Juan F. Azcárate-Aguerre1*†¶
Alexandra C. den Heijer2‡¶Monique H. Arkesteijn2‡¶
Luz María Vergara d’Alençon2§¶Tillmann Klein1§‖¶- 1Department of Architectural Engineering and Technology, Faculty of Architecture and The Built Environment, Chair Building Product Innovation, Delft University of Technology, Delft, Netherlands
- 2Department of Management in the Built Environment, Faculty of Architecture and the Built Environment, Chair Public Real Estate, Delft University of Technology, Delft, Netherlands
Introduction: The challenge of the energy transition in the built environment has, in recent years, been exacerbated by rising awareness of the material resource limitations we face on the path towards sustainable development. In this context the concepts of Circular Economy (CE) and Product-Service Systems (PSS) have emerged as potentially complementary industrial and business strategies to overcome the interdependent material resource and clean energy challenges.
Research significance: Research in the field of circular and PSS-based construction frequently centres on the design and engineering of products, mainly through technical strategies such as design for disassembly and adaptability, and the use of the different “R’s” (Reuse, Repair, Remanufacturing, etc.) to extend and/or reset the service lives of building materials and components. Such an approach often ignores the fact that these strategies require changes in the management, financing, and governance aspects of products and therefore buildings, throughout their entire service-lives. This paper will focus on the systemic administrative (i.e. management, financing, and governance) challenges of the circular and servitisation transitions in the building and construction sector, to enable products which are “Circular by Design”, to effectively support regenerative processes.
Research question: The paper asks how traditional building products’ management, financing, and governance processes prevent or delay the implementation of CE and PSS models. It explores the demand side’s perspective (commissioners, building owners and facility managers), taking a systemic view to the search for new practical, strategic, and scalable administrative models.
Methodology: The research method applies the DAS model (De Jonge et al., 2009; Van der Zwart et al., 2009; den Heijer, 2011; den Heijer et al., 2016) to data gathered from focus group discussion and co-design sessions involving multidisciplinary teams of experts from both academy and industry, as well as literature. The research was conducted within the context of the TU Delft Facades-as-a-Service full-scale pilot project.
Results: The research has shown that, while PSS models to enable material circularity can be partially implemented within the current managerial, financial, and governance framework, this implementation is not efficient, effective, or scalable. This is because standard modes of operation in these disciplines are misaligned with that goal. The practical barriers resulting from this misalignment increase the complexity, risk perception, and therefore cost of PSS alternatives, and thus prevent their organic adoption despite increasing market interest. Recommendations are made for policymakers, financiers, suppliers, and building owners to overcome these barriers.
1 Introduction
The need for radical systemic change to render the global built environment more resilient and sustainable has been amply recognized for decades. The clean energy transition, rooted in the energy crisis of the early 1970s, has seen a slow and ineffective uptake: the majority of buildings, even in developed countries, still have an energy performance significantly below the desired standard (BPIE, 2011). At the same time, the rate of renovation is consistently below that required to meet climate change mitigation goals established by the Paris Agreement and 2050 climate neutrality targets set by the EC. At the current rate of 1% it will take around 100 years to renovate the European building stock (Artola et al., 2016; European Commission, 2016; Magrini et al., 2020).
This disappointing performance is not the result of technological insufficiency. (Near) Zero-Energy Buildings (NZEBs) use a variety of complex technological components and systems to reduce operational energy consumption, while being able to generate enough renewably sourced energy to offset the remaining need. Rather, it is the result of administrative barriers such as complex decision-making processes, split incentives, lack of access to finance, lack of leadership, and short-terminist thinking (BPIE, 2011; The Economist Intelligence Unit, 2013). The construction and real estate market is, in other words, failing to assign a fair value to climate-change mitigation strategies, or to fairly appraise the risks of non-mitigation.
In addition to the clean energy transition challenge, a new awareness has been growing over the last decades of the interrelated issue of the availability of raw materials needed to deliver and run NZEBs. NZEBs rely not only on the traditional building materials associated with the construction industry (steel, concrete, brick, wood, etc.), but increasingly demand high-value and critical materials such as those found in electric engines, electronic circuits, and renewable power generation and distribution technologies (BIO Intelligence Service, 2013; Fox-Penner, 2014; Abraham, 2015) to meet ever more demanding requirements in terms of energy and environmental performance, health, safety, and comfort. Many of these material elements hadn’t been part of the built environment until a few decades ago.
For reasons ranging from dwindling volume of global deposits to increasing difficulty and cost of extraction, or geo-political and financial limitations, access to ever more crucial raw materials is under constant and growing pressure. Rising mainstream awareness of this raw material challenge has recently been exacerbated by noticeable supply-chain crises fuelled by the COVID-19 pandemic and the geopolitical Russo-Ukrainian conflict (World Economic Forum, 2022).
