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Debunking Industry Myths on Leased Net-Zero Energy Buildings

I recall my father’s advice, “Do the best you can with what you have, and if the stars align, you’ll have the opportunity for better.” The staff at Rocky Mountain Institute’s (RMI’s) office in Boulder, Colorado, had made the most of the space we occupied for the past nine years—a 50-year-old converted motorcycle shop. It was cold in the winter and hot in the summer but it had character, and we were able to operate it fairly efficiently (47 kBtu/sf/yr). However, when the opportunity was presented to become a tenant in the first net-zero energy (NZE) leased building in Boulder, we were smitten. This was our chance! We had long wanted a space that aligned with our sustainability values and provided a better environment for staff, along the lines of our Innovation Center in Basalt, Colorado. Boulder Commons gave us the opportunity to demonstrate a more market-based approach to NZE that balances investment with return. This market-based approach to NZE offered a compelling business case to both the “die-hard greenies” and a more traditional law firm.

As Boulder Common’s anchor tenant, we worked closely with the developer, Morgan Creek Ventures, to achieve NZE in a way that was economically beneficial to both landlord and tenant. The result: the first NZE lease in Colorado. RMI’s effort earned recognition in 2017 as a Green Lease Leader from the Institute for Market Transformation and from the Department of Energy. RMI has a history in green lease leadership, but this was our first time driving from the tenant seat. The experience pushed our preconceived notions and forced us to strike the right balance between what is possible and what is financially practical.

There are only a handful of leased buildings that have achieved NZE, so there was little precedence on what works and what doesn’t, particularly regarding the lease. In response, we created the NZE Leasing Best Practice Guide, which takes lessons learned not only from our experience but also from other developers that have successfully implemented NZE-leased buildings. It also builds the business case and highlights the key components required in a successful NZE lease.

This is crucial, since commercial buildings consume 36 percent of the electricity in the U.S., 52 percent of commercial buildings are leased, and NZE-leased buildings are not even close to market penetration. One potential reason for this disconnect are several myths and misconceptions about NZE-leased buildings.

Through this process, we debunked the following myths:

Myth #1: NZE-leased buildings won’t provide adequate return to the developer

While NZE-leased buildings are still a new offering, they can be more profitable than business as usual if implemented thoughtfully. NZE-leased buildings can be up to 19 percent more profitable for developers who hold on to their property and 17 percent more profitable for developers who choose to sell their property immediately.

Additional value is achieved through:

  • Higher occupancy: Studies have found 3 to 7 percent higher occupancy rates in efficient buildings, due to higher tenant attraction, lower downtime between tenants, and better tenant retention.
  • Rent premiums: NZE-leased buildings are unique and differentiated in the market and are often higher-quality, better-performing buildings, which drives rental premiums. This is consistent with market research of over 21,000 U.S. rental buildings that demonstrated rent premiums of 3.5 percent for ENERGY STAR-certified properties—a trend that will be matched, and likely exceeded, with NZE buildings
  • Higher market value: Between lower capitalization rates, higher anticipated rent, and lower operating expenses, energy-efficient buildings can sell for a premium of about 13 percent.

“We’re not doing our seventh NZE-leased building because we’re losing money,” – Kevin Bates, Sharp Development Company

Myth #2: Only sustainability-oriented companies are interested in leasing space in an NZE building

Residing in an NZE building greatly enhances the tenant experience at minimal to no additional cost. Even tenants that don’t place a high priority on sustainability benefit from residing in an NZE building through:

  • Improved employee productivity and satisfaction: The greatest benefit to the tenant comes from higher employee productivity and satisfaction due to improved thermal comfort, natural daylight, and residing in a healthy building—all shown to improve productivity by 6–16 percent. A recent U.S. department of labor study showed that people (salaries) cost a company 100 times more than energy, so while a lower utility bill is great, increasing employee productivity makes residing in an NZE office building most compelling.
  • Employee recruitment and retention: Companies can use their occupancy in an NZE-leased building as a recruitment and retention tool since research from the Society for Human Resource Management shows that 67 percent of employees place a high importance on their company’s commitment to a “green workplace.”
  • Lower operating expenses: NZE-leased buildings will have low to no energy bills depending on the utility rate structure, so may have a lower total rental cost even if there is a base rent premium. Additionally, tenants are more isolated from utility rate structure increases.
Myth #3: NZE is only for new construction

It’s true that achieving NZE in new construction is easier than in an existing building since the developer has full control over building systems and new leases. However, existing buildings can also achieve NZE operation if the landlord is willing to start a dialogue with tenants around building efficiency and give tenants a few easy wins that will get them excited about future energy projects. This process may vary, but often includes the following steps:

Step 1: Gathering past energy data on the building and sharing it with tenants

Step 2: Setting aggressive yet achievable energy goals with tenants

Step 3: Recommissioning the building so it is operating as efficiently as possible

Step 4: Implementing energy efficiency and solar PV upgrades using financing mechanisms that can be passed through to the tenant

Once lease renewals occur, an energy budget, disclosure of energy consumption, recommissioning, and cost recovery language should be included in the lease. For more details on how to incorporate NZE lease components into new leases and how to start the process toward NZE in existing buildings, please review the NZE Leasing Best Practice Guide.

Myth #4: NZE is for someone else to take on, not me.

You can take action today regardless of your role in the building sector. Rocky Mountain Institute is scaling the adoption of NZE-leased buildings by demonstrating the business case and laying out actionable next steps. Once informed, landlords and developers should start conversations with their internal teams as well as tenants around how they can integrate green lease language into their existing portfolio and consider NZE for their next new construction projects. Additional resources include:

 What’s Next?

Through the Boulder Energy Challenge, RMI aims to significantly accelerate the adoption of advanced green lease practices in Boulder. RMI will launch a Boulder-focused campaign, which will provide tailored trainings to building owners, tenants, and brokers, and work directly with four property owners/managers in Boulder to provide consulting and assistance. Click here to stay posted on local events!

RMI will also be presenting on best practices for NZE-leased buildings at the Getting to Zero Forum, April 17–19, 2018, in Pittsburgh. The Getting to Zero Forum is an opportunity for leading policymakers, design professionals, and building owners to come together to learn about best practices from successful projects and to collaborate on opportunities for NZE to transform the built environment. Register for the conference today!