Green Leases Add Value to Sustainable Real Estate

When it comes to quantifying the value green strategies bring to an asset, green leases are a fundamental component of the green real estate investing underwriting process. Yet we see that many property investors and real estate lawyers are reluctant to embrace this extremely important tool for clarifying and preserving the hard cash benefits confirmed by their terms.

Need a primer on green leases? We’re reprinting an excerpt of a post written recently on Sustainablog:

In order for a commercial office building to achieve the most in terms of sustainability, the landlord and its tenants must partner in working toward that goal. In the case of the landlord and tenant relationship, the governing document is the lease. If the landlord and the tenant agree that the property subject to the lease should be constructed, operated and occupied in a sustainable fashion, that should be reflected in the lease.

What Should a Green Lease Cover?

A “green” commercial office lease should incorporate the agreed upon sustainability goals for the building and the rights and responsibilities of each party necessary in order to achieve those goals.  Typically, sustainability goals for a commercial office building would include one or more of the following:

- Goals for reduced consumption of energy, water, and other natural resources;

- Goals for minimizing waste and diverting both construction and operational waste from landfill – in other words, recycling goals;

- Goals for creation and facilitation of superior indoor and exterior environmental quality; and

- Data collection, sharing and use as between landlord and tenant.

After these goals have been agreed to, the lease should be clear about the level of commitment on the part of the parties to achieve them.  One suggestion is that landlord and tenant agree in the lease to make good faith, reasonable efforts to achieve the stated sustainability goals and to reevaluate each of the goals periodically during the lease term.

Reduced Energy and Water Consumption

In order to make the goals of reduced energy and water consumption realistic and achievable, the parties must be able to measure their consumption.  After all, if you can’t measure it, you can’t fix it.  Thus, the green lease should provide for metering or submetering the tenant’s consumption of energy and water in its premises and should address the cost and responsibility of installing and periodically reading the meters.  The party responsible for reading the meters periodically should also be responsible for promptly communicating the information gleaned from the meter readings to the other party to the lease.

Equally important in a green office lease, the economic costs and benefits of reduced resource consumption should be allocated between landlord and tenant in a manner that both facilitates the goal of reduced consumption and compensates the appropriate party(s) for the cost(s) (if any) incurred to get to that goal.  Thus the traditional office lease arrangement whereby the cost of the energy and water consumed by the tenant in its premises is included in the base rent, with the tenant possibly paying its share of building wide cost increases over base year costs, needs to be examined and modified.  In the traditional scenario, the tenant typically has no knowledge of what it is consuming and it has no economic incentive to minimize that consumption.

Finally, the green office lease should set forth milestone dates around which the parties agree to discuss how actual consumption compares to the sustainability goals set forth in the lease and to use reasonable efforts to correct any discrepancies.

Waiting for Stimulus Bill Funding to Green Your Commercial Property?

Commercial property investors are so busy stabilizing their weakened portfolios, that it’s no wonder that the news of an impending stimulus package makes everyone hopeful.

Over the past few days we have received several summaries of the announced House Stimulus bill that is being proposed by the Obama administration. We found a brief, quick summary of the Stimulus Bill here that you can take a look at.

The news for green real estate finance and investment?

The federal government’s focus within this bill is on several sectors closely tied to federal contracting, community and private residential activities. But not much of anything for investment commercial real estate (sigh). Particularly, not for the greening of your commercial real estate assets.

Residential housing does garner some funding. But when you do some basic math, you can quickly estimate that it does not translate into larger dollars per homeowner (i.e. questionable effect at that level).

Is this wrong?

Remember,  commercial property owners with federal and state tax liability may still qualify for federal incentives to offset the cost of energy efficiency retrofits, depending upon the level of energy demand reduction that they achieve. That is in addition to any other utility rebates and state incentives their projects qualify for  — such as renewable energy, for example.

Of course, it would have been better if the federal government had included funding for green or energy efficient retrofits to commercial real estate now that so many property owners are on board with greening their properties.

But apparently we’ll have to see if the directing of funding to these other sectors may indirectly help markets where green properties operate.

Your thoughts? Do you think that the proposed Stimulus Bill should contain specific funding for the greening of commercial real estate?

Green Real Estate Finance & Investment Celebrates and Anticipates New Agenda

How are you spending your inauguration day?

No one here at Galley Eco Capital is bashful about taking personal time to celebrate  the Obama inauguration and mark the day our national leadership moved decisively towards a more sustainable economy.

USA Today confirmed that the celebration sentiment is nationwide:

But because of the special historic significance of Barack Obama’s swearing-in, some employers accept that Tuesday won’t be business as usual…About 5% of businesses are closing altogether, according to the Society for Human Resource Management. That is more than those that close on Election Day and about the same as those closed the day before Thanksgiving.