In this context the Circular Economy (CE) has in recent years gained a prominent role in both academic and professional discussions on sustainable and regenerative development. In the construction sector, CE theory aims to address the material challenge presented by the need to meet demands for increasing housing and infrastructure pressure fuelled by a growing global urban population, by the urgent need to renovate the existing building stock, and by rising living standards across the developed and developing worlds, with the imperative of ensuring access to resources for future generations (Behrens et al., 2007; Krausmann et al., 2018).
Product-Service Systems (PSS) have gained increasing traction (Camilleri, 2019) as a potential instrument to enable the Circular Economy transition. This since the redistribution of incentives, responsibilities, and risks proposed by PSS models could support addressing the administrative systemic challenges previously mentioned. PSS is a range of business and industrial models which aim to refocus companies’ value proposition from delivering tangible material products towards guaranteeing agreed performance requirements over a defined period of time (Tukker and Tischner, 2006; Stahel, 2010). If the performance requirements include environmental and CE indicators, PSS allow decoupling value-creation from resource consumption while promoting regenerative industrial practices (Fischer et al., 2012; Vezzoli et al., 2017). By doing so PSS creates a financial incentive for more diligent material stewardship (Widmer et al., 2018).
Several research projects have explored the development of PSS for application in the built environment. While frequently initiated from a technology/product manufacturer perspective (i.e. supply push), such initiatives frequently expose the interdisciplinary and cross-stakeholder nature of PSS and CE thinking. A limitation of the studies so far is their theoretical nature. Our research goes beyond what has been done until now by engaging a large consortium around a real full-scale pilot testbed, the “Façades-as-a-Service” (FaaS, a. k.a. Façade Leasing) project. The project has involved building system suppliers, façade fabricator, facility managers, financiers, and real estate developer/operators, supported by multi-disciplinary experts from academy. The aim of FaaS is to test the real life implementation of a PSS for the deep energy renovation of a 3000 m2 high-end façade of the Civil Engineering and Geo-Sciences (commonly referred to as CiTG after its Dutch acronym) building at TU Delft campus, in the city of Delft, Netherlands.
2 Research question and hypothesis
This paper is the result of a one-decade-long and ongoing research on the implementation path for CE-enabling PSS through the FaaS project, coordinated by TU Delft. The research question behind this paper is to understand how traditional building management, financing, and governance prevent or delay the implementation of CE-enabling PSS models for whole buildings or whole parts of buildings, using the renovation of a high-performance building as a testbed. The hypothesis was that a) current administrative processes (Business as Usual i.e. ‘BAU’) would hinder PSS by failing to assign a fair value to climate-change mitigation strategies, or to appraise the risks of non-mitigation; and b) a high degree of process customisation would allow the implementation of CE-enabling PSS for the façade in question, but result in a slower, more expensive, and potentially riskier project than its ‘BAU’ alternative.
3 Materials and methods
Focus-group discussions within previous stages of the FaaS project (Azcarate-Aguerre et al., 2018) led us to identify the key traditional administrative processes and objectively determinant factors to the success of a FaaS procurement model, that need to be addressed to answer our research question and prove our hypothesis, shown in Table 1.
TABLE 1. List of factors determinant to the success of a FaaS procurement model1.
The DAS (Designing an Accommodation Strategy) process model (De Jonge et al., 2009; Van der Zwart et al., 2009; den Heijer, 2011; den Heijer et al., 2016) was applied to the three categories management, finance, and governance to extrapolate actionable lessons from the collaborative strategic learning process of implementing PSS through a cross-sectoral and multi-stakeholder systemic innovation approach. Figure 1 below shows the structure of the DAS method:
FIGURE 1. Designing an Accommodation Strategy (DAS) in five steps. Adapted from (De Jonge et al., 2009; den Heijer, 2011).
Task 1. Assess the current portfolio: Determine current (mis)match in process and product.
Task 2. Explore changing demand: Determine changing strategic and functional, organisational, and societal requirements.
Task 3. Generate future models: Weigh and select alternatives.
Task 4. Define projects to transform: Detailed attainment plan.
For this paper, Task 1, Task 2, and Task 3 were used as a basis to structure the collection, analysis and evaluation of the data, while Task 4 is the basis to present and discuss the results and generate recommendations for future developments.
