What started as a novel idea several years ago, has quickly garnered widespread acceptance across the country. Green building is here to stay and is expected to emerge as a best practices for commercial buildings with governmental authorities beginning to adopt laws and regulations mandating certain sustainable building practices. Businesses too are appreciating the value of going “green”. More and more companies are pursuing green initiatives to reduce operating costs and to appeal to the growing popularity of green environments. If you are a landowner or a tenant interested in implementing green practices into your building or leased premises contemplate the following issues when negotiating your next lease agreement.
Defining a Green Lease. You, like most people, have heard the words “green lease”, buy what does it really mean, and is a green lease right for you? A “green lease” should set forth the terms under which the landlord and tenant agree to operate to achieve the mutual goal of reducing the consumption of energy, water and raw materials, encouraging recycling, increasing the use of sustainable products, and promoting practices that will lessen the adverse impact on our environment. A “green lease” need not be limited to a newly constructed, LEED certified building, but can be adapted to existing buildings. In such instances, a landlord and tenant may incorporate green lease terms that support sustainable lifestyle practices, like recycling, reducing energy consumption and installing environmentally friendly operational and maintenance systems.
Standards for Green Building Practices. The prevailing standard for ecologically sustainable development is the Leadership in Energy and Environmental Design (LEED) program established by the U.S. Green Building Council. Through the LEED program, the Green Building Council established specific guidelines for the design, construction, and operational components of a building considered to minimize the environmental impact of buildings. Under the LEED Green Building Rating System an applicant earns points for implementing approved standards to achieve a certain level of certification. The LEED program has three certification levels, silver, gold and platinum. Initially, the Green Building Council created standards for new construction, however has established a LEED rating system tailored to existing buildings. There are also guidelines for commercial interiors, retail, healthcare, schools and houses.
Design and construction. An integrated design and construction process will be an important component of a green lease especially for a build-to-suit situation. The lease should clarify the level of certification the landlord and tenant are attempting to achieve for the building and tenant improvements under the LEED rating system. When negotiating the construction schedules and delivery dates both parties will need to recognize the additional time required for green construction. Architectural renderings and construction plans may need to be exchanged between the parties more frequently than the plans for conventional buildings and tenant improvements. The lease also should specify the allocation of responsibilities between landlord and tenant concerning application and certification duties and fees, which can be expensive and time consuming. A green lease will encourage sustainable lifestyle practices of the company’s employees and customers therefore bike racks, locker rooms, showers, recycling facilities and parking spaces designated for electric cars will be common characteristics of a green building and tenant’s premises.
Demolishing tenant space and constructing tenant improvements produce significant amounts of solid waste that ends up in landfills across the country. A landlord may want the lease to obligate the tenant to dispose of its construction waste in recycling bins. In addition, a green lease should permit the tenant to utilize recycled materials when doing the initial build out or subsequent remodeling of the tenant’s premises.
Rent. The cost to construct a new green building is typically higher than a conventional building. On the other hand, utility costs and other operational expenses of a green building are on average lower. Accordingly, landlords and tenants should thoroughly consider the allocation of rental amounts. To recover the high cost of constructing a green building a landlord may utilize a gross lease with base rents comparable to the base rents for a conventional building and then receive the benefit of lower operating costs. If, however, a landlord intends to off set the high costs of initial construction with higher base rents, then the tenant should expect to receive the benefits of lower utility and operating costs. This can be achieved with a triple-net lease.
Utilities. According to a report promulgated in October 2008 by the U.S. National Science and Technology Council, commercial buildings in the United States account for 18% of all energy consumption. It is also estimated that 15% of drinking water is consumed by commercial buildings. As a result, it is important that landlords and tenants focus on measures that will promote energy efficiency and reduce water consumption. For example, a landlord may install low-flow toilets and faucets and waterless urinals, separately meter the tenant’s space, and install natural landscaping. Furthermore, both parties may agree to decrease the wattage of power provided to the leased premises and to use Energy Star-rated appliances and photocopiers.
Operation and Maintenance. The heating, ventilation, air conditioning and electrical systems of green buildings often necessitate specialized operation and maintenance requirements. A green lease may require the tenant to operate, maintain and repair these systems in accordance with a detailed operations and maintenance manual. The lease also should identify the party responsible for such maintenance and repairs and the qualifications of the person authorized to perform the work. While many conventional leases allow a landlord to charge the tenant for its share of any capital improvements made to the building to reduce energy costs, a green lease would take it one step further by requiring that such improvements comply with LEED standards. On the other hand, a tenant should attempt to limit or control the type and amount of capital costs the landlord may pass through to the tenant otherwise the landlord may completely retrofit or “green plate” an older building to achieve a LEED certification knowing that he can stick the tenants with the costs. A green lease is likely to permit the landlord to enter the tenant’s premises to determine continued compliance with environmental standards and promote the use of environmentally friendly cleaning products especially for carpet cleaning.
Insurance. Finally, consider obtaining property insurance specifically tailored to cover LEED certified buildings. This insurance would cover the cost of certification fees and replacing elements of a building that are specific to a green building including solar heating systems, energy efficient lighting, vegetative roofs, and storm water detention facilities.
Impending Laws and Regulations. Seeing long term cost savings, landlords and tenants are voluntarily incorporating sustainable building practices into their buildings and leased premises. Nevertheless, several cities, such as Seattle, Boston and Los Angeles, have started to impose building ordinances mandating that new construction satisfy certain green building practices and it appears that this will be a trend for many other governmental authorities in the United States. Laws and regulations that require owners and tenants to retrofit their existing buildings when undertaking any remodeling or expansion project are also expected in the near future.
Consult with a real estate professional about your interest in ecologically sustainable development initiatives. Many contractors, engineers, architects, and lawyers are well-informed about LEED programs and green development and are prepared to assist you with your future green project.