A green lease is a commercial lease that helps to align tenant and landlord interests for investments in energy efficiency.
In our last educational post, we looked at the differences between different types of commercial leases. Quick recap: the most common types are “gross,” under which the landlord covers expenses like taxes and utility bills and the tenant pays a flat fee, and “net,” under which the tenant covers these costs. A green lease can be gross or net – what is important is that interests are aligned for energy efficiency.
Every green lease is different by necessity. Landlords and tenants have different needs and goals, and so a green lease is a relatively nebulous thing. Generally, both parties sit down at the negotiation table before signing a green lease, because there are extra requirements on each involved in the agreement.
One clause that is often included in a green lease involves cost sharing. Under a triple net lease, tenants pay utility bills and landlords pay for building upgrades. This produces a misaligned incentive – landlords have little motivation to invest in energy-efficiency retrofits because their tenants would reap almost all of the benefits. Tenants are interested in paying lower utility bills, but it isn’t their building.
Cost sharing clauses allow landlords to pass part or all of the cost of an energy-efficiency investment on to their tenants. Landlords benefit from an investment that increases the desirability and value of their asset, and tenants benefit from monthly operating costs that are often significantly lower. The average payback time for most energy-efficiency retrofits in roughly three years.
A green lease may also include non-financial concessions. A tenant might agree to allow cleaning and repairs to be conducted during the day, while the space is in use. While this may be minimally disruptive, it prevents the building from having to be operated at night, which reduces utility costs. A tenant might also agree to close window shades on hot, sunny days, or to make other, more industry-specific concessions.
Some green leases are goal oriented. Many tenants care about obtaining certifications like LEED or Energy Star for the spaces they rent and are willing to work with landlords to achieve that goal. These certifications look good from a corporate responsibility perspective. Landlords are almost always interested in these certifications because they allow higher future rents. A green lease helps by clearly setting out the expectations on each party.
Because a green lease is not a well-defined thing, there are many approaches to the negotiations that lead to one. That said, things often begin with an interested tenant sending a Request for Proposal to one or more landlords. Interested landlords give the prospective tenant information about standard rental information like lease terms, rates, and renewal options, and also provide information about existing green practices and potential improvements.
Next, a Letter of Intent is drafted with more specific information about building certification requirements, improvement plans, and responsibilities relating to energy-efficiency. Finally, the lease is negotiated and signed.
Almost any commercial lease can be modified to include green lease elements. In fact, many buildings include features and services that are commonly included in a green lease, but miss the opportunity to position their offering as such. While there are no specific requirements as to what constitutes a green lease, the Building Owners and Managers Association International provides guidelines that can help to direct interested tenants and landlords in the right direction.
When used correctly, a green lease can be a powerful tool for reducing operating costs, increasing property values, and achieving sustainability goals for both sides of the equation.