Data for the analysis was collected through empirical evidence gathered from the Facades-as-a-Service (FaaS) project combined with secondary sources. Sources of data include a detailed diary summarising the discussions and outcomes of dozens of co-development meetings between academic and professional experts from different disciplines related to the fields identified above, a record of email threads with attachments, as well as commented legal contracts and other documents related to the most critical discussion points. Lastly, it includes three final reports per year of the project summarising the systemic business model development, the technical execution process, and societal and market dissemination activities (Azcarate-Aguerre et al., 2020; Azcarate-Aguerre et al. 2020; Azcarate-Aguerre et al. 2020). Also in the context of this project a state-of-the-art review was performed on recent and ongoing circular business model research and pilot projects (Vergara d'Alençon et al., 2019).
4 The CiTG pilot project at TU delft (tasks 1–3)
4.1 Task 1: Assess current portfolio determine current (mis)match in process and product
As presented in the Introduction, there is a mismatch between the fact that the product: the building sector, is not contributing enough to the process: climate neutrality and long-term sustainability (resilience) set by and for society. As mentioned, this is evidenced by slow energy renovation rates, leading to high carbon emissions, and no concern for circularity, further increasing emissions and other negative externalities such as pollution, as well as putting at risk the availability of crucial materials and resources for future generations.
The CiTG building selected for the FaaS project exemplifies this mismatch and is thus an appropriate testbed for our analysis. This representative building, constructed during the mid-1960s, displayed many of the performance issues and decision-making challenges common to buildings of that time: its envelope consisted of a painted, uninsulated steel frame with single glazing, and no active ventilation was present in the building. Passive ventilation through manually operable windows in each office space was further hindered when the originally open stairwells had to be enclosed in order to meet new fire-safety standards, thus reducing cross-ventilation and preventing a cooling stack effect through the building. Lastly, an internal and manually operated blind system provided limited prevention to over-heating of the office spaces in the summer, by allowing most of the solar radiation in through the single-glazed façade. As a result, the building consumed large amounts of non-renewably supplied energy and thus did not contribute to climate neutrality goals.
In 2018 the West façade of the building was the target of a minimal maintenance effort which mostly consisted in the repainting of façade frames to prevent their further corrosion and the resulting technical and visual deterioration. This work did not contribute to improving the energy or comfort performance of the building envelope. The main reason provided by decision-makers for the choice of maintenance plan was a ‘short available strategic planning horizon’, because relevant stakeholders were debating whether the building would be generally decommissioned and replaced within a 10–15-year period. This would represent a violation of the principles of CE, which include applying a hierarchy of “reduce, reuse, remanufacture” to products. The imperative of reducing the use of new raw construction materials, in this case, would have dictated reusing the CiTG building to the fullest extent possible, rather than demolishing it.
4.2 Task 2: Explore changing demand: Determine changing strategic and functional, organisational, and societal requirements
In 2019, when the same minimal maintenance work was being planned for the East façade of the building, a consortium of academic and professional experts came together to explore the possibilities of procuring a new façade instead, commissioned through a performance-based contract. Following from research by Den Heijer (den Heijer, 2011; den Heijer, 2013), the research aimed to include the perspectives of as many relevant stakeholders as possible. In particular, the key decision-makers behind the four main value criteria: Strategic management (represented by TUD board of directors and TUD Campus Real Estate (CRE’s)’s project development team), Project finance (represented by TUD central corporate finance and TUD CRE’s financial department), Technical (represented by a Façade supplier consortium and TUD CRE’s project development and facility management teams), and Sustainability performance (represented by Academic advisors and TUD CRE’s energy team).
The key performance indicators according to the perspectives of these four target stakeholder groups were summarized into a series of functional and strategic requirements, tangible and intangible, described in Table 2.
TABLE 2. List of functional and strategic requirements for the performance-based renovation of the CiTG East façade.
The authors of the paper acknowledge that the requirements list is missing critical parameters related to carbon performance. This omission of embodied carbon requirements is due to the lack of broadly recognised methodologies for calculating the embodied carbon of circular technical solutions. Operational carbon requirements are also excluded since they are determined by the building’s and the TU Delft campus’ central energy systems, which are beyond the scope of the CITG’s East façade renovation project.
4.3 Task 3: Generating future models: Weigh and select alternatives
In this phase, the multistakeholder consortia led by TU Delft co-designed a feasible decision-making route to decide between a standard and a PSS procurement and contracting models. The decision would have to flow based on the evaluation of each model’s costs and uncertainties linked to meeting the requested requirements.
Participating organisations from various fields contributed data on practical experience and expertise for the evaluation of the ‘standard’ procurement and contracting model, while previous phases of the Facades-as-a-Service project contributed data for the evaluation of the PSS model, albeit on a theoretical basis (Azcarate-Aguerre et al., 2018). These sets of data were used as a basis to design a decision-making process and timeline, structured on the achievement of gradual and specific milestones, from the diverse discipline perspectives, summarized in Figure 2 (Azcarate-Aguerre et al., 2022).
