A Growing Demand: The Need to Get Up to Speed on Green Leases

Green leases are becoming more prominent in the commercial real estate landscape. As energy efficiency and conservation play larger roles in our communities and our everyday lives, the commercial real estate industry is taking notice. But it's not only the overall, ever-present need for increased energy efficiency and conservation driving the demand for green leases - there are other very real factors driving the demand, and commercial real estate professionals (whether owner, developer, broker, attorney or other professional) need to be familiar with these forces in order to stay at the top of the ever-changing real estate market. In addition, commercial real estate professionals should be aware of some of the green leasing resources that are available today.

The additional factors driving green leases can be generally categorized as governmental requirements, investment concerns, and increasing tenant demand. As energy efficiency and conservation are playing larger and larger roles in our communities, governmental entities are responding by moving forward with sustainability mandates. Recently, the San Francisco Existing Commercial Buildings Energy Performance Ordinance (which requires commercial building owners to file annual energy benchmark reports and to conduct more extensive energy audits every five years) was put into law. New York recently passed a similar law that requires all private buildings larger than 50,000 square feet to periodically measure and report energy usage. 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. Many local planning departments are also requiring all new construction to meet sustainable or green standards, as evidenced by the fact that some are adopting the International Green Construction Code.

In addition to such governmental requirements, there are investment concerns to be aware of. Feedback from brokers across the county tends to show that, at least in the near term, tenants generally will not agree to pay rental premiums for leasing space in green buildings, and that anticipated reductions in operating expenses do not justify a landlord's expenditure on retrofitting buildings to meet green standards. Instead, the driving force for developers to construct green buildings, and for landlords to retrofit existing buildings, is to achieve an expected increase in such buildings' value upon sale. In fact, green building values continued to climb during the depths of the recession.

Finally, it should not be a surprise that more and more tenants are looking to lease space in green building. Large, publicly traded companies are often interested in occupying sustainable buildings for various reasons, including to gain improved employee productivity and to create positive public relations. As more of these types of green leases are entered into, the green leasing trend will become more pronounced by trickling down to smaller properties and tenants.

With the demand for green leases increasing over the next few years as a result of governmental requirements, investment concerns, and increasing tenant demand, it will be crucial for commercial real estate professionals to become familiar with green leases as they often contain concepts and provisions that usually aren't often found in other types of leases. Green leases are agreements in which sustainable practices have been addressed in a logical and systematic manner, and which encourage the adoption of sustainable, high efficiency methods while discouraging older, less efficient methods. As such, it is not a simple matter of merely tacking on some sustainable concepts to existing leases; there are numerous areas in green leases that need to be thoroughly contemplated and addressed with sustainable concepts in mind, such as: utilities, lighting, operating costs, recycling, construction of tenant improvements and alterations, use, insurance, cleaning and maintenance requirements, and remedies for each party. Of course, in dealing with green leases, the question that tends to arise is "where does one go to find resources on green leasing?" Fortunately, there are several great resources commercial real estate professionals can currently turn to for guidance and suggestions.

The Building Owners and Managers Association provides a "Guide to Writing a Commercial Real Estate Lease, including Green Language," which provides suggestions to incorporate sustainable operations and management into commercial lease documents. The information is provided in a lease document in which green lease provisions have been integrated throughout. More information is available online at shop.boma.org.

In addition, the Real Property Association of Canada provides a "National Standard Green Office Lease for Single-Building Projects," which also provides valuable suggestions to incorporate into commercial lease documents. More information is available online at www.realpac.ca/green-office-leases/.

Lastly, www.squarefootage.net provides a model green lease that was created by a task force of attorneys, real estate brokers, corporate tenants, landlord and green building consultants. It address numerous concepts such as indoor air quality, energy use, carbon credits, water consumption, recycling, green cleaning specifications, insurance, commissioning, operating costs, tenant improvements, and building systems.