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Green Landlords?

19 November 2007

Could FMs and occupiers be dictated to by landlords that adopt 'green leases'? Dave Wilson predicts that
'green leases' could bring financial incentives and penalties tied to tenant use of the facilities and landlord investment in plant and equipment.

SO FAR AS 'GREEN ISSUES' ARE CONCERNED, confusion and uncertainty afflict us all. As the recent spat over the proposed Severn barrage between climate change campaigners (for) and the ecological lobby (against) demonstrates all too well, there are no simple solutions, no purely beneficial measures available to us: everything seems to have a downside. For facility managers, building occupiers and landlords (and their assorted agents, advisers and funders) the drive towards so-called 'green leases' could create similar tensions between aspiration, legislation and practicability - unless we understand why it is happening and can take an informed approach.

In practice many FMs, like the population at large, are both worried and bemused by climate change and the various means proposed to respond to it. James Lovelock claims "a marked similarity between attitudes [in 1938] towards the threat of war and those now towards the threat of global heating. Most of us think that something unpleasant may soon happen, but we are confused ... over what form it will take and what to do about it. ...The Kyoto agreement was uncannily like that of Munich, with politicians out to show that they do respond but in reality playing for time"

Clearly we ought not to doubt the evidence of our own senses as well as the unanimity of the (at least) 928 published scientific papers on global warming. Our buildings account for around 52 per cent of overall UK energy consumption, so improved energy efficiency in buildings must have a significant positive impact on our collective contribution to climate change, on our costs, and on the economy of the UK. The question is whether 'green leases' are an appropriate response, and if so, why?

FM as policeman
Certainly organisations like Greenpeace and Friends of the Earth think so, and have advocated the adoption of green leases for buildings they occupy as tenants. But if you are an ordinary building occupier or FM caught in the middle of this fast changing landscape, then you probably need some help, not least because, according to the Sunday Telegraph3, under 'green leases' FMs are about to become police: "Office workers could be forced to turn off lights and use less water under proposals [from] .. landlords and their advisers." (my emphasis). Leaving aside for the moment why FMs should be dictated to by landlords, the reality is that enforcement rather than persuasion and education is being advocated. As this role is not a natural (or desirable?) one for FMs, we need to work out why it is being proposed for us.

The EU's Energy Performance of Buildings Directive will set out an 'energy rating' for a building similar to energy labels on domestic appliances to enable prospective buyers and tenants to compare the energy performance of buildings. What is happening under the move to 'green leases' is an attempt to link energy use, water consumption and waste management to financial penalties and incentives for tenants and landlords under the lease obligations.

That must be admirable, and we might hope that all responsible organisations would seek to do such things anyway in discharging their Corporate Social Responsibility commitments. There is, of course, a simply financial reason for doing all that. However, there is a risk that, once more, FMs face distorted priorities and potential conflict with their customers in pursuit of someone else's agenda, which might divert them from other, more effective, remedies.

For example, recently there have been negative comments in the media about office lights being left on at night in landmark buildings. But in practice FMs know that there are often perfectly good reasons for this - not only safety and security, but also the need for out of hours cleaning and maintenance and, especially in London, the number of people working to support global round-the-clock operations. In any case, lights may not be much of a contributor to the problem of global warming.

The issue of who determines priorities and delivers benefits is what is of particular concern to FMs. Most of them are actually perfectly well aware of the issues around energy consumption, waste and environmental impact and are striving to make real change happen. What constrains their ability to deliver is often organisational inertia - the gap between aspiration and delivery across the whole entity. To deliver a reduced impact requires senior corporate management commitment without which facilities staff cannot finance reduction measures or enforce behavioural change. There is no reason why such change can't be achieved, of course, and many FMs are driving, leading or supporting it in highly innovative and engaging ways. The payback period for such investment can be very quick - as little as six months according to research by Royal & Sun Alliance. For most organisations, education is a more natural route and cost effective process than imposition, and the whole organisational culture and processes often needs to change to meet these new challenges.

