As the movement to increase energy efficiency and create sustainable operations has swept across the real estate industry, more and more commercial tenants and property owners are expressing interest in “green leasing.”
What, exactly, is a “green lease?”
To be sure there is no form green lease; rather the term describes the evolution from a traditional, split incentive triple-net commercial lease to a lease that aligns incentives so that landlord and tenant are collectively pursuing goals of energy efficiency and sustainable practices. Typically, a green lease will include measuring criteria or rules that implement all or portions of ratings systems such as Energy Star® and the U.S. Green Building Council’s LEED™ program.
This post is the first in a series examining in detail some of the changes one may see when using a green lease. Today’s topics: Lease term and operating expenses.
Sustainability considerations are becoming a significant consideration when determining lease terms for commercial space. Longer-term leases are considered environmentally responsible because they reduce waste and other impacts of frequent tenant improvements. Moreover, theLEED™ program for Commercial Interiors awards one point of credit for lease terms of longer than ten years.
Beyond the typical enumeration of operating costs included as additional rent to the tenant, the landlord may wish to pass along some or all of the costs associated with maintaining its “green” certifications. The landlord may choose to incur the cost of initial certification, only passing through the costs of reporting and compliance, in an effort to avoid the image on only being green if the tenant pays for it. Although the costs of certification will vary from property to property, a provision providing for these additional costs may read like the below example, which is taken from the BOMA Lease Guide:
“Annual Operating Charges shall also include: (i) all costs of maintaining, managing, reporting, commissioning, and recommissioning the Building or any part thereof that was designed and /or built to be sustainable and conform with [applicable rating standard], and (ii) all costs of applying, reporting and commissioning the Building or any part thereof to seek certification under [applicable rating standard]; provided however, the cost of such applying, reporting and commissioning of the Building or any part thereof to seek certification shall be a cost capitalized and thereafter amortized as an Annual Operating Charge under GAAP.”