Green Leases and You

June 25, 2008

There seems to be a lot of interest in green leases lately: They are the new green buzz. This week, BOMA will debut its “Guide to Writing a Commercial Real Estate Lease Including Green Lease Language” at its international conference in Denver.

There seems to be a lot of interest in green leases lately: They are the new green buzz. This week, BOMA will debut its “Guide to Writing a Commercial Real Estate Lease Including Green Lease Language” at its international conference in Denver.

The Australian government, through its Greenhouse Office, has, for several years, promulgated “Green Lease Schedules,” setting out the provisions required to be incorporated in Australian governmental leases. Similarly, the U.S. General Services Administration has incorporated green standards into its standard lease and plans to release a revised version this summer.

Why Do We Need Green Leases?
It’s apparent from USGBC statistics that more and more developers are building new LEED-certified buildings – and that many building owners are seeking LEED-EB certification for greening their existing buildings.

Many tenants, too, are now seeking to reduce their carbon footprints and meet corporate sustainability reporting requirements; they also need to be in buildings that truly manage their energy consumption. They need assurance that the current and future landlord will provide what they need: ENERGY STAR® scores, submetering, and an energy-efficient building.

For tenants seeking LEED for Commercial Interiors (LEED-CI) certification, LEED gives points to the tenant: a) if the lease term is 10 years or longer, and b) for leasing space in a LEED-certified building and for leasing space in buildings with certain green attributes, such as meeting ultra-efficient water-usage standards. The tenant needs assurance that these conditions will be met.

Most of the leases I’ve seen over the last 22 years don’t encourage conservation and, in fact, often present barriers to improving energy efficiency. Angelique Wade, a Transwestern property manager, recently gave a presentation at the North Texas Corporate Recycling Association about her experiences with increasing the recycling rate at her multi-tenant office building. She says all of the tenants were more than cooperative except for one (the largest): a full-floor user. This anecdote is an example of why landlords are adding green language to their leases.

Take the typical multi-tenant gross office lease. Without submetering, tenants are largely unaware of their energy-related occupancy costs, yet occupants have the potential to have more control over energy consumption than building management. What incentive does a tenant have to employ energy-conservation measures in its leased space (measures such as turning off lights, installing motion sensors or daylight controls, purchasing ENERGY STAR-labeled equipment and appliances, and closing south-facing blinds)? After all, the tenant is paying a pro-rata share of the utility bill of the entire building. Unless the entire building is practicing the same energy-conservation measures, the tenant doesn’t reap the full benefit of the investment, but has to share it with “free riders.”

Take a triple net lease: What incentive does a landlord have to spend capital dollars to improve the efficiency of a building if the tenant is consuming the energy and paying the bills? What's the landlord's incentive to replace plumbing fixtures with more efficient fixtures in an apartment building if the residents pay the water bills?

And, while there are a handful of landlords and tenants choosing to do the right thing despite the barriers created by current lease structures, greening leases will make it easier and more equitable for everyone to do the right thing and to meet the environmental demands of the planet more quickly.

If you still aren’t convinced that any changes need to be made to your standard lease form, read your standard lease and consider the rising cost of energy, water, materials, insurance, and increased local environmental and air-quality regulatory standards – not to mention the potential for a carbon-trading market. Does the standard lease form accommodate a landlord who wishes to retrofit his/her building or make it greener? Does the form permit the landlord to adjust base-year expenses down to the level that the expenses would’ve been had energy-efficient systems been in place in the base year? Does the form lease permit the landlord to include the amount required to amortize the cost of energy-saving systems in operating expenses? Does the landlord have reasonable access to premises to install energy-efficient systems? Leases are long-term agreements – 5, 10, and even 20 years, with renewal options. The era of green will continue to evolve during the next 5 to 10 years, so incorporating flexibility today seems all the wiser.

What is a Green Lease?
Tenants and landlords have equal interest in reducing operating expenses. Accordingly, green leases should be collaborative. Green leases are nothing more than standard leases modified to remove barriers to sustainability, communicate shared environmental standards and goals, and provide greater assurance that these standards will be met by everyone. Make them flexible and easily adaptable to the needs of the future.

The structure of a green lease is one that motivates all the parties involved to invest, operate, and work in a building in the most environmentally friendly and socially responsible manner. A green lease brings all players together to contribute toward the triple bottom line: people, planet, and profit.

A traditional lease becomes green by dialing in environmental standards into all related lease clauses to ensure that everyone in the building, during finish-out and occupancy phases, is working together to achieve predetermined levels of energy efficiency, water conservation, recycling, indoor environmental quality, and the use of environmentally preferred products and materials.

For example, an environmental standard may be requiring all ENERGY STAR-labeled appliances in new installations or, more progressively, all ENERGY STAR-labeled office equipment. By doing this, everyone in the building benefits by conserving energy, and so does the environment. This would be considered a compliance standard. By requiring compliance, everyone is contributing to the energy efficiency of the building. There are no “free riders.”

Another compliance standard may be to require building occupants to recycle according to the building’s green waste management and recycling policy, which can be more stringent than the local code. The lease may even require tenants to furnish their own recycling containers in the spirit of keeping costs equitable. By sorting the waste stream, recycling revenue increases, landfill cost decreases, and everyone benefits.

If a landlord is seeking LEED certification for an existing building, the building manager will need to establish an environmentally friendly purchasing policy covering ongoing consumables, such as paper, office supplies, printer cartridges, and other low-cost items that are regularly used and replaced through the course of business. This policy extends to the tenants. In this case, the landlord would likely ask tenants to assist building management in meeting the goals and provide the tenants with the resources they need to facilitate management’s request. This would be considered a collaborative environmental standard.

Most buildings recycle today – at the rate of about 20 to 25 percent. Setting a diversion goal of 50 and asking all building occupants to work together to achieve that goal would be another example of a collaborative environmental standard.

Over time, all buildings will be built green and operated green, and environmental standards will be part of the standard lease; today, however, this type of language is new. Experience has taught me to be sure and somehow distinguish new green language added to standard leases; otherwise, these changes will likely go unnoticed, or come as a surprise.

Green practices can and should be implemented without amending leases. As your building establishes its green practices and environmental standards, however, you should begin to incorporate green lease language into new leases and renewals. If you have large vacancies and rollovers, there is a bright side: You have the opportunity to distinguish your building as a truly green building. Develop the building’s environmental standards, green the lease, and lease with the confidence that you are prepared for a new era.

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