How can we make greener leases in commercial buildings?

By Grey Lee

Endorsed by the USGBC and produced by the local Massachusetts Chapter, BuildingSmarter Buildings Forum will take place on May 9^th at Suffolk University on 73 Tremont Street in Boston.

This will be a great opportunity to discuss and learn about energy efficiency incentives in ways that commercial real estate can improve both performance and marketability through sustainability.

Speakers include:

Brian Swett (City of Boston)
Bruce Percelay (Mount Vernon Company)
Jonathan Keefe (Cassidy Turley)
Cynthia Keliher (McCarter English)
Rives Taylor (Gensler)
Mark Wartenburg (Philips)
Derek Brown (Clean Fund)

THE MARKET

We’ve made great strides in the past 10 years, yet great gaps still remain in construction communities with traditional separate interests between architects/clients, code officials/builders landlords/tenants, and entrepreneurs/supporters.

Landlords have little incentive to invest in above-code approaches to maintenance, energy, water and health improvements when payback is reaped solely by tenants.

Tenants are reluctant to renew leases in buildings that lag behind current construction practices in energy efficiency and there’s a heavy overhang of potentially large energy cost increases in the next few years.

Green leasing is a natural extension of the green building, however many barriers exist that inhibit widespread adoption of a sustainable leasing approach. Effective green leasing processes and principles remain scarcely implemented and understood by the real estate community.

In order to integrate environmentally sustainable initiatives into the commercial real estate process, it is important to have both the landlord and the tenant work collaboratively to pursue and implement these initiatives. Green leasing dictates that building performance become transparent to all parties involved in the lease transaction.

We need more collaboration, connection, and commitment. This event will help to provide that.

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GREEN LEASING BARRIERS

Establishing consensus between landlord and tenants on how a particular building’s configuration and operation should support sustainability is the first step toward a successful green leasing agenda. The ideal green leasing document set not only delineates sustainability goals, but also describes specific landlord and tenant behaviors that support them.

Declaring a commitment to manage through measurement is vital to any successful green leasing agenda. Quantitative metrics and sensible reporting protocols allow all parties to track their progress toward sustainability and make adjustments when necessary.

There are a real mutuality of concerns between the landlord and the tenant in respect of green leasing issues. The landlord is concerned about obtaining and maintaining the building’s sustainability certification, while also equally concerned about being in a position to meet any new environmental obligations that may be passed during the course of the lease. Likewise, the tenant will have the same concerns except that, being the ultimate payor of these costs, it will want to ensure that the return on its investment is a reasonable one.

A number of barriers do exist:

There can be the tendency of the parties and their counsel – who may be unfamiliar with the sustainable leasing process and principles – to focus excessively on certain legal aspects of the lease to the detriment of the process and the parties’ goals.
A lack of well-known effective approaches to overcome the “split incentive” created by many leases between landlord and tenant related to how each shares the costs and benefits of sustainability-related measures can impede progress.
The challenging market environment of the past several years has caused many market participants to defer implementing sustainability-related changes in their business practices and leasing operations that may be seen as costly or risky.
Many participants are still concerned about unsettled potential legal pitfalls posed by green leasing.
There is no comprehensive, widely distributed and easily digestible guide to overcoming these barriers and implementing sustainable practices into the leasing process.
More commercial leases do not currently stipulate any shared or unilateral environmental objectives.
Few leases incorporate provisions contemplating the reduction of waste production or require that the tenant improvements match the standards of LEED CI or equivalent.
Most existing commercial leases will not require certain types of materials to be used or mandate the use of environmentally friendly products by the parties. In fact, most leases will stipulate that the tenant must use new (or as new) building materials.

GREEN LEASING CONSIDERATION

Ultimately, pursuing a successful green initiative through the vehicle of a green lease requires the landlord and tenant to work collaboratively to establish key elements of sustainable practices and concrete methods of implementation. The main provisions that both parties will want to consider when entering into a green lease are the operating costs, utilities, landlord and tenant work, access and relocation rights, and the assignment and subletting provisions.

A green lease may also specifically detail things like environmentally preferable cleaning products, comprehensive landlord and tenant procurement guidelines, requirements for natural or low water consumption landscaping, the ability to specify higher cost.

