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Energy Aligned Clause
Energy Aligned Clause

When it comes to negotiating expenses among commercial building owners and tenants, both parties often come to the table expecting a zero-sum game of winners and losers. In this environment, particularly within New York City commercial leasing practices, energy-efficiency investments have historically been difficult to achieve, due to the disproportionate burden of costs to one party. Fortunately, the Energy Aligned Clause (EAC) aims to create a "win-win-win" situation by sharing the costs-and benefits-among both parties, unlocking gains for building owners, tenants and the environment.

The "Split Incentive" Problem
Among various obstacles hampering energy-efficiency investments in commercial buildings, the "split incentive" problem has been a significant issue. It occurs when one party pays for upgrades, but another party reaps the financial benefits of the energy savings. In most situations, the split incentive problem occurs when building owners pay the capital expenses for energy retrofits to the base building, but tenants receive the financial benefits of energy savings through a reduction in their proportionate share of base building operating expenses. Tenants, on the other hand, are wary of agreeing to pay back owners for underperforming retrofits, committing to long-term payback periods and undertaking retrofits late in their lease periods.

How It Works
Working with a task force composed of members from the real estate industry, the New York City Mayor's Office of Long-Term Planning and Sustainability has developed model lease language that solves this problem in modified gross commercial leases-the most common commercial lease type in New York City. This model lease language creates a pass-through structure where both sides share the costs and benefits of energy retrofits by agreeing on a predicted amount of annual savings and having the tenant pay the owner recovery costs based on the predicted savings. A protective measure against underperforming retrofits, called a "performance buffer," is put in place by setting annual payments at 80 percent and extending the payback period by 25 percent. This makes it easier for the tenant to pay back recovery costs by paying in smaller amounts over a longer period of time, as agreed upon by both parties.

For more information on how the lease works and to read the model lease language, please see the following:

Urban Green Council, the New York chapter of U.S. Green Building Council, provides a video presentation of the EAC. To watch the video, visit Urban Green Council.

EAC in Action

This language has been endorsed by parties on both sides of the table-major tenants and owners, alike. New commercial leases for buildings such as the 7 World Trade Center have incorporated the language into their lease agreements. The City has also committed to using the language in leases. Read the press releases below for more information.

Read the City’s press release: April 5, 2011 - Mayor Bloomberg Announces First Ever Lease for Commercial Office Space that Contains Groundbreaking Language that Incentivizes Energy Efficiency 

Read the press release: September 19, 2011 - MSCI to Move to 7 World Trade Center 

Since June 2012, the City of New York has signed the following leases for over 400,000 square feet using the EAC:

  • 100 Church St. for 285,314 square feet - June 14, 2012
  • 2865 8th St., Brooklyn for 21,651 square feet - August 8, 2012
  • 100 Church St. for 102,000 square feet - September 27, 2012

New EAC Outreach

Recognizing the potential for EAC to be adopted on a large scale, several organizations have partnered to launch a new outreach campaign to spread awareness about EAC to key players in the real estate industry. The joint effort is headed by the New York City Mayor's Office of Long-Term Planning and Sustainability and Urban Green Council. Sponsors include the New York State Energy and Research Authority (NYSERDA), the Natural Resources Defense Council (NRDC), the City of New York, the Real Estate Board of New York (REBNY), and the Environmental Defense Fund (EDF).

Visit Urban Green Council's Energy Aligned Clause page to learn more.

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