Triple Net Lease? Energy Upgrades Still Benefit Landlord, NFMT Speaker Says

So-called “split incentives” are a familiar challenge when it comes to justifying energy efficiency upgrades for buildings with triple-net leases, where the landlord passes through the cost of tenant energy use. When a tenant has a triple net lease, the landlord pays for most of the capital cost of energy saving measures, but the savings go largely to the tenant, in the form of reduced energy bills — thus the term “split incentives.” The issue is that the amount of expense is disproportionate to the savings the landlord receives.

Split incentives concern many landlords, but that issue is not the whole story. Even with triple-net leases, landlords can reap significant benefits.

Speaking at NFMT Baltimore 2017, Nathan Mitten, senior manager of property standards and improvements for Kimco Realty Corporation, identified factors that have helped justify extensive LED retrofits at Kimco properties with triple-net leases. Kimco is one of North America’s largest publicly traded owners and operators of open-air shopping centers.

A key consideration, said Mitten, is qualitative gains. The LED upgrades not only saved energy, they also made a significant improvement of the appearance of the properties, as well as in safety and security. The gains were so substantial that properties were willing to invest in the new LED lights as a way to become more appealing to customers.

Another benefit had to do with CAM (common area maintenance) charges. Those charges vary across leases but may include energy costs for common areas like parking lots. Even though the energy savings from the LED upgrades didn’t flow through to Kimco directly, the company did benefit from the reduction of CAM expenses that resulted from the upgrade. Leases cap the amount of CAM charges a tenant pays. With less of the CAM charges being spent on energy, more was available for other operational improvements.

This Quick Read was submitted by Edward Sullivan, editor of Building Operating Management magazine, edward.sullivan@tradepress.com. Click here to read more about energy efficiency on Facilitiesnet.com.

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