When it is time to select and buildout your new office space, it is essential to ask how the energy systems and indoor environmental quality in your new space will contribute to business outcomes:

1) Are you getting top value?
2) Is the space going to help you meet your corporate sustainability goals?

A building with energy efficient systems, and a tenant space that includes energy efficient features, can result in significant energy and cost savings relative to the established budget for a traditional Class A office space over the life of the lease. In addition, energy efficiency is at the heart of any green, sustainable space.

Benefits of a sustainable space include:

• Lower energy costs
• Improved indoor air quality
• Increased worker satisfaction & productivity
• Enhanced brand or public image
• Customer attraction/retention

When you move into a new tenant space or renew your existing lease there is an opportunity to significantly improve the energy performance of that space. There are both physical and contractual reasons for the opportunity. A tenant buildout includes renovations, structural changes, and improvements. It is highly cost effective to couple energy efficiency measures to these other planned physical disruptions to the work space. Contractually, when a new lease is being negotiated, it is possible to ensure that the party who pays for any energy efficiency improvements is repaid for that investment from the energy cost savings.

Why Go Green

Commercial tenants are looking for energy efficient and green space because customers and employees increasingly expect a company to follow sustainable practices. More and more companies have corporate sustainability policies that include goals of carbon footprint reduction, and improving energy efficiency in buildings and operations is a top strategy for achieving emissions reductions targets. In today's competitive market, companies and organizations in energy efficient office space have an advantage because of the positive brand image associated with sustainability. Additionally, a green office space can qualify for certification under the LEED Commercial Interiors green benchmarking system, the most well-known standard for green building. With several major U.S. cities requiring building labeling and public disclosure of energy use, efficiency investments are viewed as a way to avoid obsolescence.

Lowering utility bills gives a tenant a hedge against volatile energy prices. Also, initial studies indicate that there is a correlation between worker productivity and better lighting, temperature control, acoustic control and indoor air quality, all of which can be improved with energy efficiency improvements. With salaries being the largest expense for most office environments, worker productivity gains can bring significant increases in profitability.

Your Space, Your Utility Bill, Your Opportunity to Save

A tenant who pays the utility bills under a triple-net-lease can save a significant amount of money on their energy bill over the term of the lease by investing in energy efficiency and indoor environmental quality improvements when they move in. If a tenant pays for their own energy efficiency improvement in their own space, and they are located in a building where their energy is sub-metered, then that tenant will automatically see the energy savings from any energy efficiency improvements in their own space.

Paying for High Performance Buildouts

A top consideration on the minds of tenants when determining the types of ECMs to include in their space is cost. Financial planning takes into account the energy bill savings and determines when tenants will break even on the investment, but tenants and building owners must define a lease agreement upfront that leaves utility savings in the pockets of whoever pays for the energy conservation measures (discussed below). Government and utility incentives, rebates and tax breaks are also often available to companies and organizations implementing efficiency and should be included in cost evaluations during project development.

Working with the Building Owner to Invest in Energy Efficiency

Any investments in energy efficiency paid for by the building owner often run into the split incentive problem. The split incentive problem occurs because building owners typically pay the capital expenses for energy improvement, but tenants receive the financial benefits of energy savings through a reduction in their energy bill. This split of responsibility for capital versus operating expenses leaves building owners with little incentive to undertake energy retrofits. An energy-aligned lease can help resolve this challenge by allowing owners to recover predicted energy savings from tenants, with protection for tenants against underperformance.

This chart (click on link for lightwindow) illustrates various scenarios for aligning the investment and benefits of efficiency improvements between the landlord and tenant. For example, the building owner may want to cover some or all of the energy efficiency improvement as part of the tenant improvement allowance or upgrade the energy systems in the whole building. Also, if the tenant has a gross lease where the building owner pays the energy bills a decrease in rent payment may be possible to share the energy savings benefit with the tenant. See the following chart for an overview of the types of contractual changes that can be used to enable the payee of an energy efficiency improvement to receive the return from the savings on the energy bill.

Tenant Space vs. Whole Building Energy Conservation Measures

In a multi-tenant office space, certain energy conservation measures (ECMs) can be undertaken in the tenant's own space while other ECMs involve building-wide systems and require participation from the building owner. Tenants can gain energy savings through measures like lighting, temperature management, and equipment and appliances in their own space for energy savings of 10-30%. Whole building energy efficiency improvements are those that require changing or adjusting building-wide systems, such as the heating, air conditioning and ventilation (HVAC) system. The following is an illustrative list of the types of energy conservation measures that can be pursued in a tenant space vs. at the whole building level.

Selecting a Green Building

Tenants with sustainability goals will gain significant benefits from moving into an energy efficient building, as some efficiency measures can only be implemented by building owners at the whole building level and result in lower energy costs for the tenant. Building owners are taking steps to lower the energy use of their asset because energy efficient buildings have been shown to have higher occupancy rates, increased rent, increased resale value, and a lower capitalization rates.

• In the US, occupancy rates are three percent higher for office buildings which are Energy Star certified and eight percent higher for LEED-labeled offices because tenants increasingly view green as an essential feature of their office space.
• Rent premiums for office buildings which are Energy Star certified can range from 5 to 8.5 percent. One study found rent premiums as high as nine percent for Energy Star rated buildings and 17 percent for LEED certified buildings.
• Resale premiums for office buildings which are Energy Star certified can range from 13-26 percent. One study showed that building owners expect a 6.8 percent increase in the value of their green-retrofitted building over the next three years.
• Investors have proven willing to purchase Energy Star properties at lower cap rates, producing a premium in value over non Energy Star properties.

Savings and the Size of the Tenant Buildout

Generally, spaces 100,000sqft or larger have a high number of energy conservation measures (ECMs) that are both cost effective and feasible, while smaller spaces have fewer options for cost effective improvements. Large buildings are also more likely to be sub-metered, making repayment easier. Despite the bigger opportunity for buildouts in large office space, smaller sized tenants are also able to lower their energy usage and utility bills through low-cost efficiency improvements, such as lighting.