FIGURE 2. Timeline for the CiTG East façade renovation decision-process, and the several multi-disciplinary discussions and milestones contributing to these decisions.
As a result, TU Delft’s Campus Real Estate presented the University’s Board of Directors, the final decision-maker, with information comparing three scenarios:
• Business as Usual (BAU): A minimum renovation work on the existing East façade, modelled on the works on the West façade procured through a traditional ‘linear’ purchasing model.
• Traditional baseline renovation: Replacement of the East façade through a traditional ‘linear’ purchasing model. Some product innovation would be implemented, beyond the technical requirements traditionally established in the procurement process, but no systemic contractual innovation would be implemented.
• Extended FaaS requirements: Replacement of the East façade through a systemically innovative ‘circular’ PSS model. Technical and organisational innovation would be implemented, beyond the technical requirements traditionally established in the procurement process.
Due to their relatively old and/or heritage building portfolios, retrofit decisions are a challenge common to TUD and other universities. At the time (2020) TUD had to make decisions on the renovation of three of its largest buildings, and resources allocated to these projects in that year’s budget was only sufficient for one of them. This illustrates the types of constraints faced even by building owners with relatively extensive resources. Below, we summarize the decision-making process for each scenario.
4.3.1 Decision 1: Business as usual
TUD’s Board of Directors recognised the long-term sub-optimal nature of this comparatively inexpensive and fast but underperforming solution. However, on the one hand, a minimum scheduled maintenance could not be put on hold indefinitely while other options were weighted, because corrosion would start affecting the window frames to an irreversible extent. On the other hand, since no energy performance or user comfort improvement was expected from a minimal intervention, there was no pressure from the end-user (the CiTG faculty) to schedule these measures sooner. In fact, the end-user welcomed the opportunity to consider a more extensive renovation project which would contribute to better energy and user comfort performance. If the façade wasn’t improved at the time, another 6–10 years would pass before the BAU maintenance had depreciated down to zero, and a decision could once again be considered.
The decision was taken early in the process, In Q4.2017 and even before the project grant had been awarded, to temporarily suspend the planned minimum renovation project on the East façade of the CiTG building.
4.3.2 Decision 2: Traditional baseline renovation
A full decision for a FaaS renovation couldn’t yet be taken, as it required further research, but once the BAU scenario was placed on hold, a decision would have to be made on whether the CiTG’s East façade would be renovated by Q4.2019, or the BaU scenario would be reinstated to prevent damage to the façade.
The choice was then made to split the decision in two: In Q3.2019 green light was given to the technical CiTG East façade renovation project, so that planning and fabrication could start, and the façade could be replaced between late Q2.2020 and Q4.2020. The decision whether to implement the FaaS model would be delayed until further research was carried out in early 2020.
4.3.3 Decision 3: Extended FaaS model implementation
Once technical decisions had been made and the construction execution process had started, the focus of the project team and the multiple academic and professional advisors could shift towards Task 4, addressing the broader systemic challenges to the FaaS model implementation. Lessons learnt are summarized and presented in the Results section.
Several constraints resulted difficult to overcome, and the final decision was not to enter a full PSS-based FaaS contracting and financing model covering all requirements from Table 1. This as the building owner and not the façade provider is the owner of the façade. Still, a service contract was developed and entered between the building owner and the façade provider. An innovative aspect of this contract is that it is based on the ongoing provision of the Technical and Strategic performance requirements specified in Table 2.
5 Results
5.1 Task 4: Define projects to transform: Detailed attainment plan
In this phase, the consortium set up and defined the proposed FaaS model in terms of its technical, managerial, financial/fiscal, and legal implications. During the co-development process the project consortium aimed to limit as much as possible the number of diverse systemic innovations required for the FaaS model to work. In other words, it attempted to fit performance-based procurement ambitions—to the largest extent possible—within the traditional processes of the real estate and construction sectors. The process and findings from each disciplinary perspective are summarised in the Results section below.
The results of the study (Task 4) are presented below in a summarized form and organised according to the three disciplinary fields previously identified in Table 1. An extended version of these results is provided as additional reference to the reader, in Table 4.
5.2 Strategic management
The lifecycle of a building project - from its initial conceptualisation through its commissioning, operation, and final decommissioning - is guided by traditional and well-established processes which aim to minimise uncertainty and risk. These traditional processes result in systemic inertia across the built environment, resulting in the slow rate of change commonly associated with the construction sector. Decisions are constrained to a narrow range due to prescriptive financial evaluation models, organisational structures, and contracting mechanisms.
