Principal-agent Or Split-incentive Problem.pdf

What's in a Green Lease? Measuring Impact on U.S. Office Sector (2015)

This report by the Institute for Market Transformation (IMT) explores the potential impact of green leases on energy consumption and cost savings within the U.S. office sector.

Key Findings:

Energy Savings Potential: Green leases have the capacity to reduce energy consumption in offices by 11-22%, translating to significant utility cost savings—up to $0.51 per square foot. This equates to potential annual savings of $1.7-$3.3 billion for the U.S. leased office market.
Split Incentive Problem: Market failures, particularly the principal-agent problem, have led to suboptimal energy efficiency in commercial buildings. Green leases offer a solution by aligning the interests of landlords and tenants through split incentive mechanisms.
Benefits of Key Green Lease Clauses:
Cost Recovery Clause (Split Incentive): Allows for cost sharing between landlord and tenant for energy efficiency upgrades, promoting joint investment in savings.
Energy-Efficient Tenant Buildout: Promotes the use of ENERGY STAR appliances, lighting controls, and efficient plug loads during tenant fit-out.
Submetering: Enables individual tenants to track their energy consumption, fostering accountability and potential for further efficiency measures.
Building Commissioning: Ensures buildings are designed and constructed to operate at peak efficiency.
Corporate Sustainability and Green Certification: The report highlights leading companies adopting green leasing practices as part of broader sustainability initiatives.

Conclusion:

The report emphasizes that green leases offer a powerful tool for increasing energy efficiency in the office sector, delivering both environmental and economic benefits to landlords and tenants alike. By leveraging lease structures as a mechanism for incentivizing energy savings, significant cost savings can be achieved while contributing to a more sustainable built environment.