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.