Green real estate was bolstered in 2008 on Barack Obama’s promise of an agenda that focuses on a green economy. No one really knows what a green economy is, actually.  Everyone knows, however, that commercial real estate is at the center of it.

So what’s different now that our national leadership favors green buildings and energy efficiency?

Two thoughts:

• Less excuses for the laggards. There will be less collective sympathy for property owners who are not employing a green strategy to their portfolio’s.  I think some owners will be surprised by how quickly that sentiment will start to materialize. Also, those that have already been on the green learning curve will be accelerating their pace ahead of the pack — capital markets willing.

• More focus on the nuts and bolts “how-to” instead of the “maybe if” of energy efficiency retrofits on exisiting buildings. We think there will be an explosion in on the ground best practices for property owners that want to retrofit or green their existing properties.  Our particular focus this year will be on financial and  underwriting best practices that help the owners to realize the best returns on their energy efficiency retrofit or green development investment. More about that later.

In the meantime, soak in the history we’ve all created. And don’t be shy about sharing with all of us your thoughts on the following question:

What’s your green real estate burning question in 2009?

Share your thoughts. Great answers will be published here and shared with the rest of the (rapidly growing) Green Journey crowd.

Enjoy the day!

Part 6: Starting A Green Real Estate Fund?

If commercial real estate has truly embraced going green, why bother with green real estate funds?

In Part 6 of our Special Series on the Green Building Finance & Investment Forum - New York, co-sponsored by Galley Eco Capital, we talked shop with established and emerging green real estate fund managers. We wanted to learn why investors and development partners want these funds, and the do’s and don’ts for building a green fund.

The panel, moderated by our own Lisa Michelle Galley, featured the perspectives of  industry pacesetters Deborah La Franchi of Strategic Development Solutions, John Hirschfeld of Class Green Capital Partners, Raymond McGaugh of Kiwanja Capital Partners, and Leanne Tobias of Malachite LLC.

Does commercial real estate need pure green real estate funds?

The panelists highlighted the following advantages of a green-specific fund strategy:

• Green real estate funds align capital more clearly with mission. Increasing numbers of  of institutional investors, especially pension funds, are adopting a double and/or triple bottom line (TBL) focus - meaning they measure economic, ecological and social returns on their investments. Green real estate funds allow them to allocate capital to sustainable investments at their targeted market rate of return. For Raymond McGaugh and Kiwanja Capital, a green, urban redevelopment investment strategy resonates better with their investor audience.

• JV development partners are seeking a green fund’s concentrated expertise. It’s not just investors that are looking for green real estate, potential JV partners are looking toward green capital sources. Strategic Development Solutions recently surveyed over 400 developers to gauge whether a green-specific fund would satisfy their equity needs. The response was very positive, even among the groups that had never worked with green before. The results make sense: there are many experienced, smart development groups that need to gain the organizational capacity to develop green properties cost effectively, or risk becoming obsolete. Partnering with capital sources committed to sustainability, that can also educate them is a cost-effective method of gaining this capacity.

“Developers would love to have a capital source to help them up the green learning curve.“-Debbie La Franchi, Strategic Development Solutions

• Green funds benefit from the superior financial performance of green assets. Green real estate assets benefit from lower operating costs and reduced performance risk. A “mixed” fund that invests in both green and conventional real estate assets dilutes the positive green impact on returns. For Leanne Tobias of Malachite LLC, this is the most important reason for an all-green fund: “If you are going to spend the time to create a new investment platform, why would you not build a vehicle that will maximize the benefit from green-specific performance enhancements?”

Best practices for building a green real estate fund

Already raising your own green fund or planning on contributing capital to one? Here’s first hand advice from the panelists:

• Your team must have sustainability expertise. The fund absolutely must have in-house staff that is knowledgeable of green construction and design, and is experienced working with both LEED and Energy Star rating systems. For John Hirschfeld of Class Green Capital Partners, this means staff that understands sustainable construction and can “get through the green clutter“, identifying the financial implications of green components for a potential investment, and bring these figures into the financial engineering of both the asset and the fund.

• Pay attention to both the leasing team and lease structure. Work with your JV partners to ensure that the leasing team for your investments understand the marketing benefits of green assets, and can adequately convey these benefits to the marketplace. (Our note: also make sure that their asset managers know and understand the value of green). It’s also crucial that your partners are using the right lease structure, so that the financial benefits of going green are accruing to the investors, not just the tenants.

• Establish the right partnerships. Seek partners that can help you maximize the returns from your green fund. As an example, Strategic Development Solutions has a partnership with Johnson Controls, who evaluates the green construction and design for each fund investment. Strategic partners look at the fund’s activities from a different lens, ensuring that no important details have been overlooked and that potential returns are not left on the table.

