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The Institute for Market Transformation offers a possible solution

Local Law 97 was touted as an ambitious plan to reduce the Big Apple's carbon emissions. Passed by the City Council in 2019 as part of the Mayor’s New York City Green New Deal, the law requires most New York City buildings -- over 25,000 square feet -- to meet stringent carbon emissions caps starting in 2024, or face significant penalties.

Typically, building owners pay for energy efficiency investments, while tenants (who are responsible for about 50% of all energy consumption in commercial buildings) often do not do so. To balance the economic burdens and incentivize tenants to contribute to the shift to energy efficient measures, the Institute for Market Transformation released a model “high-performance lease” that contains provisions mandating compliance by both parties with certain energy efficiency and carbon-emissions requirements.

Some of the key provisions include the following:

  • Setting Benchmarks: The model lease sets forth energy consumption goals for the building and the leased premises, the capital improvements needed to meet these goals, and, as applicable, design requirements that building tenants must satisfy to realize the leased premises’ energy consumption goals.
  • Transparency and Accountability: The form requires that sub-meters be installed in rental spaces and in building common areas so that landlords and tenants have equal access to information about energy consumption in the building and leased premises. The model lease further mandates that energy consumption reports be made available to both parties for review and inspection.
  • Shared Responsibility: Both landlord and tenant, per the model lease, are to share the costs of meeting the energy conservation obligations. By way of example, the lease allows landlords to pass through to tenant, as an operating expenses, certain capital expenditures required to meet the building performance standards. Tenants, on their part, must comply with the energy standards and design criteria for the leased space, and landlord can offer rebates or other concessions to incentivize tenants to make such improvements.
  • Routine Recommissioning: According to the model lease, building systems, equipment, and operations are to be periodically tested to ensure optimal energy efficiency and to identify and address any issues. It also recommends recommissioning of the base building systems and common areas, as well as individual leased tenant spaces.
  • Mitigation Plan: If the building falls short of its energy consumption goals, the new form mandates that the owner work collaboratively with all of the tenants to establish an energy optimization plan for the building and each leased space. Additionally, if a particular tenant exceeds its individual energy cap, the model lease allows landlord to charge that tenant for any recommissioning that may be needed. Landlords may also be able to pass on any penalties incurred that may be equitably attributable to the tenant’s over-consumption of energy.

As commercial building owners look to implement plans in compliance with Local Law 97, the Model High Performance Lease provides a way for landlords and tenants to work collaboratively to help realize the city’s goal of reducing carbon emissions and reducing the impacts of climate change.

But given that NYC operating costs are already significant enough, and are currently burdensome for many commercial tenants, is a storm brewing ahead?   (We think so.)

SOURCE: https://www.imt.org/wp-content/uploads/2021/07/IMT-Model-Performance-Based-Lease-Template-July-2021.pdf