More on green lease clauses: Out with the bad, in with the good
Today’s post shares details about that “bad” green lease featured last Friday. Also I’m sharing a few green lease tips from BEPN that talk about ways green lease language can help support value creation in environmentally certified buildings.
The “bad” green clause’s web of risk
Several folks pointed out that LEED-EBOM certification can be achieved without any cooperation from the tenants. Unfortunately, our “uniquely negotiated” lease contained other typical provisions, which, when combined with the green clause in question, made the green business case uncertain, in the eyes of the buyer.
The lease in question was that of a major tenant - and major tenants are often able to negotiate special terms many other areas of the lease, with a deep focus on the expenses that can be passed through via common area maintenance and capital expenditures.
The major tenant lease was no different. Lease language required the Landlord to obtain the major tenant’s permission in advance of passing through any expenditures, which were outside of a stipulated list. On top of that, the pro rata formula for calculating the tenant’s share of base building common area included an alternative common area square footage. The formula denominator was a negotiated larger number, so the major tenant would pay less than its full share of common area expenses.
All of the above moves are typical, and limit the major tenant’s exposure to unforeseen or undesirable cost increases over the lease term. In exchange for this, the Landlord gets a great tenant on a long term, which greatly enhances the building’s image and value.
The limiting of expenses (which is typical) plus the questionable “green” clause, created a situation for the investors where, a) much of the CAM and capital expenditure repayments were “locked in” by the prior owner over a very long time, limiting the new landlord’s flexibility, and b) if any type of CAM or cap-ex charges were related to “green features” over the major tenant’s lease term, they couldn’t recoup those charges from the major or any other tenant either.
These investors’ business plan is to hold assets for a long term and realize an explicit increase to NOI from operating them as certified green buildings. So they were very focused on lease language not limiting their ability to execute that strategy. Losing part of the CAM recovery via the negotiations might be typical, but being further prevented from recovering costs from any tenant for any sustainable features over a long term put the lease contract into their “risky” column.
BEPN: “Green leases essential for achieving landlord’s environmental goals”
Check out this article from BEPN titled “Green Leases are Coming” (subscription might be required). It lays out a few issues that green leases address, all aimed to make sure that tenants and landlords are aligned with the environmental goals set for a project.
Essentially, the article talks about the kinds of lease provisions that can be negotiated with tenants so that it is easier for the landlord to achieve environmental objectives for a building.
The only part of the article that I would question is the assertion that most leases in the United States are triple net. During my tenure on the San Francisco Mayor’s Task Force, we talked about this point at great length. Large owners and property managers on the task force indicated that most office buildings are leased with gross leases. Of course, retail and industrial properties are nearly always triple net leased.
In any event, the main point here is to make sure you do not exhaust yourself trying to develop or retrofit green, then negotiate the “same old same old” in your leases. If you do, you are passing up a great opportunity to maintain and enhance the value of your environmentally certified building.
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Green Building Finance and Investment Forum New York
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The Green Building Finance & Investment Forum is where industry pacesetters advance sustainability via their innovations and best practice in energy efficiency, green real estate development, investment, finance and operations. Twice a year, approximately 150 leading green real estate investors, financiers and practitioners come together for an intense 2-1/2 days of workshops, presentations, frank discussions and, of course, dealmaking.
The participants, all senior professionals from high-caliber firms, set the bar high. And the presenters, their equally demanding peers, never fail to deliver hard content and inspire. The result is a productive, memorable experience that we humbly call “the TED of green real estate”.
Galley Eco Capital, in collaboration with InfoCast, is a founding co-organizer of this highly unique event. On the heels of a very successful New York meeting in September ‘08, we decided, together with our friends at Building Energy Performance News, to publish the summary perspectives of the industry pacesetters that are making sustainability a successful, viable investment strategy for the real estate community.
The summaries of the forum topics and individual perspectives will be published here in a series of ten posts on a weekly basis. Here is an advance peek at the lineup (note: if a post is linked, then it has already been published – click on the link to go directly to the post).
- Lessons for Future-Proofing Property Values
- Unlock Hidden Cash Flow and Value with Energy Efficiency Retrofits
- JP Morgan Chase Talks Green Real Estate Investing
- Portfolio Owners Top Advice for Greening Existing Buildings
- Green Building Drives Triple Bottom Line Advantages
- Starting a Green Real Estate Fund?
- Valuation & Risk in High Performance / LEED Commercial Real Estate
- Green Leases: An Important Component of a Green Real Estate Investment Strategy
- Perspectives on Assessing & Financing Portfolios for Energy Retrofits
- Green Finance: Current Trends, Future Outlook
- Carbon Risk Management: What It Means for Real Estate Portfolios
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Subscribers to Our Green Journey will be receiving this series automatically. Please subscribe to Our Green Journey either via email or RSS in order to make sure that you do not miss any of these summaries. Clients and friends who are already within Galley Eco Capital’s newsletter community will see special summaries of these posts in future newsletter editions as well. Contact us if you wish to receive our newsletter.
Our special thanks to Building Energy Performance News for helping us to spread the word about this special event and its participants, as well as to InfoCast, which has been an innovative partner in creating and advancing this particular meeting for the green real estate community.
And if you were a participant at these meetings, and wish to share your feedback, by all means contact us.
