Sustainable Property

How to contribute one's fair share

10-11-2022
The ESG policy of companies in relation to property mainly relates to the E for "environmental". In this respect, not only energy consumption and carbon emissions, but also material use, waste flows and water consumption play an important role. When it comes to the S for "social" in relation to property, one may think of relationships, reputation and working conditions. For the G for governance, one may think of a sustainability strategy and sustainability reporting. In the end, it is all about sustainable property.

The built environment accounts for some 40% of the total energy consumption in the Netherlands.

It is no surprise that energy consumption and carbon emissions play such a prominent role when it comes to ESG. The built environment accounts for some 40% of the total energy consumption in the Netherlands. Therefore, in order to achieve carbon reduction targets, the built environment will also have to make a substantial contribution.

In this chapter, we will outline the existing rules for owning and using buildings, the possibilities to make property more sustainable, market developments and upcoming amendments to laws and regulations in respect of sustainability and sustainable energy. We will conclude with several 'tips & tricks' for companies on the use and purchase of sustainable property.

Nearly Zero-Energy Buildings

Since 1 January 2021, permit applications for new dwellings and utility buildings (including offices) have been subject to the requirements of Nearly Zero-Energy Buildings (NZEB). The energy performance under NZEB is determined based on three requirements: a) the maximum annual energy demand; b) the maximum annual primary fossil energy consumption; and c) the minimum share of renewable energy expressed as a percentage. The NZEB requirements ensue from the Dutch Energy Agreement for Sustainable Growth and the European Energy Performance of Buildings Directive (EPBD).

On 15 December 2021, the European Commission published a proposal for revision of the EPBD. This revision is likely to result in stricter standards. Under Article 2.15 of the Activities (Environmental Management) Decree, a large variety of companies have been required, since as early as 1 July 2019, to take all energy-saving measures which can be recovered within five years. This applies to 'Type A' and 'Type B' companies, if the energy consumption per calendar year exceeds a threshold of 50,000 kWh for electricity and 25,000 m3 natural gas equivalents for fuels. Type B companies are establishments that are required to notify the competent authorities upon incorporation or in the event of a change, but do not need to hold an environmental permit, such as metalworking companies or workshops. Type A companies are establishments that carry out activities with less environmental impact, so they are not subject to a notification duty either, such as offices and school buildings. Type C companies are subject to authorisation. As a result, the Activities (Environmental Management) Decree is applicable to Type C companies to a limited extent only. Type C companies are usually companies in heavy industry.

In addition to implementing the energy-saving measures, the Type A and Type B companies that exceed the abovementioned thresholds are also subject to a duty to report once every four years to the competent authorities on the actual energy-saving measures taken.

Energy label

The Buildings Decree provides that an existing building must have an energy label. Starting 1 January 2023, using an office building of 100 sqm or more will be prohibited if that building does not at least have an energy label C (energy index of 1.3 or less). Small office buildings and monument buildings are exempted from this requirement.

By 2030, office buildings will likely have to obtain an energy label A.

This means that before 1 January 2023, some 65,000 office buildings in the Netherlands have to obtain an energy label C. Failure to meet this requirement will expose the user to a fine or even closure of the office building. According to an estimate by the Netherlands Enterprise Agency (RVO), 48% held this label on 1 July 2022. The RVO concludes that the pace of adjustment of office buildings in the run-up to 1 January 2023 is still very low. This is due, among other things, to the 'split incentive' problems. Over 60% of the Dutch offices are leased. The party bearing the costs of energy-efficient measures (often the lessor) is usually not the party benefiting from a lower energy consumption (the lessee).

Expectations are that office buildings will have to meet the requirements of an energy label A by 2030. Where installing LED lighting and adjusting the climate system in an office building can relatively easily lead to an energy label C without having to make too many structural modifications, an energy label A will require much more work on existing buildings. New buildings will generally meet the requirements of an energy label A (up to A++) upon completion.