From the initial planning of a new construction or renovation project, financial feasibility models tend to focus on a specific range of values and liabilities. These as determined by the type and priorities of commissioning organisation (Figure 3). A narrow focus on short-term hard costs and values lead to a wide range of project choices being discarded from an early phase. The lack of standardised and comprehensive Total Value of Ownership models, which include not only short-term, hard values and costs, but also long-term, softer parameters and externalities, distorts the decision-making process in the benefit of well-known and well-tested choices.
FIGURE 3. Non-exhaustive diagram of soft and hard values and costs in strategic real estate decisions. Highlighted those parameters most relevant to each type of building owner. Adapted from (Azcarate-Aguerre et al., 2022).
Commissioning organisations are likewise organised according to traditional and linear practices. Building projects are frequently transferred from short-term parties responsible for developing and building the project, to long-term parties responsible for operating it. Even in instances when one single organisation is responsible for all phases, as is the case with TU Delft’s Campus Real Estate, such organisations are frequently structured according to the same life-cycle stages common among independent parties (Figure 4). This results in a loss of potential knowledge exchange between specialists responsible for the different lifecycle stages, loss of decision-making complexity which would benefit choices with a positive performance over the longer term, while embedding a linear mentality into the construction management process.
FIGURE 4. Diagram of the “Solid Real Estate” created by development and management organisations with a traditional linear mentality. Even if the same organisation acts as developer, owner/manager, and end-user, the stepped approach to the diverse building life-cycle stages limits strategic knowledge and priority exchange. This in turns limits the chances for innovation in the procurement and management process. Inspired by (den Heijer et al., 2016).
The procurement process traditionally focuses on specifying technical solutions, rather than establishing functional requirements. Such a prescriptive approach commoditises system suppliers competing on the basis of lowest price versus highest performance. Long-term performance is frequently beyond the producer responsibility, as is environmentally responsible or circular treatment of material resources. Client organisations (commissioners) therefore assume the risks associated with technical decision-making, component operation, building performance, user satisfaction, and final resource decommissioning and (ideally circular) material treatment.
Contracting models, which are closely related to project finance and bankability, aim to minimise disputes by concentrating ownership. Alternative models for financing and managing PSS alternatives, such as the SPV model illustrated in Figure 5, rely on customized and untested interpretations of building, rental, and property laws. As such they are perceived, from both a legal and financial perspective, as riskier and therefore costlier. The added cost of capital from this perceived novelty and risk result in PSS models being unlikely competitors (from a cost perspective) with more traditional models of direct ownership. This hinders the upscalability of PSS solutions, limiting them only to early adopters with strategic interests and value hierarchies beyond the directly commercial (Figure 3).
FIGURE 5. Structure for the financing and contractual management of a Façade-as-a-Service, based on a “Special Purpose Vehicle” established by a FaaS developer and possible investor. First published in (Azcarate-Aguerre et al., 2020). In terms of material circularity and the regenerative decommission of building components, the study shows that effective solutions are not yet readily available for either the reprocessing of legacy equipment (reactive circularity), nor for the commissioning on new and effectively circular solutions (proactive circularity). Even commissioners willing to make the additional effort and expense of circular material treatment are most frequently unable to find a second-hand material market and reverse logistics chain capable of handling material recovery from both a technical and administrative perspective.
5.3 Project finance
Financial performance evaluation of the project was guided by the same procedural constraints identified above and illustrated in Figure 3. The decision-making process was guided by hard costs and values related to capital costs, cleaning and maintenance schedules (internal or externalised in the case of PSS), financial costs and fiscal depreciation. Additional softer values such as expected energy savings and the estimated productivity value of increased user comfort were calculated as a reference, and considered in the decision-making process, but were not prioritised. Residual (circular) value of components was also excluded from the calculation, as none of the involved parties could establish a reliable methodology for assigning a financial value (or cost) to the recovery of materials at the end of the PSS façade’s service life.
The results of the financial evaluation process can be found in Figures 6, 7. From a hard value and cost perspective the Business-as-Usual alternative (i.e. not renovating the façade) was calculated to be the most financially attractive (i.e. cheapest) alternative. Only when running the calculation over a 30-year planning horizon did this change, as it would be unrealistic to expect the current façade to perform for another 30 years, so that a major renovation would be necessary. Direct purchasing of the façade would be marginally cheaper from a Total Cost of Ownership perspective over 15 or 30 years, but leasing (or PSS contracting) of the façade would result more attractive from a cash-flow perspective. These conclusions are specific to the accountancy practices of the commissioner organisation, and the way in which local fiscal regulation and project finance treat the depreciation of a building asset.