GREEN LEASING PROCESSES AND PRINCIPLES

Effective green leasing processes and principles remain scarcely implemented and understood by the real estate community.

The Rationale for Sustainability

Because green leasing formalizes the meaning of sustainability between the owner and tenants, the process should begin with a transparent understanding of why this is good for both parties. A clear sustainability vision allows for better definition of the scope of the sustainability program, key metrics, and monitoring and enforcement protocols.

Reaching Stakeholder Consensus

All parties must work together to define expectations, balancing the ideal with the practical and incorporating the flexibility needed to cope with difficult leasing and capital markets. If consensus is not reached regarding the sustainability efforts of the property and one or more parties does not fully embrace the initiative, this could potentially damage other parties’ financial expectations or reputations when performance levels are not met.

Setting the Boundaries of the Sustainability Program

A green lease should be a framework for achieving the goals the landlord and tenants share on these issues, rather than an overly strict document that could become a barrier to tenant attraction and retention.

Moving Toward Common Ground

It helps to begin with an entirely new lease template – adding green components or making amendments to an existing lease document can prove cumbersome and limit your flexibility. If circumstances make wholesale updating of existing tenant leases impractical, a phased approach may be required. In some situations, one tenant’s lease may contradict or prohibit the sustainability goals of another tenant. Identifying and actively managing these conflicts – and striving for consistency in lease language wherever possible – can help prevent friction or disappointments among the building’s occupants.

Assembling a Green Document Set

The best approach is to supplement the lease itself with the following exhibits or appendices:

Guidelines for materials and procedures related to tenant fit-out
A tenant primer that extends the concept of green to office equipment, recycling, travel and day to-day practices (e.g., the proper use of operable windows in air-conditioned spaces)
Procurement guidelines that reinforce the building’s goals of resource-efficiency, indoor air quality, etc.

This integrated set of materials provides greater detail than any single document could. Moreover, this approach distinguishes items that are within the landlord’s control and enforceable under the terms of the lease from ones that may be just as important to the building’s sustainability profile, but depend on the tenant’s voluntary compliance.

Requirements and Enforcement Protocols

A green lease should facilitate the achievement of mutually agreed upon levels of sustainability. Both landlord and tenant need to understand what a good job looks like, how their respective performances will be tracked, and how failures to meet standards will be identified and remedied. Before obligating either party to any green standard practice or reporting protocol, be sure it is both attainable and cost-effective.

Incentives for Collaboration

The ideal green leasing arrangement is one where the landlord forms a collaborative rather than a paternalistic relationship with its tenants. Delineated mutual goals and transparency in reporting are two key elements of this collaboration. Make sure your lease form defines “who pays for” and “who benefits from” greening investments where appropriate.

Managing Through Measurement

Reporting is critical to the success of any green program. Your green leases should delineate the type of reporting that you intend to request and provide. Establish upfront which data sets will be exchanged, at what frequency and at what cost, in order to satisfy the reporting needs of the landlord or any tenant. Each party needs to understand what level of reporting will be required and agree to allocate the dollars and human capital needed to deliver data in a timely fashion.

Considering that the relentless pursuit of energy efficiency is perhaps the most significant step that a commercial building can take on its path to sustainability, any green lease should include a clause that requires the cooperation of landlord and tenants in benchmarking the building’s energy performance with EPA’s Energy Star Portfolio Manager tool.

Certification Strategy and Frequency

Once you decide to pursue a sustainability program for your building, you need to investigate whether you (and/or your tenants) are willing to invest the time and money necessary to secure third-party validation of its sustainability. Decide if you’re simply seeking a one-time certification or are willing to commit to tracking and certifying your building’s performance over the long term. The latter choice should not be made casually because you will need to stay up-to-date as the green standards and rating systems evolve.

Allocating Greening Expenses

Retrofits that enhance the building’s energy efficiency engineering and other assessments related to various building certifications, as well as higher insurance premiums that entitle you to have damaged portions of your building rebuilt to green standards (and recertified as such), are just a few examples of the cost of greening a building. A green lease should clearly reference these expenses and describe how they will be allocated between landlord and tenant. Some tenants may insist on setting a limit on the amount of green expenses that they will be asked to shoulder in any given year.

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[This article written by Dennis Walsh, Building Better Buildings Organizer]