How a Green Lease Helps Investors and Tenants Save Money

By Published On: November 19, 20217 min read

According to the World Green Building Council’s 2020 Global Status Report, buildings — including operations, materials and construction — generate 38% of annual global CO2 emissions. With climate change issues a major concern, municipalities across the nation are determined to find ways to reduce their carbon footprint. Many have signed on to pledges such as the Architecture 2030 Challenge and are adopting strategies to meet more stringent energy-efficiency targets for new construction, retrofitting and renovating.

Several cities and states have ordinances requiring new building performance standards be met. Washington and Colorado, as well as New York City, Washington, D.C. and St. Louis, all have created building performance standards policies.

One way for commercial real estate owners to make a difference is the green lease, a unique type of commercial lease that specifies how tenants and landlords agree to use energy. An Institute for Market Transformation (IMT) study estimated that green leases have the potential to cut energy use in office buildings by as much as 22%, potentially saving the U.S. office market up to $3.3 billion annually.

What Is a Green Lease?

Simply put, a green lease (sometimes called an aligned lease, a high-performance lease, or an energy-efficient lease) is a rental agreement whereby a tenant shares the cost burden of sustainability initiatives with the building owner — expenses such as water and energy conservation, waste reduction and recycling.

But green leasing goes much deeper than that: it’s a tool that lays out priorities and makes sure there is transparency, accountability and a way to track progress.

“It’s a process that helps a building owner and tenant align priorities in a document that is also followed through in operating practices,” said Audi Banny, Associate Director of Business Engagement at the Institute for Market Transformation, a Washington, D.C.-based nonprofit organization promoting energy efficiency, green building and environmental protection in the U.S. and abroad. “Whether the priorities are energy efficiency or indoor air quality or health and wellness, a green lease identifies those priorities up front. Then it outlines how both parties will work together to achieve success.”

What Are the Benefits of a Green Lease?

A well-structured green lease is beneficial for the building owner, the tenant and, ultimately, society at large. Here are some ways that a green lease can create value for all stakeholders:

Reduced Energy Consumption

According to a recent IMT report, “green leases have the potential to help reduce energy consumption in U.S. office buildings by as much as 22 percent.”

Higher Quality Spaces for Tenants

In today’s rental and leasing market, particularly because of COVID, tenants are placing value on healthy buildings, indoor air quality (IAQ), lower overhead costs and a general commitment to sustainability.

As Banny pointed out, without a green lease, tenants interested in more sustainable practices don’t have the agency to make changes on their own. A green lease allows for transparency and a way to open the conversation.

More Control

The owner of the property controls the base building systems, but tenants control how much energy is consumed. With a green lease, investors and property owners have the ability to set priorities, whether it’s reduced carbon emissions or building performance or net operating income.

Banny said, “Whatever financials are important to investors, a green lease allows them to put requirements in the lease and track whether assets are performing to those goals they are reporting.”

Reduced Energy Costs = Costs Savings

IMT reported that green leases have the potential to reduce “utility expenditures in commercial buildings up to $0.51 per square foot.… [W]hen executed, green leases have the potential to provide the leased U.S. office market $3.3 billion in annual cost savings.”

Higher Building Occupancy Rates

Green leasing makes buildings more attractive to prospective tenants interested in sustainable practices, making lease-up a little easier and reducing the need for rental concessions. The number of those prospects keeps growing.

According to a recent article in the Stanford Social Innovation Review, “more than 90 percent of CEOs state that sustainability is important to their company’s success.”

Improved Property Value

Once a building owner has invested in upgrades, the building will be more desirable, and operating costs will decrease. Owners can charge higher rents in the future and could even get a better appraisal when it comes time to sell the real estate.

A Positive Public Image

GreenPrint, an environmental technology company, found that 64% of Americans are willing to pay more for sustainable products. Building owners and landlords can capitalize on that desire with green leasing.

What About Negatives?

Are there drawbacks to green leasing? Banny believes any disadvantages come down to a misconception of what it actually means. “Once you get past defining what it is, it’s a matter of common sense: making a building more efficient and doing so in an equitable and transparent way where the landlord and tenant are sharing how they’re doing their part to meet efficiency and sustainability goals important to both parties.”

5 Green Lease Best Practices

Banny said a green lease includes information regarding these five “buckets”:

Good Communication

There should be a point of contact between a landlord and tenants, someone who is designated to communicate about sustainability and efficiency priorities for the building and the tenant’s space.

Specifics on the “Split Incentive” Issue

Typically, while landlords may want to improve their building’s energy efficiency, they bear the costs of improvements, but the tenants experience the benefits. This dynamic is a “split incentive.”

A green lease includes language specifying how the tenant will share in the cost burden.

“Some landlords might take a hard line and say, ‘This is what cost-sharing will look like,’ and some tenants might say, ‘I’m not sharing capital improvement costs with you,’” Banny illustrated. “But the green lease allows them the opportunity to have those conversations in an open fashion and be transparent about financials.”

Tenant Responsibility

How should a tenant build out space so they, too, are being energy-efficient, which will ultimately save them in operating expenses. A green lease will lay out the rules regarding build out.

Sustainable Operations

The green lease identifies operating efficiencies, how they will work and who’s responsible: What is the building manager doing about the priorities? What is the follow through? How does waste recycling happen? How is the building being efficient with lighting? Off-hour cleaning?

Tracking and Reporting

It’s important to ensure that what’s negotiated in the lease is followed through in design and operations and that you’re able to track and report progress.

How to Create a Green Lease Agreement

It’s no more difficult or costly to create a green lease agreement than any other kind of lease; it can be a gross or net lease or single-tenant net lease. Any commercial lease can be modified to be a green lease. There are, however, a variety of clauses that need to be incorporated into the green lease. The good news is that there are plenty of resources available.

In particular, Green Lease Leaders, a national program, provides a framework for implementing green leases and offers a slew of case studies, reference guides (for landlords and tenants) and samples. For example, Green Lease Language Examples offers specific terminology on everything from pass-through clauses to HVAC, submetering, retrofitting, plumbing and more. The document offers guidelines for tenant language, landlord language, tenant and landlord language, and general lease language.

Anything with the designation, “landlord and tenant language” explains actions that must be taken by both parties. Think of an agreement in which the landlord handles HVAC installation and repair, but tenants are responsible for maintaining an energy efficient setting on their units to ensure optimal HVAC operation.

Other resources include the following:

The Time is Now for Green Leasing

There is great urgency for consumers and businesses to focus on energy efficiency solutions. There also is interest and a push from government policymakers.

“Government policies like building performance standards are growing at a more rapid pace than any other policy in history,” Banny noted.

A green lease is just one tool that can be used to encourage builders, developers and others in the commercial real estate market to do their part.

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