• Proper reporting is crucial. Reporting obligations are critical components of a successful green fund. Your triple-bottom line investors will require reports that show the environmental impacts of your investments- how much energy and carbon emissions is your investment portfolio actually saving? Your JV partners and their vendors will have to accurately track energy and water usage. In addition,  don’t forget about appraisers: there aren’t many green comps out there yet, and if you want to maximize the value of your assets, you need accurate and robust reporting of energy performance and green-leasing advantages to build the case for higher valuation.

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If you liked this post and would like to receive more, please subscribe. Don’t forget to read the other installments of our Special Series on the Green Building Finance and Investment Forum - New York. As always, we welcome your comments.

Your 2009 Career Insurance Policy: Get LEED Accredited

Happy New Year!

The team at Galley Eco Capital enjoyed a restful holiday and are happy to reconnect with you on the 2009 Green Journey.

Hint: A recent study says that nearly 85% of real estate executives are working on greening their portfolios.

Are you prepared?

I’ve spoken with finance and investment professionals who say that they are not convinced that project LEED certification issues really relate to their work.  (Author’s epiphany: They never seem to subscribe to Our Green Journey, either.)

Being at the top of our game in this business is all about knowing how to judge property values and where they’re headed. And you can’t tell where values are headed these days without establishing the positive connections between integrated design, or green retrofitting, and asset value.

I think pragmatism should guide your thinking on this one. So many investors have announced that they are working on greening their existing building portfolios, you don’t want to run the risk of having obsolete skills. Finally, the USGBC is transitioning to LEED 3.0 soon, so you may want to get accredited anyway, particularly if you’d already started studying for the LEED-NC 2.2 exam and had gotten sidetracked before.

Do the LEED Hustle: Updates and Exam Prep Opportunities here in the San Francisco Bay Area

So here’s a public service announcement from my local Northern California USGBC Chapter:

Registration for the current LEED AP exams closes March 31st!

LEED Exam prep classes here in the Bay Area sell out in minutes. So some energetic hustle is required if you’re serious about getting accredited. Upcoming course choices with links are posted below.

Everyone else –> contact your local USGBC chapter about exam prep classes, get accredited and be the lion in your job market, not the gazelle.

LEED New Construction (NC) v2.2 Exam Preparation Workshops:

This full-day LEED NCv2.2 Exam Training Workshop will be offered in Silicon Valley and Sacramento and is designed to prepare you pass the test with confidence - the first time.  This is the “old” New Construction exam that will be offered until around May of 2009.  The “new” exam will come out sometime around summer of 2009.

January 23rd
8:30 AM - 4:30 PM
Milpitas

Click here for more information/registration.

February 11th
8:30 AM - 4:30 PM
Sacramento

Click here for more information/registration.

LEED Project Management Workshop:

January 30th
8:30 AM - 4:30 PM
San Francisco

Click here for more information/registration.

LEED for Commercial Interiors Exam Prep Workshop:

February 2nd
8:30 AM - 4:30 PM
San Francisco

Click here for more information/registration.

Green Building Operations and Maintenance Workshop;  The LEED Implementation Process:

This is the new 2009 version that will be part of the support for the new LEED EB exam that is due out around spring 2009.

February 6th
8:30 AM - 4:30 PM
San Jose

Click here for more information/registration.

Informative events about the LEED v3.0 transition:

LEED 2009: Looking Ahead:

The U.S. Green Building Council Silicon Valley Branch is presenting a look ahead at the changes to LEED Accreditation.

In this session you’ll get answers to your questions, like:
* Why is the LEED AP exam system changing?
* What are the differences between the new LEED Credentialing system and the
current LEED AP examination system?
* What is the timeline for introducing the new system?
* When can I expect the exam to change?
* When the new system emerges what does it mean for current and future LEED AP’s?

January 13th
5:30 PM - 8:30 PM
San Jose

Click here for more information/registration.

LEED Update: New Testing and Rating Systems:

For those of you who could not make it to Boston for GreenBuild, now is your chance to catch up on what is in store for LEED in 2009 and beyond.  LEED Version 3 takes effect in 2009 and will bring about the most significant changes to the LEED program in years.

Additionally, the LEED AP testing program will be overhauled in 2009.  The new credentialing program will feature LEED Associates, LEED Accredited Professionals and LEED Fellows - each with their own testing and maintenance requirements.  Join us on Jan 14th and be among the first to learn how these important changes to LEED will impact your projects and teams.

January 14th
5:30 PM - 7:00 PM
San Francisco
Click here for more information/registration.