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Green Initiatives and the “Split Incentive” Conflict

It’s Not Easy Being Green.

Last week, we had a post concerning NYC’s Greener, Greater Buildings Plan, which was enacted to install “green” performance requirements for buildings in New York City.

One issue that has arisen in the context of this initiative is the incentive, or more accurately, the lack of incentive, on the part of building owners to make capital improvements to their buildings to become more energy efficient.

The reason owners are not motivated to make these types of capital improvements is because most commercial leases are set up so that tenants pay their percentage share of the building’s operating costs while owners pay for capital improvements.  Therefore, owners would be the party expending funds to make the building more energy efficient, while the tenants would be the ones reaping the benefits as their energy costs decrease.

One suggested solution to what is commonly referred to as the “split incentive” conflict, is to create “green leases,” which incorporate sustainability clauses.  These clauses would provide for a shared incentive approach whereby the energy savings would be shared between tenants and owners.

While it is still too early to gauge the exact manner in which owners intend on addressing this issue, the city’s sustainability office is working on model language to be incorporated into leases to properly motivate owners to meet the increasing demand for more energy efficient buildings.

Nahum Palefski, Esq.

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