Builders and developers have earned recognition in the past 10 years for elevating the U.S. Green Building Council’s Leadership in Energy & Environmental Design (LEED) program into an industry standard, but the commercial real estate experts in charge of the next step – how the sustainability plans get carried out – have been ignored until now.
The Green Lease Leaders Recognition Program began in mid-January 2014. The program, sponsored by the Department of Energy’s (DOE) Better Building Alliance, will provide brokers, landlords and tenants who participate in the program the chance to add a marketable “Green Lease Leader” seal after the name. To apply, brokers must provide examples of their green leases to the Washington, D.C.-based Institute for Market Transformation, which will manage the recognition program for the DOE.
Green leases are contracts that align the financial and energy incentives of building owners and tenants working together to save money, conserve resources and ensure the efficient operation of buildings. Some common components of a green lease that go beyond standard cost-recovery clauses include provisions that require energy- and water-usage data. An agreement on operating schedules to maximize energy savings during off-hours (nights and weekends) and clauses encouraging energy-efficient tenant fit-outs should also be agreed to.
Green Language in Leases
Other industry programs recognize green- minded building professionals, but these programs, such as the LEED AP program for brokers, require much more green engineering knowledge than how a lease is structured. Green language in leasing, in practice, is still relatively young, and it is a part of a lease that is generally not shared publicly. It is hoped this recognition program will elevate knowledge and awareness, and encourage conversations with clients about why adding the green requirements to the lease, rather than just having a recognized building label, will keep the sustainability programs from falling short.
Ground Lease/Net Lease: Split Incentive
In 2013, the Alliance released two case studies featuring tenants who incorporated green lease standards. One company was in the retail space and the other was in the office space. Both companies had to battle what has held green leasing back: the problem of “split incentive.” Gross leases do little to encourage the tenants to save energy because the costs are paid by the landlord. Net leases, on the other hand, give tenants more incentive to save money, but landlords then have the added burden and expense of gaining access to tenants’ energy-use data to make informed sustainable spending decisions.
The case study included a 1.3 million square foot retail complex. The property has sustainable features such as a green power purchase agreement, a rainwater harvest system and energy-efficient lighting systems. However, the standard leases do not reflect the needs of the sustainable features, so the company implemented green language in the leases to achieve the LEED Interiors certification.
The other firm included a clause to get past the net lease split incentive problem, requiring tenants to either submit monthly utility data or allow the landlord to install submeters to track energy usage. The company was able to incorporate the clause into all new leases in 2012, covering roughly 1.8 million square feet. It has experienced very little resistance to the new contract requirement. Some examples of green lease language, provided by the DOE, include:
- “Landlord is hereby authorized to request and obtain, on behalf of Tenant, Tenant’s electric consumption data from applicable utility provider.”
- “Notwithstanding anything herein to the contrary, if Landlord reasonably determines that Tenant’s use of electricity is excessive,
Tenant agrees to pay for the installation of a separate electric meter to measure electrical usage in excess of normal office use and to pay Landlord for all such excess electricity registered in such submeter.”
The Green Leaders program is working closely with the largest landlords and brokerage firms as well as all industry associations to be sure there is a comprehensive awareness that will help achieve their long-term goals of sustainability and conservation.
Article written by Alvin Arnold, Editor of the BDO Real Estate Monitor. It was originally published in the BDO Real Estate Monitor Spring 2014.
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