efficient office space.
Adam Sledd manages the green leasing and federal buildings program at IMT. The third and final post in this series will focus on how our green lease goals played out in negotiations with the landlords.