Economic forces are moving buildings toward sustainable leases.
In February, San Francisco
Mayor Edwin Lee signed into law the San Francisco Existing Commercial Buildings
Energy Performance Ordinance, requiring commercial building owners to file
annual energy benchmark reports and to conduct more-extensive energy audits
every five years. New York passed a similar law that requires all private
buildings larger than 50,000 square feet to periodically measure and report
energy usage. In addition, Washington, D.C., Austin, Texas, Seattle, and
Washington State have enacted sustainability mandates. And, in December 2010,
the Energy Independence and Security Act of 2007 took effect, requiring federal
agencies to lease space only in buildings that carry the U.S. Environmental
Protection Agency’s Energy Star label.
As energy efficiency plays
a larger role in the commercial real estate industry, green leases must
contractually mandate tenant cooperation, since failure to comply with such
auditing requirements can lead to a breach of leases, tax abatement agreements,
and loan covenants in addition to the loss of green certification. The
magnitude of such failures can’t be overstated: For example, the developer of
Destiny USA, a retail project in Syracuse, N.Y., is in danger of losing more
than $120 million in tax exemptions for failing to include promised alternative
energy innovations in the redevelopment.
In many U.S. cities,
planning departments are leading the way by requiring all new construction to
meet sustainable or green standards, as evidenced by the fact that some are
adopting the International Green Construction Code.
Market forces as well as
government mandates point to a future where all new construction contains
sustainable elements. These technologies include using high-efficiency interior
lighting and day-lighting by increasing window size and number, improving the
sound-attenuation and air quality of interior spaces, using reclaimed water for
landscaping irrigation, installing water-efficient plumbing fixtures, using
recycled or renewable materials in building construction and tenant
improvements, and using low-toxicity cleaning materials.
Return on Investment
In surveying brokers
throughout the country, feedback consistently shows that tenants generally will
not agree to pay a base rent premium in the near term for leasing space in
green buildings. And, the anticipated reduction in operating expenses does not
justify landlords’ expenditures to retrofit buildings to meet green standards.
construct green buildings and landlords make retrofit investments to achieve an
expected increase in building value upon sale. With federal entities and more
private businesses demanding green space, the green building values continue to
rise — even without higher rents — because sellers can demonstrate increased
occupancy and market demand for energy-efficient space.
In fact, green building
values continued to climb during the depths of the recession in 2009, according
to McGraw-Hill construction reports. From 2005 to 2009, green building value
increased from $10 billion to $49 billion and is estimated to increase to $150
billion by 2013. In addition, CB Richard Ellis reports that green buildings
comprised 35 percent of new construction last year.
Architects and designers
often lead green building initiatives, incorporating their sustainable designs
into corporate properties. While large, publicly traded companies have been
first to implement sustainable practices, they are also the most interested in
occupying sustainable buildings to gain improved employee productivity and
positive public relations, according to CBRE data.
As green leasing trends
trickle down to smaller properties and tenants, the challenge will be for
brokers to learn how green leases protect both parties by requiring compliance,
not only with energy and water audit laws, but also with more broad-based state
and local green building construction mandates.
Green leases have key
elements not typically seen in other leases. For example, green leases require
a landlord’s detailed review of the space, including interviewing occupants and
checking a property’s thermal comfort and other systems to ensure they are
being used correctly and maintained properly to maximize efficiency. Green
leases also help to ensure that tenant actions remain consistent with landlord
intentions to meet state and local green rating compliance obligations.
Commercial real estate
professionals have access to numerous green leasing resources. The Building
Owners and Managers Association International’s most recent Guide to Writing a
Commercial Real Estate Lease, Including Green Lease Language provides
suggestions for brokers to incorporate sustainable operations and management
practices into their deals. In addition, the Real Property Association of
Canada’s National Standard Green Office Lease for Single-Building Projects is
available free online. The RealPAC lease has a lengthy addendum, whereas the BOMA
lease has the provisions integrated throughout the lease.
www.squarefootage.net provides a model green lease that was created by a task
force of attorneys, real estate brokers, corporate tenants, landlords, and
green-building consultants. It covers indoor air quality, energy use, carbon
credits, water consumption, recycling, green cleaning specifications,
insurance, commissioning, operating costs, tenant improvements, and building
Richard C. Mallory is a
partner in the real estate group at Allen Matkins Leck Gamble Mallory &
Natsis LLP in San Francisco. Contact him at firstname.lastname@example.org.