Carbon emissions

Under the Dutch Climate Agreement, national and local government, companies and civil society organisations have agreed that the total carbon emissions in the Netherlands must be reduced by 49% compared to 2019 levels by 2030. Another dot on the horizon is 2050. By that time, the emissions of all greenhouse gases in the Netherlands should be reduced by 95%. The measures to be taken vary for each sector, and each sector sets its own targets. One of these sectors is the built environment. Property investors, for example, have set up programmes to determine (based on the carbon footprint per square metre) whether the property portfolios are rendered more sustainable at the required pace in order to meet the targets for 2050. This renovation is an investment, but is also partially subsidised, particularly through taxation, in order to expedite the decision-making process and, thus, the achievement of the sustainability goals. Below are some examples of the most common subsidies.

Subsidies and tax incentives

The government encourages energy-efficient and sustainable building. It often does so by reducing the tax burden. The Energy Investment Allowance (EIA) scheme offers a tax credit for investment in energy-efficient measures. The Environmental Investment Credit (MIA) scheme offers a tax credit for environmentally friendly investments, including sustainable buildings. The amount of the investment deduction is set at a percentage of the investment costs. That percentage is dependent on the asset and changes annually. Both schemes lower the entrepreneur's taxable profit.

The government encourages energy-efficient and sustainable building by reducing the tax burden.

Just as the MIA scheme, the Arbitrary Depreciation of Environmental Investments (Vamil) scheme is an investment credit aimed at investments that promote a sustainable built environment. This scheme promotes circular building by using fewer raw materials and re-using raw materials and construction waste. This may include materials such as concrete, but also the creation of a green roof or a circular steel construction with a take-back guarantee from the supplier in the event of demolition of the building, or a method to buffer rainwater underneath parking spaces.

It is also possible to qualify for an SDE++ (Sustainable Energy Production Stimulation) subsidy for the use of solar panels or sustainable heat. These incentives are included in the financial calculations of a property project, often from an economic and commercial perspective, but also increasingly focusing on sustainability and awareness of the environmental impact. As property is often developed with a view towards selling to institutional investors, who are increasingly looking for sustainable property portfolios and sustainable financing, energy-efficient measures must be integrated as early as the property design phase. For more detailed information on sustainable financing, see Chapter 4.

Sustainability certification

Several studies have shown that making property more sustainable has a positive effect on the value of the property. There is not yet any uniformity in these studies, so that it is not clear how sustainability measures should be assessed. This fuels the concerns surrounding whether, and to what extent, measures positively contribute to a better environment and whether the property should, thus, be valued at a higher amount. Still, there are several labels from reputable parties that are becoming increasingly common place. Below is a summary of the most frequently seen labels and methods of sustainability certification.

Making property more sustainable has a positive effect on the value.

The Dutch Green Building Council (DGBC), a nationwide active foundation committed to making the built environment future-proof, has introduced the term BREEAM in the property sector. BREEAM stands for Building Research Establishment Environmental Assessment Method. In the Netherlands, BREEAM-NL is used. In sum, this classifies the sustainability of an existing or new building. In addition, there are BREEAM-NL quality labels for demolition and for complete area development projects. The BREEAM-NL quality label is an assessment of sustainability on the basis of several aspects, including energy savings and efficiency, and water reduction, material selection and health. Classifications include ‘Very Good’, ‘Excellent’ and ‘Outstanding’.

It has taken several years for the investment market to recognise BREEAM-NL certification, but in today's European landscape, this is part of the ESG policy of nearly all institutional investors, such as pension funds and insurers, but also increasingly of non-institutional investors. It is not just the policy on the part of investors - lessees are also eager to lease sustainable buildings (see the section below on Green Lease). Not just from the perspective of energy and operational cost savings, but also from the perspective of their corporate social responsibility (CSR) and ESG policies. It is not just office users, such as commercial service providers, who will determine their own policy in that respect, but more and more clients will set requirements for corporate social responsibility on the part of their consultants, including housing, based on their CSR and ESG policies.

The requirement of obtaining a BREEAM-NL certification may be a condition for obtaining an environmental permit, for example for the realisation of logistics buildings surrounding Schiphol Airport. In that type of situation, there is no choice, and often solar panels, for example, form part of the design of the building from the beginning.

