How can leasing and financing come together to reduce operating costs, improve building valuation, and support policy compliance? IMT, the National Laboratory of the Rockies, and Sustainable Investment Group came together to explore the current market conditions, leasing best practices, and examples that showcase how these tools come together to create win-win outcomes. This blog post provides a snapshot into the findings of our paper.
Key Takeaways
- A split incentive misaligns who pays for building upgrades and who benefits from the savings, and it’s the core hurdle high-performance leasing is built to solve.
- Demand for high-performance workspace is projected to outpace supply by 75% across major U.S. markets by 2030.
- Modified gross leases already make up 21% of the Atlanta market, a sign owners and tenants are already negotiating the terms that address the split incentive.
- In New York City, one REIT used quantified LL97 risk models and a dedicated lease addendum to build a high-performance lease that could transfer cleanly to a new owner.
- Getting lease structure right can raise asset valuation, lower tenants’ total cost of occupancy, and help owners avoid building performance standard fines.
Market Analysis
A high-performance building combines energy efficiency, and business value. A 2023 study by JLL shows that the demand for high-performance workspaces is set to outstrip supply by 75% across major U.S. markets by 2030. To achieve their full potential, high-performance buildings need high-performance leases. These leases include language that overcomes the split incentive by aligning financial and efficiency benefits of capital investment at the building level and supports collaboration and transparency between owners and tenants. This creates a partnership where both owners and tenants have the information they need to make smart business decisions about their spaces.
Green Lease Leaders sets the global standard for high-performance leasing best practices. Each year, companies who meet these best practices can earn recognition for their leasing work. The program acts as a window into leasing adoption and evolution. Each year, about half of Green Lease Leaders winners are new to the program. This demonstrates that high-performance leasing practices are continuously expanding through the commercial real estate sector.
Using the CoStar database, we analyzed over 11,000 leases in the Atlanta market to understand how current practices in one major market support high performance buildings investment. In this analysis, we combined several CoStar lease sub-types to align with industry standard categories.
Lease Types and Definitions
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Using these categories, we found that modified gross leases comprise about 21% of the Atlanta market. This demonstrates that owners and tenants are already negotiating utility responsibilities, cost-sharing, and how operating cost fluctuations are managed – all of which are elements of addressing the split incentive. While a modified gross lease does not always equate to a high-performance lease, the appetite for modified gross leases is an indication that the market is willing to negotiate clauses that overcome the split incentive.
Case Study: New York City
The full paper covers three case studies. The one in New York City illustrates several components of why high-performance leasing is important, and what it takes to implement.
In New York City, Local Law 97 (LL97) has changed building performance requirements for large existing buildings. One real estate investment trust (REIT) turned to high-performance leasing to overcome the split incentive and manage the potential financial liabilities associated with LL97. As a merchant-builder, this REIT was particularly keen to build leasing language that would transfer well to new owners. These were the challenges addressed with a high-performance lease:
Merchant-builders build properties and lease up the development with the intention of selling the building. With this execution strategy, merchant-builders typically have shorter hold periods than other types of building owners and often sell the property before permanent financing is in place.
LL97 risk allocation. Who pays for emissions penalties driven by tenant loads/operations?
Split incentive. As described in this paper in The Split Incentive section, under a traditional lease structure, the landlord typically funds improvements, but the tenant often receives the savings.
Data and audit access. Energy performance, compliance with LL97, and having the data needed to make smart business decisions requires data rights, audits, and cooperation.
Market acceptability. Lease language must be negotiable and financeable.
To develop their high-performance leasing strategy, the team reviewed Green Lease Leaders standards and worked with their general counsel to identify high-value clauses, craft transaction-ready clause language and operating requirements, and ensure enforceability. Through this process, the team built custom financial models; these quantified and allocated LL97 penalty exposure, audit costs, capital expenditure for energy conservation measures, and project savings benefits; and a specific NYC LL97 Addendum. This development improved tenant willingness to accept cost recovery clauses. This included allocation of cost and savings from a building capital investment, standardized pathways to align incentives, and clear apportionment of energy conservation measures. The REIT tested this strategy in early 2023 and then refined this strategy across their portfolio to industrial, multifamily, and office buildings with tailored riders. The high-performance lease became a diligence-ready artifact demonstrating risk governance, operating discipline, and a credible pathway to compliance and capital expenditure planning.
Prospective tenants, including those who were not in the Green Lease Leaders program or not being assessed LL97 fines, generally reacted positively to the high-performance lease. A tenant noted that they had “never seen it expressed like this,” referring to this quantified, apportionment-based structure rather than generic language. Implementation by a high-credibility partner (well recognized REIT/merchant-builder) with recognized market standards helped drive acceptance. The lessons learned and replicable elements include:
Quantification beats aspiration. Modeling LL97 exposure and CapEx/savings created negotiable clarity.
Clause library and clear governance/operating cadence. Implementation clarity made it easy to deploy across asset classes while staying transaction-friendly.
Aligned incentives. Acknowledge when the tenant is the savings beneficiary and build a payment logic that matches economics.
Buyer-ready narrative. Demonstrate high-performance leasing as a diligence-strength asset, not a marketing appendix.
Conclusion
High-performance leases are a critical tool to resolve the split incentive. These lease mechanics can have multiple benefits, including:
- Increasing valuation at sale of the asset
- Allowing the landlord to recoup CapEx for high performance building systems
- Lowering tenants’ total cost of occupancy
- Achieving capital providers, landlord, and tenants building performance goals
- Properly allocating and potentially avoiding building performance standard fines
- Improving initial financial underwriting metrics
Combining Leasing and Financing for Building Performance
Real estate deals have many pieces, several of which an owner cannot predict or influence. However, lease structure and other related high-performance factors are within their control, and can improve building and financial performance for all parties. To see additional case studies and market analysis, read the full paper.
Abstract
Emerging building performance programs, rising energy costs, and increased weather variability all raise risk for buildings and create new value propositions for energy efficiency technologies and building resilience strategies. High-performance leasing can dramatically improve building energy performance by (1) establishing shared goals for property owners and tenants and (2) strengthening communication and coordination on capital investments.
In this study, we will outline the value of high-performance lease language, the financial opportunities available when a high-performance lease is in place and how those two pieces enable cash flow savings, enhanced building performance, reduced operating costs, and improved building valuation. The analysis leverages real project case studies from various property types and reviews existing terms, conditions, and capital stacks of high-performance and traditional leases. These case studies will compare two scenarios: one with a traditional lease and conventional financing capital stack and a second where the property has a high-performance lease in place and an updated capital stack. This analysis will use indicators like utility cost-sharing, indoor air quality standards, and capital investment responsibilities to demonstrate performance-based and investment benefits which address split incentive challenges. We aim to demonstrate how high-performance leases support more reliable and effective investment models by linking lease terms and conditions to capital stack composition, acknowledging cash flow impacts of shared operating expenses, and potentially reducing tenant’s total cost of occupancy. The paper’s findings will build on previous cost valuation for high-performance leases and offer a practical pathway in scaling building energy efficiency and reliability.
