Lease structures and occupancy costs in eco-labeled buildings

Jeremy Gabe, Spenser Robinson, Andrew Sanderford and Robert A. Simons

Journal of Property Investment & Finance, 2019, vol. 38, issue 1, 31-46

Abstract: Purpose - The purpose of this paper is to investigate whether energy-efficient green buildings tend to provide net lease structures over gross lease ones. It then considers whether owners benefit by trading away operational savings in a net lease structure. Design/methodology/approach - Empirical models of office leasing transactions in Sydney, Australia, with wider transferability supported by analysis of office rent data in the USA. Findings - Labeled green buildings are approximately four to five times more likely than non-labeled buildings to use a net lease structure. However, despite receiving operational savings, tenants in net leases pay higher total occupancy costs (TOC), benefiting owners. On average, the increase in TOC paid by tenants in a net lease is equal to or greater than savings attributed to an eco-labeled building. Practical implications - A full accounting of TOC in eco-labeled buildings suggests that net lease structures provide numerous benefits to owners that offset the loss of trading away operational savings. Originality/value - The principal-agent market inefficiency, or “split incentive,” is a widely cited barrier to private investment in energy-efficient building technology. Here, a uniquely broad look at rental cash flows suggests its role as a barrier is exaggerated.

Keywords: Commercial real estate; Energy efficiency; Green building; Real estate investment; Split incentive; Sustainable real estate (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jpifpp:jpif-07-2019-0098

DOI: 10.1108/JPIF-07-2019-0098

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