A counterpart of BREEAM-NL is LEED (Leadership in Energy and Environmental Design), set up by the US Green Building Council. Like BREEAM-NL, LEED can apply to both existing buildings and new buildings and, again like BREEAM-NL, it focuses on water conservation, material selection, and energy savings and efficiency. LEED includes silver, gold and platinum certifications.

In addition to BREEAM-NL and LEED, the WELL Building Standard (WELL) is a sustainability certificate which focuses more on the health of individuals in a building. This not only includes light, air and water quality (which BREEAM-NL and LEED also focus on), but also food and health in relation to reduction of sickness absence, labour productivity and welfare. A WELL certificate for a building often goes hand in hand with a BREEAM-NL or a LEED certificate. Another name that should not be left out of this list is GRESB. GRESB stands for Global Real Estate Sustainability Benchmark. This is an organisation that measures the sustainability performance of registered institutional and private property funds as part of their ESG policy by way of an annual survey. Such survey includes building information and energy and waste flows.

For new buildings, the design, the construction process and the material selection must be aligned with the sustainability quality labels that are being sought. Often, the design of a building includes a calculation that results in a GPR score. The GPR is the Municipal Code of Practice for buildings. It provides an overall picture of the sustainability of a building based on energy, environment, health, use quality and future value. Such a calculation is not a requirement for an environmental permit application, but several municipalities pursue a certain ambition level and grant a discount on the building charges if that level is met. The GPR calculation is also relevant to the calculation of several investment credits, such as MIA and Vamil.

The sustainability certifications described above may also lead to financial incentives through more favourable forms of financing, tax incentives and subsidies for both the developer, owner and the lessee of a building, in addition to lower energy consumption, less waste production and reduced carbon emissions. The certifications will be required for a large number of companies as part of their reporting duties, as they will apply to large companies starting in 2023 under the Corporate Sustainability Reporting Directive (CSRD) and similar reporting duties for financial institutions under the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR). For more detailed information, see Chapters 1 and 4.

Lease

When developing a new building, the lessor and the lessee can make arrangements in the lease agreement, in consultation with the developer, in respect of the construction phase of the project as to the requirements to be met by the new building. For example, the parties can agree that the roof will be made suitable for solar panels, that certain green areas/green roofs will be realised, or that requirements will be set for insulation. Such arrangements between the lessor and the lessee relate to situations where a building is tailored to a specific lessee, so that the lessee is closely involved in the development of the building. In these developments, the lessor, the lessee, the developer and possibly financiers work closely together to achieve the sustainability goals. As a rule, these are projects where the lessee sets high standards for a sustainable and high-profile office or commercial building. Before entering into a lease agreement, these lessees will often have thought about a sustainable location, for example close to amenities and with good public transport connections.

A Green Lease makes it possible to distribute the costs and revenues of sustainability measures.

For the phase following construction and for an existing building, the lessor and the lessee can make arrangements on sustainable use of the building. Green Lease is a term for a lease agreement leading to a sustainable result. In essence, a Green Lease contains performance arrangements on sustainable use and sustainable operation (management) of a building, the mutual responsibility to achieve those goals and the distribution of costs, revenues and risks in relation to ensuring sustainable use and sustainable operation (management).

A Green Lease is a useful tool for lessors and lessees to distribute the costs and revenues of sustainability measures between the lessor and the lessee. This offers a solution for situations where the lessor does not have any incentive to take sustainability measures, because that requires an investment on the lessor's part, while it is the lessee that benefits from those measures through a lower energy consumption. In a Green Lease, the parties work together to achieve certain goals. A Green Lease varies from the traditional distribution of responsibilities between the lessor and the lessee. For that reason, a Green Lease often contains several variations from the ROZ General Provisions (when an ROZ lease agreement is used). These variations may relate to the distribution of renovation obligations or responsibilities in the context of permits.

Starting in 2025, new commercial buildings with large roofs must have solar panels.