FIGURE 6. Total Value of Ownership results comparing the three strategic scenarios for the CitG East façade renovation, including selected “soft” values, over a 15- and 30-year planning horizon. First published in (Azcarate-Aguerre et al., 2020).
FIGURE 7. Distributed, cumulative Total Value of Ownership results comparing the three strategic scenarios for the CitG East façade renovation, including selected “soft” values. First published in: (Azcarate-Aguerre et al., 2020).
Value Added Tax (VAT) and property transfer tax have a significant impact on the PSS contracting of building components and are the object of some uncertainty due to their fiscal novelty. VAT must be paid by the FaaS owner but can be deducted since the façade is a business operating asset. The building owner, FaaS procurer, will then have to pay VAT on the ongoing monthly service fees. Transfer taxes are likely to result if the façade is transferred (to the SPV or another FaaS-owner entity) after its completion. At the time of the façade construction completion the façade would usually become legal and economic ownership of the building owner, so that its transfer to a third-party entity would result in property transfer taxes. This is unique to each country’s tax code, but due to the extensive similarities between tax policies such a transfer tax is expected to result in considerable additional costs and should be considered in the project’s financial and fiscal planning.
Bankability of the FaaS alternative is currently a significant challenge. The additional perceived risk of the façade being contractually disconnected from the building results in two financial uncertainties which can carry added capital costs: 1. The financing of the façade is not backed by a complete real estate asset, as would be the case in a traditional mortgage-backed loan. Since the value of the façade, as an independent asset, at any given time is difficult to estimate, the financial construction is backed largely by the solidity of the building owner as FaaS customer. This results in capital costs similar to those of a business loan, and higher than a traditional mortgage-backed loan. 2. The value of the building as collateral, for securing other mortgage-backed loans, might be negatively affected by the “lack” of a legally and economically owned façade. This was a topic of debate, since the loss in collateral value might be counterbalanced by a general increase in the property’s value as a result of the new façade and its increased aesthetic, energy-, and comfort-performance.
Lastly but crucially, the difficulty of banking the residual value of materials is a crucial current hurdle to the implementation of PSS or the Circular Economy. The residual value of the FaaS components could not be estimated or considered in the financial evaluation model, and the consulted banks were unwilling to assume any risks related to the residual value of physical components. A more extensive discussion of the rationality behind this barrier can be found in Annex 1: Results (Extended).
5.4 Governance and building law
From a policy and legislative perspective, the implementation of PSS contracting models represents a significant change from a status quo built on centuries or even millennia of legal precedence. Innovative and relatively untested contracting models result in an added risk to all parties involved in the PSS project. These risks may translate into disputes during the decades-long contracting periods required from built environment technical components, or which may -and currently does—translate into added complexity and cost of financing.
In the case of Netherlands, and many other nations built on Western European and Roman law, the rule of accession gives building owners ownership of all fixtures attached to a building, and which can’t be removed without damaging the building or affecting its performance. While several models exist for circumventing this legal barrier, these models are based on innovative interpretations of rental and real estate law, and therefore carry a risk in the case of litigation.
A further challenge, once that of legal and economic ownership of physical components is overcome, is the demarcation of technical and financial responsibility over different building components and the technical requirements they aim to fulfil. Of special concern are physical interphases between components (e.g. the structural brackets linking the façade to the building structure) or between interrelated building services (e.g. the interrelation between building façade and heating or ventilation systems when delivering the final energy and user-comfort performance of the building). In the process of breaking down the building unit into its technical systems and performance attributes a chance for new types of disputes exists, when determining who must bear the technical responsibility and the financial expenses related to it.
In the context of the potential legal and financial disputes discussed above, provisions must be made in advance for the potential exit—willing or unwilling—of one or more of the parties contractually collaborating on the PSS project. Over the 10- to 50-year period which a PSS contract in the built environment might span, innumerable events could occur which would result in the exit of a partner or the reorganization or transfer of part or the whole of the PSS structure. These events include corporate reorganisations, mergers and acquisitions, property transactions, bankruptcy of one or more parties, physical damage to the building by unforeseen events (e.g. natural disasters), market fluctuations resulting in chronical building vacancy, and many others. Different forms of financial insurances or technical/administrative securities provided by, for example, industry branch organisations, must be developed and set in place contractually to deal with such events in the most risk-mitigating manner. Some examples of these securities are illustrated in Figure 8.
