Say you are the CEO of a commercial real estate firm whose large industrial and office portfolio has changed dramatically in the last 18 months.
The annual report to investors is coming up and you know they’re going to grill you on ESG. The problem is, you don’t have the data they’re looking for: portfolio-level transparency into carbon emissions.
That’s because the portfolio is primarily triple net leased, meaning tenants pay their utility bills directly and there’s little to no access to that data.
Truth is, your teams have been doing the right things. Whenever there is a tenant move out or other major project, the site is evaluated for LED retrofits, EV charging, solar demand generation and more.
But at the end of the day, there’s simply no way to quantify that effort. There’s no baseline for portfolio-level emissions today and no way to prove to investors that environmental metrics are moving in the right direction.
And quantification is everything. Raising capital to scale the portfolio has essentially become dependent on it.
Green leases
One of the FAQs in the GRESB reporting framework is:
I know that performance indicators are a substantial part of my score, but many of the assets in my portfolio have NNN leases and I do not have access to utility and waste consumption information. How can I successfully report within this category?
Their answer: do the best you can.
Unfortunately, that often means being limited to the energy consumed by the lighting in the parking lot. While that might have been sufficient to “check the box” a couple years ago, it’s becoming shakier ground to stand on.
There’s no silver bullet solution for getting this data, but there are several paths to pursue.
The first step that should always be pursued is to ensure that all new leases are “green leases,” which include a clause to have the right to collect utility data.
In some cases, the incorporation of green clauses is not limited to new leases. Where a lease is already in place, owners and tenants can enter into a Memorandum of Understanding (MoU) which provides a roadmap for co-operation between the parties on sharing data and improving the environmental performance of the property.
But this is a long term strategy. It takes years or even decades to rollover and/or update the leases for an entire portfolio. So, while the work on green leases should begin today, it can’t be counted on in the near term.
Utility-based strategies
The other strategy is to work directly with utilities to get the data. However, this approach can only be used when the utility serving a specific building or portfolio makes whole building energy use data available to third parties.
For example, ComEd, a major utility in Illinois, offers Energy Usage Data System (“EUDS”) tools via a web portal through which building owners can access whole building electricity data.
While there is increasing pressure on utilities to participate, these types of initiatives have been decades in the making and changes can’t be counted on in the short term.
In cases where the utility does not make the data available to third parties, there is an option to try and create a mechanism and incentive for tenants to share utility bills manually. Monthly uploads could be performed through a secure FTP, through email or through a dedicated online portal. On the backend, software can scrape these documents to pull out the relevant information and bring it to life in reporting.
This is almost always a dead-end, but it may be worth pursuing as an effective, if not elegant, solution.
Clearly however, these strategies are far from a sure bet in a large and regionally diverse portfolio.
One more option is for a third party to perform manual monthly meter readings of the utility meters at each property. While this would only capture raw consumption data, software can dynamically determine the utility rate and the emission factor to translate this into useful ESG data, such as carbon emissions.
The problem is that this requires tenants to grant access to the third party each month, a non-starter in many cases.
Digital metering
Sometimes, the only strategy is to just go direct to the source.
Digital metering (or smart meters) have been around for a long time. About 10 years ago, they were billed as the solution to bring energy usage to life in buildings.
However, it eventually became clear that, even though it was real-time data of building energy consumption, it was not actionable because it was not granular enough.
For example, if there was a spike in usage, it still required a thorough analysis by a trained professional to begin identifying the root cause of the problem.
With the rising need for data for ESG reporting and the significantly lower costs compared to a decade ago, digital metering is having a comeback.
The truth is, for the level of reporting that’s required today, real-time data is probably overkill.
But, if it’s the only way due to the particulars of triple net leases, it’s worth exploring what the additional benefits of real-time digital metering over just utility bill tracking could be.
First, ESG frameworks like GRESB aren’t just measuring performance, they’re tracking the relative level of transparency that a portfolio can provide. Demonstrating, even qualitatively, that there’s real-time utility data may give a leg up in the eyes of investors.
Moreover, all those activities talked about earlier such as LED retrofits and solar generation generally require expensive and time consuming measurement and verification (M&V) afterwards. Real-time digital metering essentially automates M&V and makes it as easy as pulling up a dashboard.
Of course, there are potential complications such as potentially needing to access tenant spaces for the installation and tenant facility managers insisting on a power shutdown (even those are not required with new metering technology).
But given the need and the challenges with the other options, digital metering is being seen as the bridge for triple net leased assets.
Importance of ESG in NNN Leasing
The importance of ESG (Environmental, Social, and Governance) when utilizing a triple net (NNN) lease structure cannot be understated. ESG is a set of criteria used to measure the sustainability and ethical performance of an organization or company. In commercial real estate, it is increasingly important for companies to have a good ESG score in order to attract both tenants and investors alike. When correctly done, bridging the gap between NNN leasing and ESG can give your company a competitive advantage in your market while also improving your property's desirability.
When employing a triple-net lease structure, the tenant is expected to cover all expenses related to the property. This includes but is not limited to utilities, taxes, and insurance. Each of these factors can have a substantial impact on their surrounding environment. When gone unmonitored, poor ESG scores can quickly lead to higher costs for both tenants and investors. As such, having a strong ESG score when using a NNN lease structure will help protect both parties from unforeseen liabilities.
Under pressure to execute a more robust ESG strategy? Schedule a demo of the Enertiv Platform and speak with one of our consultants.
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