Examples of arrangements that may be laid down in a Green Lease include arrangements on minimum sustainability certificates to be obtained and performance (for example, reduction of energy consumption), the way in which the building is to be cleaned (ecological detergents) and the use of lighting, arrangements on waste treatment and recycling, arrangements on the method for measuring, reporting and evaluating energy efficiency (often, it is agreed that the lessor and the lessee will periodically consult to discuss the progress), permits and subsidies (such as the obligation to inform or support each other in respect of permit and subsidy applications in the context of sustainability/environment) and compliance with laws and regulations (the parties may, for example, make arrangements on the distribution of the costs of investments in view of requirements set for buildings under new laws and regulations).

In addition, a Green Lease may include a complaints procedure and arrangements on the time frame within which certain goals are to be achieved. This makes it possible to hold the other party to account if it fails to comply with the arrangements made or if goals are not achieved. Furthermore, a number of privacy legislation related provisions (General Data Protection Regulation) are often included. This is important because, generally, a Green Lease contains arrangements on the sharing of confidential data for purposes including measuring the energy consumption of a building.

In actual practice, Green Lease provisions are often attached as an annex to the lease agreement. It is advisable to make arrangements in a Green Lease as concrete as possible, so that they can be enforced.

Sustainable energy

Energy-saving measures as described above may make an important contribution to the carbon emission objectives. In addition, the remaining energy demand must be met by generating green energy. This may include wind farms and solar panels, or making the heat demand more sustainable.

In the Climate Agreement, it has been agreed that the 30 energy regions in the Netherlands will investigate how and where this sustainable electricity can be generated and what heat sources will replace natural gas. This has been stipulated for each region in a Regional Energy Strategy (RES).

In a recent letter to the Lower House, Mr Jetten, Minister for Climate and Energy Policy, indicated that sustainable energy from solar panels is an essential part of the energy transition and will allow for a large part of the intended carbon emission reduction. Therefore, the cabinet wants to expedite the increase of the number of solar panels in order to meet the tightened climate target for 2030 and to reduce the dependence on fossil energy. For that reason, a bill is under preparation which makes solar panels mandatory for large roofs (> 250 sqm) of new commercial buildings starting in 2025. Construction requirements for new buildings will be adjusted to allow for this new obligation.

There will be a drastic change in the Dutch roof landscape.

Initially, this obligation will only apply to new commercial buildings with large roofs. The government does, however, also have measures in mind for existing commercial buildings and new commercial buildings with small roofs, to try and achieve a similar effect. For example, the government has already indicated to be committed to having at least 80% of all - both new and existing - government buildings fitted with solar panels by 2025. Furthermore, the cabinet is reviewing whether the NZEB requirements for the energy performance of buildings can be adjusted for new commercial buildings with roofs smaller than 250 sqm and newbuild homes, and whether the requirements for sustainable energy in the event of drastic renovations can be tightened.

Although adjustment of the regulations for existing buildings that undergo non-drastic renovations is a more complex issue (there must be a compelling interest in order to intervene in the ownership right), it is currently being reviewed whether an addition to the energy saving duty or regulations customised per municipality could be used to achieve an obligation for the roofs of existing commercial buildings to be fitted with solar panels as well.

In other words: the government is working on an extensive set of legislation and incentives to ensure a drastic change in the Dutch roof landscape in the short term. The Netherlands is not alone in this ambition. In the context of REPowerEU, which envisages a reduction of the dependence on Russian fossil energy sources as rapidly as possible by accelerating the clean energy transition, the European Commission also intends to steer things in the direction of mandatory application of solar panels on roofs.

Recent studies have demonstrated that many of the existing buildings with large roofs show load-bearing capacity problems. Most of these problems can, however, be resolved with relatively limited investments. With a view to a rapid increase of the number of solar panels on roofs, the cabinet wants to make roofs that are not yet usable for solar panels suitable as yet. For that purpose, a compensation is offered towards additional costs of adjustments to the roof or the application of light-weight panels. Furthermore, insurers are being consulted on the insurability of proposed large-scale roll-outs of rooftop solar panels.

