Solving the Energy Efficiency Disconnect Between Tenant and Landlord

If you own a building and have tenants, you may not be motivated to do energy efficiency upgrades. If the tenants pay the utility bills, they will get all the savings while you pay for the upgrades. The landlord, however, may get to keep depreciation and, especially in 2016, special tax advantages. (See my column on federal tax benefits set to expire this year.) A green lease is one way to resolve this disconnect between landlord and tenant on energy savings.

A green lease and some green amendments are designed to allow the landlord and tenant to share energy savings and possibly maintenance savings. To show an example, I am sharing with you the final text of an amendment to one of my leases. It is not perfect but it shows the actual wording of an agreement that the tenant can understand. It was executed with only one revision.

Feel free to use the text below to help you get more projects implemented, even if you as landlord do not receive all the benefits. Remember – in addition to the benefits outlined in the amendment, the landlord still gets the depreciation tax benefits, and these can be significant.

I have color-coded the text to highlight advantages to the tenant, which are optional and can be negotiated. In other words, a landlord might not want to concede these benefits, but I did because this is a first such contract in my county and it wasn’t worth arguing over.

Moreover, my tenant probably wouldn’t have had the attention span to discuss all these details for such a small contract (their energy expense was only about $3,500 last year). If your tenant’s energy expenses are larger or your investment is larger, you may choose to negotiate away the red-colored portions of the amendment.

Utility Savings Amendment:

Landlord shall complete at its sole expense for all costs associated with purchasing, labor, and installation of LED lighting fixtures and/or energy efficient HVAC upgrades. In undertaking and completing such work Landlord shall engage the services of professional, licensed, insured and competent people. Tenant agrees to reimburse landlord 50% of all electrical energy bill savings[1] per month if, and only if, the following requirements are met:

1. The baseline kWh charge for cost savings is capped at a rate of $0.13/kWh[2] (2015 average charges) regardless of what the actual kWh charge is for the current electrical billing month;
2. The monthly baseline for comparing kWh savings is permanently fixed at the previous year’s corresponding month, prior to any energy saving LED light fixtures or HVAC systems being installed (Current baseline months are August 2015 – July 2016);
3. If no kWh savings are accrued by tenant in a given month in relation to the fixed baseline corresponding month, no savings payments shall be made to Landlord for that month;
4. This Amendment expires when the current Lease expires on 2/28/2018, regardless of whether or not the Lease is renewed. However, if Lease is renewed, Tenant will be willing to renegotiate a new Utility Savings Amendment that is to be agreed upon by all parties prior to it taking effect;
5. Reimbursement will be capped at 50% of the overall costs of aforementioned LED light fixtures and/or energy efficient HVAC upgrades[3];
6. If Tenant vacates the premises prior to the current expiration of Lease, Tenant will have no further obligation to continue reimbursements payments (related to this Amendment) to the Landlord.

Is a Green Lease Worth It?

Some of you might look at the amendment above and wonder – Was it worth it?

I say yes. It represents progress toward a society that places more value on energy. But there are some tangible reasons, too. In my case, I am going to upgrade the lighting and HVAC systems, which will cost me about $20,000. Because of the 2016 energy tax deductions, I will be able to depreciate an additional $14,400, bringing the total deduction to $34,400.

If I consider that about one-third of a tax deduction is equivalent to a tax credit, then I have about $11,467 in direct benefit. If the energy savings occur, the Tenant could repay me up to $10,000 over a number of years.

I probably won’t get all that back, but I have made my tenant more comfortable and I probably would have had to upgrade the 15-year-old HVAC system anyway. Thus any shared savings that I receive is an extra benefit to me.

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