Lease Structures & Occupancy Costs in Eco-Labeled Buildings

Purpose: This research investigates whether energy-efficient green buildings tend to provide net lease structures over gross lease ones. It then considers whether owners benefit by theoretically trading away operational savings in a net lease structure. <br><br>Design: Empirical models of office leasing transactions in Sydney, Australia, with wider transferability supported by analysis of office rent data in the United States.<br><br>Findings: Labelled green buildings are approximately four to five times more likely than non-labelled buildings to use a net lease structure. However, despite receiving operational savings, tenants in net leases pay higher total occupancy costs, benefiting owners. On average, the increase in total occupancy costs paid by tenants in a net lease is equal to or greater than savings attributed to an eco-labelled building.<br><br>Implications: A full accounting of total occupancy costs in eco-labelled buildings suggests that net lease structures provide numerous benefits to owners that offset the loss of trading away operational savings. <br><br>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. <br>