So, with that in mind, why is there still pressure for 'green leases'? Paul Jayson of global legal services business DLA Piper explains that landlords now face a critical problem which arises when a property is given an EPC rating resulting from the way the occupier behaves, which is likely to affect its value as an asset. Having a poor operational energy rating may affect the value and yield of the asset, but currently the investor has no direct control over the behaviour of the tenant, so is unable to materially improve the building's operational energy performance, and thus cannot maintain their asset value. This scenario is driving demand for a relationship through which landlord and tenant can work together to achieve optimum building performance. 'Green Leases' have emerged as a response.

Jayson explains that 'green leases' essentially address the log jam caused by the present landlord and tenant relationships. He believes that the existing separation of responsibilities between landlord and tenant is one of the most significant obstacles to improving the sustainability of the commercial building stock in the UK. The net leasing system creates a disincentive for landlords to make capital expenditure to improve the energy, water or waste efficiency of their property assets, since the financial benefits accrue to the tenant in the form of lower utility bills, rather than to the landlord in terms of higher yields. In addition, this is especially problematic in multi-tenant buildings where the landlord provides and manages most of the core building utilities. In this case in particular, 'green leases' enshrine firm mutual commitment to everyone's benefit.

Jayson says that there is no evidence yet of occupiers paying higher rents for buildings with strong sustainability credentials, even where the organisation claims in their CSR policy to try to reduce their carbon footprint. The market consensus seems to be that occupiers will instead become unwilling to pay prime rent for a building that doesn't have strong sustainability credentials - making capital expenditure a form of risk mitigation for landlords but not creating a scenario for the quick investment in change that is needed to tackle climate change.

Equally, tenants also have little incentive to invest capital on a building they are likely to occupy for a relatively short time when pay back times on some of investments often exceed 10 years. As lease periods become shorter, in line with tenant demands for greater flexibility and leases more aligned to business strategy, this further reduces the incentive for tenant investment in the property.

The upshot of this, especially where old building stock is being let, is the 'green lease' with financial incentives and penalties tied to tenant use of the facilities and landlord investment in plant and equipment.

If it is disappointing that this response is necessary then probably both landlords, owners of energy inefficient buildings and tenant organisations, failing to focus sufficiently on reducing utilities use fast enough, are both to blame. However, we ought not to lose sight of the fact that for FMs, while their building's environmental impact may be a major contributor, it may also be quite 'fixed' in the short term, and there may be more quick wins available elsewhere. Thus, there is a need for FMs to create rounded plans which look at the whole of their organisation's activities and promote change across the entirety, working with senior managers and directors.

Rounded approach
This is line, at least partly, with the BIFM's position4, which is to advocate a more rounded approach, including energy-use ratings for existing buildings, but extending to:

.... Greater involvement of FMs in building projects to ensure energy efficient design takes into account the whole life cycle of the building and how it will be used
.... A greater profile for the role of FM in energy efficiency
.... Inclusion of environmental reporting requirements in Business Reviews
.... Stressing the role of FM in advising on and implementing energy efficiency measures.

The risk with 'green leases' is that they become a substitute for a more rounded approach: symbolic, perhaps, of our desire for positive action, but creating a focus on buildings rather than organisational activity as a whole. Jayson agrees that lease obligations can achieve a certain amount of benefit, but they cannot do

There are both opportunities and pitfalls ahead as we all explore this new challenge. For example, we might think that business travel should be tackled more coherently. But the risk is of some 'green' responses being over simplistic. For example, homeworking may be an attractive contributor, reducing the size of an organisation's building requirements and reducing home to work travel - but who has yet calculated whether the energy used by all those individuals sitting at home is higher or lower than having them in one building?

There are no simple answers. 'Green leases' are a response to a particular local UK problem, but they cannot be the whole of the solution, and we should not allow senior management, landlords or the property industry to portray them as all that is needed if we are going to effect positive change. As a short term measure, the 'green lease' is far better than doing nothing, but it cannot, and must not, be the only response which property owners and occupiers develop in this changing world.

More info
1 The Revenge of Gaia, Penguin, 2007
2 John Lanchester in the London Review of Books, 22 March 2007
3 Jonathan Russell, Sunday Telegraph 16 June 2007
4 BIFM Energy Position Paper, January 2007

Link: DLA Piper

.... Dave Wilson is MD, Stratus Management Limited, a strategic management consultancy specialising in change within the international facilities and property industries. He is Deputy Chair of the BIFM.

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