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How Landlords and Tenants Can Cooperate on Climate Change

August 16, 2021

Partnering with tenants is one of the most effective ways shopping center landlords can tackle climate change. It isn’t easy, but a growing number of landlords and retailers find it’s worth the effort. “We know that consumers, tenants and investors are all looking to put their dollars into sustainability,” said ICSC vice president of federal operations Jennifer Platt. “They want to see sustainability in the businesses they spend their money with.”

The data-access dilemma

Landlords need access to tenant data to help reduce greenhouse-gas emissions, starting with how much electricity and natural gas tenants actually use. As the adage goes, “You can’t manage what you don’t measure.” Measuring open-air center tenants’ power consumption can be especially difficult, given the prevalence of triple-net leases, under which tenants pay rent plus expenses. Utilities typically meter these tenants directly. The data-access dilemma is one reason green leases are becoming increasingly common in open-air centers. Green leases typically call for landlords and tenants to share utility data and contain other clauses aimed at sustainability goals.

“Getting access to electricity and natural gas consumption data is a key element to understanding Scope 3 [tenant-related] emissions and evaluating what opportunities exist to reduce such emissions,” explained Will Teichman, vice president of business operations for Kimco Realty, an early adopter of green leases. The EPA defines Scope 3 emissions as “the result of activities from assets not owned or controlled by the reporting organization but that the organization indirectly impacts in its value chain.” Scope 1 covers direct emissions from properties, while Scope 2 covers indirect emissions from electricity purchases for common areas and vacancies.

Kimco has ambitious goals on the climate front. By 2030, it plans to have reduced its Scope 1 and 2 emissions by 30 percent from 2018 levels and by 2050 to have net-zero Scope 1 and 2 emissions. It also aims by 2025 to set a Scope 3 goal. “If you’re committed as a company, like we are, to having a positive effect on the climate, you have to focus on Scope 3 emissions,” said Teichman. He estimates Scope 3 emissions account for 80% to 90% of emissions from open-air centers, versus 50 to 70% from enclosed malls, as tenants generally control a much larger portion of space at open-air centers. At malls, landlords control large interior common areas.

In May, the Institute for Market Transformation and the U.S. Department of Energy’s Better Buildings Alliance named Kimco a Gold Green Lease Leader, a designation the company has maintained since 2014. This year’s nearly three dozen commercial real estate landlord and tenant Green Lease Leaders own more than 2 billion square feet. Silver Green Lease Leaders have established foundational policies and business practices that reduce energy and water consumption in leased spaces. Gold goes to companies that also execute green leases and embrace operational best practices, such as energy-efficient tenant fit-outs.

The split incentive

Brixmor, a Gold Green Lease Leader since 2018, owns nearly 400 open-air centers nationwide and is working through solar power-adoption issues, particularly the split incentive that prevents many landlords and tenants from implementing solar. Large shopping center roofs may seem ideal for solar panels, but landlords sometimes have little direct financial incentive to install them, especially in triple-net lease environments in which most utilities are paid by tenants, according to a Brixmor case study. Meanwhile, most tenants, particularly smaller retailers, don’t have the roof space, lease duration and/or capital to justify their own solar projects.

Brixmor has agreed to lease roof space to renewable energy developer Blue Sky Utility at more than a dozen sites in California and expects to sign more in the Golden State and beyond. Under the typically 20- to 25-year leases, Blue Sky installs and commissions solar systems and sells power directly to tenants at lower rates than those charged by local utility companies. Blue Sky similarly sells solar power at a discounted rate to Brixmor for common areas.

A Blue Sky Utility solar installation at Brixmor’s Village at Mira Mesa in San Diego. Another, at Brixmor’s Puente Hills Town Center in Rowland Heights, California, is pictured at top.

That partnership and Brixmor’s own projects to supply some of its largest tenants with solar power are helping it meet ambitious sustainability goals. The company is on track to meet its goal of an installed capacity of on-site renewable energy of 20 megawatts by 2025. Most rooftop systems are 0.5 to 1 megawatt, “so it will take probably 30 properties to hit that goal,” said Brixmor senior vice president of operations and sustainability Daren Moss. “The actual production varies based on location and weather conditions.”

Over the past several years, Brixmor has reduced its electricity use and emissions significantly through LED lighting upgrades, according to Moss. By 2030, the company plans to have reduced its Scope 1 and 2 emissions by 50 percent from 2018 levels. By 2045, it plans to have achieved net-zero Scope 1 and 2 emissions. “If we want to reduce our properties’ impact on the environment, we need to work with our tenants and be thoughtful about how we provide opportunities for tenants to reduce their own emissions,” he said. “One of the ways we do that is through our solar program.”

Lines of communication

For its part, ICSC is helping landlords and tenants tackle the climate crisis and other sustainability issues by bringing them together to discuss priorities, challenges and best practices and to forge collective solutions.

In 2016, ICSC joined with IMT and the Retail Industry Leaders Association to found the Landlord-Tenant Energy Partnership, a coordinated national effort to reduce energy use across billions of square feet of leased commercial space. The partnership has enhanced communications between landlords and tenants by hosting workshops and webinars attended not just by sustainability professionals but also by their counterparts in property leasing, operations, marketing and other fields. “The purpose of the partnership is to get to the core of the challenges that landlords and tenants face when it comes to driving efficiency and sustainability forward,” said IMT associate director for private sector engagement Audi Banny. She noted a frequent mismatch between how landlords and retailers communicate about property-level expectations for energy efficiency. The Green Lease Leaders program, she said, has brought greater clarity to those expectations.

Landlords and tenants also will have opportunities to share information on climate-related initiatives at upcoming ICSC events. ICSC expects to hold the Beyond Sustainability Summit, an invitation-only thought leadership conference, during the first quarter of 2022. And at a working lunch at ICSC’s December event in Las Vegas — called Here, We Go. 2021 — interested participants will discuss developments in environmental, social and governance trends, including what has changed with sustainability expectations and practices since 2019.

By Anna Robaton

Contributor, Commerce + Communities Today

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