Increasing the effectiveness of green leases: stakeholder collaboration holds the key

Citation

(2019), "Increasing the effectiveness of green leases: stakeholder collaboration holds the key", Annals in Social Responsibility, Vol. 5 No. 2, pp. 42-44. https://doi.org/10.1108/ASR-08-2019-047

Concern for environmental protection has intensified to the point where very few business aspects escape close scrutiny. The growing power of the green lobby is such that any indifference to issues raised is an unwise stance to adopt.

Sustainability and buildings

In more recent times, the effect of commercial buildings on the environment has increasingly come under the spotlight. That operating such properties generates substantial amounts of greenhouse gases is one reason for such attention.

Creating a sustainability agenda for real estate was something of a logical response. However, proposed initiatives were initially met with skepticism due to a variety of real or perceived barriers. Most of these related to higher costs with regard to such as construction and certification among other issues. Enthusiasm has replaced trepidation though and stakeholders are now generally more willing to make a financial contribution toward sustainability measures.

Potential benefits up for grabs have obviously helped sway their thinking. Research in the USA has shown that water conservation, access to natural light and sophisticated HVAC systems are among elements recognized as enhancing the value creation of buildings. Furthermore, tenants are often willing to pay a premium for sustainability features that some regard as boosting their competitiveness. The possibility of recouping investment through energy and water cost savings adds to the appeal for different stakeholders involved. Grants, tax reductions and other government incentives likewise help increase interest in sustainable buildings.

Green leasing

This growing emphasis on including sustainability measures in commercial properties has led to the emergence of “green leasing.” The expression refers to a voluntary arrangement between landlord and tenant to ensure that the rented building is operated in a sustainable manner. Terms are mutually agreed and included in the lease agreement alongside more conventional clauses.

Green objectives are identified in the agreement, which also incorporates a governance framework to help attain them. Targets typically relate to environmental performance, operational performance, monitoring and reporting and provision of feedback.

Few contracts will produce the intended outcomes unless all parties involved are prepared to work closely together. It is certainly no different here. Collaboration can certainly not be taken for granted though. It often happens that landlord and tenant have different agendas to pursue. For instance, landlords are likely to be attracted to measures which make operations more cost-effective. But any enthusiasm on the part of tenants tends to be minimal unless sustainability offers them some significant benefits. In such circumstances, conflict rather than harmony becomes the order of the day. A green lease might help address barriers caused by these so-called split-incentives between the parties.

Prospect of these tensions arguably increases the importance of the input of the facilities manager. In the past, wider service provision was the remit of facilities management (FM). But growing importance attached to sustainability and the growth of green leases has triggered a shift in focus. Performance is now the leading priority, indicated by the degree of emphasis afforded to issues including energy and the quality of the indoor environment.

Any assumption that a facilities manager would be a panacea on these occasions might prove somewhat misguided. If anything, their presence frequently adds to the problem. The manager functions as the “agent” for the landlord, who is the “principal” in the lease agreement. Since considerable scope also exists for conflict in their working relationship, an additional “incentive gap” is created.

The agent is charged with looking after the operational and maintenance aspects of the building. This serves the interests of the principal, who would normally have scant involvement in and awareness of such issues. If communication between the pair is lacking, the landlord is faced with making important decisions based on insufficient performance-related information.

Key challenges and how to address them

In a comparable vein, the agent is also often starved of important details. He or she also has responsibilities toward tenants, yet it is common to have limited knowledge of them. Information gaps likewise exist with regards to terms and conditions of the green lease. It would therefore be a step in the right direction to have FM represented on the formal Building Management Committee (BMC) which can be set up as part of the monitoring process, does not always happen though. In fact, some facilities managers only have contact with the BMC through third-parties. Such flawed logic is further exacerbated when FM is outsourced, as is often the case.

Problems are clearly unavoidable while this “information asymmetry” prevails between principal and agent. Poor communication invites misunderstandings that can enhance the already challenging task of managing different expectations of the various stakeholders concerned with the green lease.

Unintentionally or otherwise, keeping the facilities manager out of the loop is hardly the smartest move. Not affording them total control of buildings’ operation is similarly questionable. Then there are the conflicts of interest that seem to frequently arise. One reported instance of this is the belief among certain facilities managers that real-time smart systems would enhance the reporting process and positively impact on energy usage. However, the landlord in question gave their idea the thumbs-down. His view was that the benefits were not enough to justify the investment.

Facilities managers are primarily remunerated for duties relating to operations and maintenance. Evidence indicates that financial rewards linked with sustainability are at best minimal. So given the absence of incentives, the obstacles noted above could lower their inclination to perform duties that can ensure lease effectiveness. Any such reluctance could well cause problems for the landlord further down the line. For example, tenant retention becomes more difficult if the lease does not deliver lower energy bills, superior amenities, CSR recognition and other benefits promised to them.

Many of these difficulties could be avoided if all stakeholders become more willing to work together for mutual gain. Discussion at the outset is important and needs to be backed up subsequently with regular communication. Commitment on all sides and incentive gaps and information asymmetry would soon become less prevalent.

A possible outcome of more effective communication could be that the strategic importance of FM is recognized. A sound move at this stage would be to appoint an in-house facilities manager as this option is more suited to strategic-level services. It would also increase scope for facilities managers to devise low-cost maintenance strategies to enhance performance and undoubtedly win landlord approval.

Comment

The review is based on: “Ensuring environmental performance in green leases: the role of facilities managers” by Raufdeen Rameezdeen et al. (2019), published in Facilities. The emergence of green leases has increased the emphasis on incorporating sustainability goals into the operation of commercial buildings. However, such leases will only deliver if stakeholders involved are committed to working together instead of pursuing different and often conflicting agendas.