Unfortunately, a bottleneck in the ambitions of the cabinet is the fact that the existing power grid does not have sufficient capacity for all sustainably generated energy. For that reason, the subsidy for solar panels will be limited, for the time being, to 50% of the peak load (this already applies to solar projects > 1 MW). The grid operators are currently working on increasing the capacity of the grids and implementing a new system of congestion management. Furthermore, it is being reviewed whether additional policies will be required to increase flexibility on the power grid, for example, by promoting home and neighbourhood batteries, but also via large-scale storage of solar energy.

Sustainable heat

Under the Climate Agreement, all 7.5 million existing homes and 1 million other buildings must be natural gas-free by 2050. Until 2030, the requirement is that 1.5 million homes and other buildings will be made sustainable.

The natural gas-free transition is drastic. Making our heat supply sustainable requires us to let go of the idea of one dominant source, technology and infrastructure, as is currently the case for natural gas. The heat supply will, no doubt, become more diverse. One may think of a combination of electrical heat supply (for example, through hybrid heat pumps, whether or not in combination with other technologies, such as a ground-coupled heat exchanger), renewable gases (green gas or hydrogen) and heat grids (sources being residual heat, geothermal heat or aquathermia), where the selection will depend on local characteristics (urban/rural area, newbuild/existing buildings, availability of heat sources). We are, therefore, facing a huge challenge.

The Energy Transition (Progress) Act (the "VET Act"), which took effect on 1 July 2018, already provides that new buildings will no longer be connected to natural gas, other than in exceptional situations. Making existing buildings natural gas-free, however, is more difficult. The cabinet is currently working on a bill for a Heat Transition (Municipal Instruments) Act to make this possible for existing buildings as well. The draft bill is a joint bill presented by the Ministries of Economic Affairs and Climate Policy and the Interior and Kingdom Relations, containing adjustments to the Gas Act and the Environment and Planning Act.

A set of legislation and incentives under preparation to make existing buildings more sustainable.

The bill authorises municipalities to draw up local rules for the heat transition from natural gas to sustainable alternatives. Since at this point, municipalities cannot really force unwilling citizens to abandon natural gas, the law will give municipalities the legal tools to make districts natural gas-free and make the energy supply more sustainable. Based on the bill, municipalities can instruct grid operators to disconnect from the natural gas grid districts designated in the environment plan. On the condition, of course, that a 'reasonable' sustainable alternative is available. Furthermore, after the designation order, municipalities must allow an eight-year transition period, so that citizens and building owners can prepare for the new situation. The Heat Transition (Municipal Instruments) Act is intended to take effect on 1 January 2024.

Around that time, the Collective Heating Supply Act (also called the Heating Supply Act 2.0) is likely to come into effect as well. The bill for that law is expected to be presented to the Council of State after the summer, and then to the Lower House by the end of 2022. The purpose of this bill is to increase the base of support for the heating product, the confidence in the market and the willingness to invest in sustainable collective heating. This new law will make the heat market future-proof.

Conclusion

It is impossible to imagine today's property scene without ESG criteria. Property is an investment product, and investments must become increasingly sustainable. That is what both the government and the market want. In addition to direct legislation - such as the obligation to hold a certain energy label - there are numerous, non-government-regulated methods to promote the sustainability of property.

Tips & Tricks

• As the owner/lessor of an (office) building, make sure that you hold the right energy labels in good time, and as the lessee, make sure that the right energy label is presented when you enter into the lease agreement.
• When applying for investments, financing or subsidies, pay attention to the terms as they may apply now or in the future, because the changes are coming in rapid succession.
• In the event of lease or purchase of property, investigate the presence and value of sustainability certificates and make arrangements in that respect in a lease/purchase contract.
• As the lessor or the lessee, consider formulating sustainability goals and making concrete arrangements on such goals in a Green Lease.
• As the owner or lessee, pay attention to the possibilities for installation of solar panels on the roof of the building and the possibility to feed the power generated into the power grid.