FIGURE 8. Extended structural diagram of the FaaS “SPV” model, showing stakeholders or contractual/financial products intended to guarantee - and therefore reduce the perceived risks and consequential costs of - a FaaS system. First published in (Azcarate-Aguerre et al., 2020).
A matter of legal consequence which was unfortunately not addressed by the project, but which was frequently discussed during the planning process, is the organization of economically feasible reverse logistics chains for the remanufacturing of used building components. EU regulations are known to limit the cross-border transportation of secondary components, since they are labelled as “waste” which must be treated in its country of origin. This represents a barrier to the economic potential of transporting secondary components to neighbouring EU countries with lower labour costs, where remanufacturing work could more likely be performed in an economically feasible manner.
6 Conclusion
The study set out to test whether the traditional systemic framework for managing, financing, and regulating buildings projects hinder the practical implementation of CE-enabling PSS contracting models. It concludes that, across all the mentioned building-related disciplines, the momentum provided by traditional processes generates a systemic inertia which severely limits the actual decision-making scope of the key stakeholders involved in a construction project. Even in cases in which all stakeholders are aligned from the start in terms of motivations, long-term strategic sustainability goals and willingness to innovate, existing processes largely determine the outcome of financial and fiscal decisions, legal collaboration contracts, building techniques, and managerial organisation. Significant additional effort, motivation, and cost- and risk-bearing is necessary to overcome this inertia. In some cases (such as that of project financing) current practices cannot support competitive PSS alternatives capable of being upscaled to the mainstream construction market. However, the study has also shown that, at least in the case of the Netherlands, conditions enabling a more mainstream implementation of PSS models could be achieved through targeted action in each of the identified disciplinary fields.
Crucially, results have highlighted the interlinked nature of decisions and innovation pathways across involved disciplines and sectors. In several instances, circular arguments spanning across disciplines block progress for the whole industry. This is a clear indication of the need for orchestrating actors whose role is to coordinate multi-lever action at scale.
Table 3 Below summarises results and main recommendations for the three administrative processes addressed by the study: Cells in the column summarizing ‘Pathway to systemic innovation towards PSS’ have been colour coded to represent a feasibility/readiness assessment according to the following legend.
TABLE 3. Results summary from the perspective of the three disciplinary fields of study.
Perhaps the key challenge highlighted by this study is the broad restructuring and rethinking of the ways in which buildings are developed, managed, financed, and legally protected. The shift from valuing buildings as full functional units, to valuing them as temporary material depositories, puts into question the entire solidity of real estate investment markets. It conceptually forces together the solidity of real estate investment with the volatility of long-term material value speculation. These concepts could arguably be defined more by our culture than by economic reality, and our lack of consideration for the value of materials might significantly change once these materials become scarcer.
7 Challenges and future perspectives
On the matter of scalability of these results we consider that performance-based models can be an administrative alternative which addresses internal organisation challenges (flexibility and ease of decision-making) and external societal challenges (environmental sustainability). However, their implementation currently faces significant practical hurdles. The hurdles and conditions described are common to different types of real estate owners and project investment decisions around the world. While regional differences exist, the multi-disciplinary approach hereby described and the factors evaluated are expected to be for the most part similar, as are their consequences to CE and PSS implementation. The authors acknowledge that selecting a public entity as client/building owner resulted in specific financial and fiscal conditions which influenced the applicability of the model and the pilot project’s outcome. This showcases how the administrative conditions of a building project can be more determinant than the technical specifications of the building. Because of this, the conclusions of this process highlight once again the need for a holistic planning process which integrates all relevant fields of knowledge.
The systemic innovation proposed in this paper could facilitate a shift from Total Cost of Ownership to Total Value of Service. As building technologies evolve, real estate markets fluctuate, and end-user trends change, buildings and their components must be able to adapt to this changing world technically, managerially, financially, and legally, while retaining their value. Solid real estate, inflexible to changes, could be acknowledged as a liability when compared with more flexible and ‘liquid real estate’ (den Heijer et al., 2016).
In the story of Theseus’ ship, the vessel is repaired, and components replaced until no physical part of the original ship remains present in the current one. The thought exercise focuses on whether the ship remains the same ship, after all components have been replaced. Questions are rarely asked about the destiny of the removed components, as these seem to be hardly relevant. Theseus’ ship is only one temporary application of potentially eternal materials, and therefore should not be our focus of attention. The thought experiment should focus instead on the different vessels, building structures, furniture, and infinite other applications for which the materials in Theseus’ ship could be used.
8 Annex 1: Results (extended)
Table 4 presents a more extensive collection of results organised according to each. administrative process identified. Cells in the column summarizing ‘Pathway to systemic innovation towards PSS’ have been colour coded to represent a feasibility/readiness assessment according to the following legend:
TABLE 4. Systemic innovation pathways required for each determinant factor towards PSS for building projects.
