Publications: Green leases: a general primer

Over the course of the last decade, the green building movement has changed the way developers and corporate users of real estate view a building's effect on the surrounding environment. Not surprisingly, green leases have become a particularly important topic for landlords, tenants and their respective professional advisers in recent years. Tenants of all kinds are becoming more environmentally conscious of the characteristics of their space. And in challenging financing and leasing environments, landlords are looking at the long-term financial benefits that green buildings can provide, both from marketing and operational perspectives. This article provides an introduction to basic green leasing concepts and some of the resources available to tenants and landlords who may be contemplating green lease transactions.

Any professional who is going to be involved in a green lease transaction should have some familiarity with the most commonly used environmental rating systems.

• LEED — Leadership in Environment and Energy Design. This rating system was developed by the United States Green Building Council (USGBC). The system awards various levels of certification (certified, silver, gold and platinum) depending on the number of credits earned by a project. The credits are earned based on the project meeting specified criteria in the areas of: site selection, water efficiency, energy and air quality, building materials, indoor environmental quality, location and linkage to infrastructure and transportation, innovation in design and regional priority. The individual rating systems were originally designed for different product types such as new construction, existing buildings, commercial interiors and core and shell. Recently, however, the USGBC has introduced sector-specific systems to rate schools, retail, health-care facilities, homes and even neighborhood development.
• ENERGY STAR. Less comprehensive than LEED, the ENERGY STAR rating system manages how efficiently a building uses its energy. Generally, a building is assigned a score of one to 100 relative to buildings of similar use and size based on data gathered nationally by the U.S. Department of Energy every four years. Any building with a rating of 75 or higher is eligible for the ENERGY STAR label. There is also a similar certification process for new buildings.
• Green Globes. Developed by the Green Building Initiative, Green Globes has rating systems for new construction and existing buildings. Much like LEED, it assigns credits based on the project meeting standards in the areas of site selection, energy use, indoor environment, water use, resources and materials, emissions and environmental management.

Below are some of the major issues that arise in green leases:

• Rent structure and operating expenses. With a traditional triple net commercial lease, some real estate professionals have noted that the respective economic interests of the parties are not always aligned so that a green lease makes sense for both parties. While a long-term user may be able to realize the savings provided by green space built to a certain certification level, a shorter term tenant has much less financial incentive to pay the higher base rent the landlord charges for the same green space. One approach that has been suggested for green space is to use a gross (or modified gross) lease structure with an appropriate expense stop so that the landlord has control over the operating expenses and realizes the significant financial benefits of those savings. Meanwhile, tenants have some cost certainty and enjoy the benefits of the green space without having to pay a premium in base rent. The landlord's business person may have to consider alternative rent structures to make green space more attractive to the typical office or retail tenant. If the lease remains a triple net structure, the parties should address who pays for capital improvements made to improve building performance or to bring the building or premises into compliance with any rating system and the maintenance of any certification received.
• Environmental performance objectives. It may be advisable for the lease to contain general language, either in the preambles or in a separate provision, spelling out the parties' intent with regard to the operation of the building. This provision may cite a general obligation for both parties to operate and use the building and the space in a way that minimizes energy and water consumption, wastewater and activities that negatively impact indoor air quality.
• Operating covenants and audits. Here is where the tenant and landlord should try to define specific operating standards and obligations relating to items like indoor air quality, temperature control, recycling, water and electrical consumption and green cleaning. These may also be addressed in the building rules and regulations commonly attached to commercial leases. Maintenance of any rating system certification by the building or premises should be addressed here as well.
• Tenant improvements. In existing building situations, if the tenant has enough bargaining power or is performing the leasehold improvements itself, the work letter should specify which rating system and level of certification the tenant requires the premises (or building) to be built.

Below are two model lease forms that have been developed to help landlords and tenants deal with issues unique to green leases:

• Building Owners and Managers Association (BOMA). BOMA revised its standard lease form in 2008 to include green provisions, which is known as "BOMA's Guide to Writing a Commercial Real Estate Lease, Including Green Lease Language." The form is designed for both office and retail leases, and to be rating system neutral. It employs a traditional triple net lease structure, and the operating expenses include things like rating system compliance and certification costs and capital improvements made to achieve a certain certification. The lease refers to "landlord sustainability practices" as the reference for how the building and premises will be operated and maintained. This form also addresses operating covenants of the tenant relating to energy and carbon reduction and recycling programs.
• Corporate Realty, Design & Management Institute. The Corporate Realty, Design & Management Institute has recently developed its "Model Green Lease" to try to address what it refers to as the "split-incentive" problem. Instead of the traditional triple net lease, the Model Green Lease is structured as a full-service, gross lease with an operating expense stop and an all-inclusive definition of operating expenses. Fixed or CPI-based rent escalations are also included. The rationale behind this model is that the landlord will now have the incentive to control operating expenses and energy costs, where they have less incentive to do so under a net lease structure. The Model Green Lease also addresses such issues as environmental performance objectives, operational performance standards, environmental audits, green cleaning requirements and tenant improvement requirements.

Green leases require the consideration of some unique issues that differ from those encountered in the negotiation and drafting of a traditional commercial lease. However, green buildings are here to stay, so green leases will probably become the new reality in the leasing world.

Reprinted with permission of The Law Bulletin Publishing Company.