If an energy efficiency building upgrade doesn’t benefit both the property owner and the tenant – especially with a triple net lease – it’s often easier to simply leave things the way they are even if that means losing money on wasted energy!
Recently E3 Prime Environment’s President, Curt Monhart, took a tour of a business operation with a high monthly utility bill. The sustainability manager was focused on reducing energy waste and lowering overall utility costs. The business wanted immediate solutions!
During the tour Monhart was keenly aware that simply replacing the obsolete HVAC system and upgrading the existing outdated lighting would yield significant cost savings. Even though energy savings would be easy to achieve, a huge barrier would have to be overcome first. It’s the barrier known as the “split incentive.” Simply put, the building’s owner would be responsible for paying for the upgrades but the tenant would reap all the financial benefits of the reduction in the use of energy.
Split Incentive…If you’re not the one paying the bill, you’re likely using more energy.
A simple explanation of the split incentive is this: when a building owner is responsible for paying energy expenses there’s a strong incentive to utilize the latest energy efficient technology which leave the tenants with little incentive to conserve energy because they never see a bill. On the other hand, if the tenants are paying for energy, they have an incentive to reduce their use of energy, but the building owner now has zero incentive to provide them with the latest energy efficient technology since they don’t receive any of the financial benefit!
If an energy renovation doesn’t benefit both the building owner as well as the tenant – it’s much easier to do nothing!
The business Monhart was meeting with is a tenant who leases their building. The lease is triple net which means tenants are responsible for all expenses not related to the building structure. If tenants want to be more energy efficient, they have to pay for all upgrades, or buyout the lease and look for a more energy efficient property – both costly propositions. If the landlord receives none of the benefits from installing energy efficient equipment, any energy technology upgrade project is most likely a non-starter due to the added cost.
What is needed is a solution where both parties benefit!
The Solution – the Building Owner’s Energy Project Financing Paid for by the Tenants Energy Savings!
What if the building owner could finance an energy efficient upgrade without using any of their own cash and have the financing paid for out of the tenant’s energy savings with no increase in his monthly rent and utility expenses?* A huge win for both parties!
The building owner would benefit from the FREE “green advantage” which includes:
- Increased property value
- Decreased vacancy rates
- Increased rental rates
- Minimized tenant turnover
- Increased tenant comfort
- Increased productivity in an office or industrial facility
The tenants benefit with the reduction of energy costs and a more comfortable environment. A true win-win solution!
The win-win solution is made possible by a finance program known as Property Assessed Clean Energy (PACE). It provides the perfect opportunity for overcoming the barrier of the split incentive.
In a PACE project the cost of the loan is paid by the tenants via a prorated special assessment on the property tax. However, with a PACE energy efficiency upgrade, their utility bills are less than this cost resulting in a win-win for the owner and the tenants. The owner gets an energy efficient building with a higher market value, increased occupancy and lease rates, and tenants see an overall lower cost of renting.
One of the key ingredients of the PACE program is that most funded projects must be cash flow positive. When the benefits of the PACE program are explained to building owners a typical response is “why in the world would I not do this?”
“..split incentives between building owners and tenants create a problem for encouraging energy efficiency.”
The PACE program makes significant energy efficiency upgrade projects possible because of the many financial barriers it’s designed to overcome. This includes 100% financing, non-recourse and the ability to sell the property without needing to pay off the loan.
And in many cases a PACE loan can be considered “off-balance-sheet.” Being classified as an expensed instead of a long-term liability, this saves the owner’s borrowing capacity for other projects.
PACE financing helps overcome the split incentive that stalls prevents many building owners from launching efficiency renovation projects that are often long overdue. If you would like more details about financing your energy renovation project with Property Assessed Clean Energy you can download the free report by clicking HERE.
About Kerry Kilpatrick
Kerry Kilpatrick is the Corporate Social Media Director of EAG, the Energy Alliance Group of North America, an energy solutions and cost recovery company taking a “holistic” approach to reducing a company’s energy, water and operating costs.