Upgrading Tenant spaces-Who is Responsible?

Determining the responsible party for a lighting retrofit is a common question between the tenant and the owner, and in the back-and-forth process there is always missed opportunity on the owner’s part.

It is, without a doubt, in the owners best interest as he is basing the rent off the property value in total, meaning land value, building upgrades, amenities available to the tenant, etc. Any upgrade or change which benefits the tenant is reason for a base price increase.
No matter what, the tenant has to pay an out-of-pocket expense besides the rent. If you can lower their utility cost (a major part of their out-of-pocket expense) while raising the rent simultaneously, however, still being lower than what their combined out-of-pocket and rent was previously, it will be to their advantage. When it comes time for scheduled rent increases and renewals, you’ll be able to lock the tenant in at a higher base price and schedule your increases from there.
From the tenant’s point of view, it is not always wise for the tenant to invest in improving the energy- efficiency of a property that it does not own, even if the lease makes the tenant responsible for electricity costs. This disincentive is even more pronounced if the remaining term of the tenant’s lease is less than the simple payback period of the energy-saving improvement under consideration.”
From the landlord’s point of view, there is often no incentive to invest in energy-saving improvements inside the tenant’s space, because many leases treat the electricity usage within the tenant’s space as the responsibility of the tenant. Even in those situations where a landlord or a tenant is interested in pursuing energy-efficiency measures, additional challenges must be faced. Communication between landlords and tenants is often filtered through third parties, such as brokers, attorneys and property managers. Lack of information on energy-efficient alternatives, lack of access to capital, and unnecessarily high hurdle rates are just a few additional barriers.”
This is an example of how you might approach your tenants to create a win-win situation for both parties:
“Mr. Tenant, I will pay 100% of the installed cost of energy-efficient lighting for your space. I intend to invest approximately $1 per square foot to redesign your lighting to provide state-of-the-art, flicker-free, high-color-rendering light with brand new fixtures. Lighting levels and fixture placement will be professionally designed to optimize the lighting quality in your space. As a result of this upgrade, your electric bill will decrease by about 35 cents per square foot per year. I only ask that you increase your rent payment to me by 80% of the 35 cent electricity savings. In other words, it is estimated that your electric bill will go down by 35 cents per square foot per year. However, your rent will go up by only 28 cents per square foot p/year. Any reduction in your electricity bill that is more than your rent increase (i.e., greater than 28 cents per square foot) will be yours to keep.”

Albrights’ Triple Win Package.

 

Lighting does not sell the building, but 9 out of 10 times, a tenant will choose a building with lower total operating costs than higher.

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