New York tries to help landlords, tenants pick 'low-hanging fruit'

NEW YORK -- In 2007, when Mayor Michael Bloomberg unveiled his plan to cut this city's greenhouse gas emissions by 30 percent compared to 2005 levels, most of his aides had only a vague idea of how the city might reach the goal by Bloomberg's deadline, which was 2030. But they knew that a major part of the solution would have to involve buildings.

New York City has more than a million of them, including a large collection of the oldest, draftiest, most soot-spewing buildings in the United States. Unlike in most major cities, where 40 percent of carbon dioxide and other so-called greenhouse gases come from buildings, 75 percent of New York's emissions come from heating, cooling, powering and lighting buildings.

That posed a problem. The mayor could use the power of regulation to stiffen building codes and enforce other "green" practices, which would mainly apply to retrofits and new buildings. He could lead in updating city-owned buildings. He could preach that the favorable economics of so-called green buildings are the wave of the future.

But the great majority of the city's existing building stock still appeared to be beyond the city's legal and financial reach. Since the 1930s, when New York's building codes were written, there had been very, very little happening by way of making buildings more energy-efficient.

Many people speak of energy efficiency as the "low-hanging fruit" among the cluster of difficult issues surrounding climate change. That might be true in theory, but when it comes to buildings, the "fruit" is difficult to harvest, explained Greg Hale, a veteran New York real estate attorney and property investor.

"There are very tiny pieces of it to be found in a large number of buildings," said Hale, referring to the savings that might be gleaned from making buildings less energy-guzzling.

He explained that until recently, energy costs were regarded as minor items on the typical landlord's balance sheet. "In the high-flying days, you thought your rents were going up 5 percent a year forever." And beyond that, New York's landlords and tenants faced what the experts call "split incentives" that left both sides with little interest in creating mutual energy savings.

Who pays for the long, hot showers?

Many of the city's apartment dwellers and office tenants have no electricity meters, so they have no reason to shun long, hot showers or to temper the air conditioning on hot days. The landlord pays the energy bill, whatever it is.

Meanwhile, the standard commercial rental lease requires the landlord who upgrades heating or cooling systems to pass all of the resulting energy savings to the tenants. That left the landlord little reason to invest in a new heating and air conditioning system. If the tenants get most of the savings, why bother?

Moreover, when Mayor Bloomberg began talking about his climate change efforts, the real estate community was spooked, "and I think with good reason," said Angela Pinsky, an urban planner who then worked in Bloomberg's office. "The city was sounding very aggressive. It took a position that it [reducing climate-changing emissions] was good at almost any expense."

Bloomberg's task forces, she explained, had to rethink the wisdom of a regulation-heavy approach. "We would say, 'Oh, let's roll this out.' Well, you can't just throw plans out there and expect people to go from 30 miles per hour to 90. What you're asking people to do is change their behavior."

Then there was Vijay Modi, a professor of mechanical engineering at Columbia University, who had the idea of making a computerized map, based on the size of buildings and ZIP code, of energy consumption data that would give each landlord a rough measure of his or her building's efficiency against the competitor's building across the street. "You want to know whether you are doing better or worse in your own class of people," said Modi.

During the next five years, a team of 200 experts, including Modi, Hale and Pinsky, found ways to improve the city's approach. Bloomberg did, too, using some polite arm-twisting to get 29 major institutions, including hospitals and universities, to match the city's pledge to reduce its emissions from buildings by 30 percent in 10 years.

According to city officials, more than 129 large city-owned buildings have had their energy systems retrofitted and another 114 projects are in the works. Almost 2,800 city buildings have had their energy use benchmarked, so their energy consumption is available on a website.

Aiming at 16,000 buildings

But leading by example and volunteer efforts only get you so far in New York. The city reached out to the experts to examine the legal changes it would need to reach a much larger base of buildings. This resulted in a package of laws called the "Greener, Greater Buildings Plan," which was approved by the City Council in December 2009.

Three of the laws targeted 16,000 of the city's largest private buildings, roughly half of the built area in New York. One law puts professor Modi's mapping idea on steroids. Rather than estimating a building's energy use, it requires building owners to disclose their annual energy use to the city. The city then will give each building an overall energy efficiency score.

In September the scores, or "benchmarks," will be posted on a public website, which will take much of the traditional mystery away from who pays what amount for the energy bill in building X, Y or Z.

Another part requires energy efficiency upgrades to be part of all renovations and repairs. A third requires detailed energy audits showing how efficiently energy is used in a building every 10 years, and a fourth requires the use of sub-meters to measure the use of electricity by large tenants and energy-efficient lighting upgrades by 2025.

"This is a big deal," asserted Uwe Brandes, a senior vice president of the Urban Land Institute, a nonprofit research group serving the real estate community. "What this does is open the conversation." For the first time, landlords will know whether they are competitive with other buildings, and so will their tenants. "The real estate community is developing a whole new set of expertise around this, and they're not doing that for the public benefit necessarily. They're doing it for strategic business reasons."

Pinsky, the urban planner who helped the mayor's office develop the plan, has since joined the Real Estate Board of New York, representing 12,000 brokers and building managers and owners, as a senior vice president. "Over time," she said, "building owners have realized the city isn't trying to tax them to death; they're trying to do something that's good -- and that it is in their long-term interest. In New York City, landlords and developers are some of the most aggressive in the world. They want to create a premier product."

'Allocating the winnings'

The final piece of the puzzle, called an "energy aligned lease," is not a law but a newly written clause for rental contracts. The idea came from Hale, the veteran real estate lawyer and landlord. He joined the Natural Resources Defense Council to work on it because plans to curb greenhouse gas emissions did not seem to be making much headway at the federal level.

Hale helped organize a task force that included landlords, tenants and brokers to draft a clause that would have both landlords and tenants agreeing to share the savings of more energy-efficient retrofits. That would give the landlord more incentive in the form of a shorter time period to get paid back for a retrofit. Meanwhile, the tenant would get a rental bill reflecting lower energy costs. "It's a matter of allocating the winnings," explained Hale.


Overall, Bloomberg has estimated his building plan will save New Yorkers $750 million a year in energy costs. The mayor showed up last year for the signing of the first energy-aligned lease, saying it "breaks new ground."

The lease was signed between WilmerHale, an international law firm, and the owners of 7 World Trade Center, a new building at the foot of Manhattan. Eric Friedman, managing director of facilities development for the firm, said it signed a 20-year lease for five floors in the building.

"We're in it for the long haul," Friedman said. "Technology changes every day. Next year, something might come out that makes a building more efficient." If it does, both the law firm and the landlord, he explained, will share in the investment and the savings.

According to Brandes of the Urban Land Institute, a half-dozen other cities, led by Philadelphia, are engaged in passing building legislation similar to New York's. Hale, the NRDC lawyer, is developing a workshop to explain the new lease to officials and building owners in Chicago, Washington, D.C., and other cities.

"A lot of city administrators are looking to learn about this. The beauty is that it's pretty low-cost," said Hale. "We're not asking for big money, just trying to share a good idea with building owners."

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