What Color Is Your Lease? - Beyond the Grid

Green leases offer sustainable and financial benefits for landlords and tenants alike

By Ina Drosu

In an environment where the ecological lobby is prevalent, and the general economic downturn begs for practical innovation that reduces operating costs, green leases are steadily gaining the interest of landlords and tenants. Profitability is key to survival of commercial ventures; without it, loftier concerns fly out the window. What better way to harness broad improvement potentials than a lease structured as economic driver accommodating comprehensive environmental regulations and allowing for necessary changes over time?

According to a study done by CRD&MI, energy costs are 29 percent of landlord
operating costs while less than one percent is paid for by tenants.

Alan Whitson, president of Corporate Realty, Design & Management Institute, created a model green lease to serve as more than a “token gesture to sustainability.” The lease provides incentives for landlords to build cost-effective peak-performance buildings that address energy and water efficiency, emission reduction, and waste minimization. According to a study done by CRD&MI, energy costs are 29 percent of a building’s operating costs while less than one percent is paid for by tenants. Most commercial leases leave energy efficiency out of the equation. He adds, “in a booming market it’s easy to be green, but now, savvy people realize it is part of an economic strategy to improve performance and productivity.” Additionally, the typical speculative commercial project is built, leased up and then sold, making life-cycle costing of building systems mostly irrelevant to the original developer. There is an inherent disadvantage to installing higher initial cost, more efficient building systems but that is now starting to change.

According to Tom Usher, senior director at brokerage Cushman and Wakefield, green leases promote several beneficial goals such as helping building owners achieve energy efficiency and reducing overall waste. However, a few obstacles prevent them from being more universally adopted. “Many tenants have reservations about how a green lease will impact them, their employees and the bottom line,” says Usher. While landlords who practice triple-net leases which pass increases in operating expenses on to tenants, see little incentive to installing expensive sustainable improvements. “Additionally, it is unclear how the green aspects will be monitored,” says Usher.

Increasingly, commercial leases are including incentives for sustainable upgrades in line with LEED requirements. Rodney Stone, president of space planning firm Environetics, says there is an “explosion in demand for LEED-certified buildings” partly due to corporate sustainability reporting programs, partly in anticipation of compliance mandates by government regulators. Several bills passed in California, for instance, point to an increase in green leases, such as AB-32’s greenhouse gas legislation and
AB-1103’s mandatory owner provision of building energy performance information to tenants and prospective buyers. Third party validation systems, says Stone, such as LEED or Energy Star “provide independent verification that a building project meets a higher standard.”

While building certification and startup commissioning are good first steps, success depends on ongoing operational performance, measurement of which is a LEED shortcoming the USGBC recognizes and is seeking to improve. “Technology in and of itself is not the answer, 61 percent of buildings with an Energy Star rating [which precedes and is stricter than LEED] of 75 or higher are 25 years old or older,” says Whitson. Consequently, he insists on keeping the model green lease neutral, not promoting any particular rating system. In the end, the goal of green leases is to encourage a marketplace where prosperity and sustainability are interchangeable, improving both profits and quality of life.