Data availability statement
The raw data supporting the conclusion of this article will be made available by the authors, without undue reservation.
Author contributions
JA-A is first author of this paper, and has been responsible for its conceptualisation, structure, and research coordination. AD and MA have contributed to the research methodology and scientific validation within the broader real estate management field. LVd’A and TK have contributed with specific knowledge in targeted sections of the study.
Funding
This project was partially funded by Climate-KIC under KAVA 2.7.3, grant agreement 190177. Climate-KIC is supported by the EIT, a body of the European Union.
Acknowledgments
We thank the different departments and individuals at TU Delft who actively and enthusiastically contributed to this study, including the TUD Board of Directors, TUD Campus Real Estate, TUD Finance, TUD Legal, and TUD Procurement. We also thank the industry partners who made this practical research possible, including Alkondor Hengelo (façade builder and service provider), ABN AMRO and Rabobank (financiers), and Houthoff (legal firm).
Conflict of interest
The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.
Publisher’s note
All claims expressed in this article are solely those of the authors and do not necessarily represent those of their affiliated organizations, or those of the publisher, the editors and the reviewers. Any product that may be evaluated in this article, or claim that may be made by its manufacturer, is not guaranteed or endorsed by the publisher.
Footnotes
1The technological dimension is partially beyond the scope of this paper, and has been described in closer detail in Azcarate-Aguerre et al. (2022). “Facades-as-a-Service: The Role of Technology in the Circular Servitisation of the Building Envelope.” Applied Sciences 12(3): 1267. In the present study technical requirements are discussed as a boundary condition to the decision-making process of other stakeholder disciplines. In a similar manner, financial project evaluation has been expanded upon in a separate publication Azcarate-Aguerre et al. (2022). “Building energy retrofit-as-a-service: a Total Value of Ownership assessment methodology to support whole life-cycle building circularity and decarbonisation.” Construction Management and Economics: 1–14. The present paper focuses on the systemic and strategic interaction between different disciplines, and the current real-world constraints which prevent the organic adoption of PSS contracting models in the built environment.
2As a result of the ongoing Dutch housing crisis these values have changed, and exceptions have been created since the period during which the CiTG project was ongoing. These changes are not directly relevant to the present study, but they would influence the extent to which fiscal policy could hinder a FaaS model. Transfer tax is not charged if less than 6 months have passed between a previous ownership change and a new one, in which case the buyer in the second transaction will cover the transfer taxes paid by the buyer in the first transaction. Thus, can double transfer taxation be avoided, but it must be paid when more than 6 months have passed between the first and second transfer.
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Keywords: product-service systems, circular economy, energy retrofit, building envelope, performance contracting, systemic innovation
Citation: Azcárate-Aguerre JF, den Heijer AC, Arkesteijn MH, Vergara d’Alençon LM and Klein T (2023) Facades-as-a-Service: Systemic managerial, financial, and governance innovation to enable a circular economy for buildings. Lessons learnt from a full-scale pilot project in the Netherlands. Front. Built Environ. 9:1084078. doi: 10.3389/fbuil.2023.1084078
Received: 29 October 2022; Accepted: 20 March 2023;
Published: 25 April 2023.
Edited by:
Eugenia Gasparri, The University of Sydney, AustraliaReviewed by:
Enrico Sergio Mazzucchelli, Polytechnic University of Milan, ItalyAysu Kuru, The University of Sydney, Australia
Copyright © 2023 Azcárate-Aguerre, den Heijer, Arkesteijn, Vergara d’Alençon and Klein. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY). The use, distribution or reproduction in other forums is permitted, provided the original author(s) and the copyright owner(s) are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
*Correspondence: Juan F. Azcárate-Aguerre, j.f.azcarateaguerre@tudelft.nl
†These authors have contributed equally to this work
‡These authors have contributed equally to this work and share senior authorship
§These authors have contributed equally to this work and share last authorship
‖Present address: Luz María Vergara d’Alençon, Escuela de Arquitectura, Facultad de Arquitectura, Arte y Diseño, Universidad Diego Portales, Santiago, Chile
¶ORCID: Juan F. Azcárate-Aguerre, orcid.org/0000-0002-0377-9879; Alexandra C. den Heijer, orcid.org/0000-0002-9153-1661; Monique H. Arkesteijn, orcid.org/0000-0001-8852-8034; Luz María Vergara d’Alençon, orcid.org/0000-0002-4502-794X; Tillmann Klein, orcid.org/0000-0001-7883-1953