Every successful campaign needs a good hook, and although “carbon footprint” and “doing the right thing” may sound like excellent reasons to go green, the reality is fairly straightforward: Campaigns that demonstrate that going green will save money—and will be a team effort with shared responsibilities and consequences—tend to be far more effective than even the most noble crusade that focuses solely on social responsibility.
It’s a realization that is playing out in leasing offices everywhere, as an increasing number of commercial real estate owners and tenants are looking to green their leases in ways that will reduce costs and provide flexibility and fairness.
Steve Teitelbaum, a partner with Jones Day and the author of BOMA International’s Guide to Writing a Commercial Real Estate Lease Including Green Lease Language, agrees that advancing the ideals of sustainability will work best if people focus on more immediate benefits rather than solely on doing good.
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“Lower carbon footprints is a conceptual issue of interest to relatively few, and most Americans think carbon is primarily related to auto emissions,” Teitelbaum says. “Higher employee productivity is definitely part of the conversation, but it alone more strongly benefits tenants, and most landlords won’t spend money to ‘green’ their buildings for the sole benefit of tenants. Higher property values are certainly of interest to landlords, but if greening requires capital outlay, and capital is in short supply, it’s a harder sell.”
“We have different incentives driving different actors,” he adds, “and those differences make it difficult to agree on a common course of action. But cost savings is a green blanket in which everyone can wrap themselves for mutual benefit.”
Not surprisingly, improving energy efficiency is one of the most obvious ways to green a building. Addressing capital expenditures that result in cost savings as part of multi-tenant, triple-net leases is one of the best places to start, as this lease structure presents one of the biggest barriers to improved energy efficiency. (In most leases, landlords have no incentive to make upgrades to improve energy efficiency because tenants pay for utilities. Conversely, individual tenants have no incentive to conserve energy if they have little control over the building’s overall usage and pay a pro-rata share of the utility bill.) Dual-incentive green leases, however, pass through to the tenant the cost of capital upgrades that directly affect a tenant’s operating expenses, but also reduce their expenses when lower utility bills result.
“By bringing the discussion of energy efficiency to the forefront, and incorporating a building’s energy performance into the leasing process, you add two very important things—transparency and accountability,” says Mychele Lord, founder of LORD Green Real Estate Strategies, Inc. “Greening a lease is a continual, collaborative approach in essence, it’s a process of sharing incentives, costs and rewards as partners.”
That kind of collaborative approach is exactly how Glenborough, LLC, a company with $2.5 billion worth of assets primarily in California, Colorado and Washington, D.C.—all epicenters of the green movement—went about greening its standard lease document.
Everyone, from brokers to building engineers, were part of the review team charged with revising the lease, explains Michael Steele, executive vice president and CEO of Glenborough, so that every proposed change could be considered from a building operations and engineering standpoint as well as from a negotiations and tenant standpoint.
“If there was one overriding guide to our process,” Steele says, “it was that we wanted our lease to allow us and our tenants enough flexibility to comply with local, state or federal standards without placing tenants and landlords at odds with each other, or disadvantaging one tenant over another. We also strove to be very specific in our language; we didn’t think it was practical to require a tenant to adopt or abide by undefined ‘landlord sustainability practices’ that’s too amorphous. We’re really striving to ‘go green’ in a practical manner that doesn’t hurt our businesses or create a situation where one tenant is penalized because of the way another tenant has to operate.”
Of course, the best green lease in the world won’t get much buy-in if tenants or even landlords aren’t aware of the changes or fully understand how the new lease language affects both parties, and it’s here that the all-important education phase comes in.
“There are a lot of misconceptions about green leases and buildings,” says Teitelbaum, “and now is the time to sort it all out. You can have a green-certified building that isn’t particularly efficient, and you can have an old building with incredible green practices. Being green often depends more on operations than on construction, and the lease is intended to help everyone understand what’s possible. The building was developed as a green building or it wasn’t, so do the best you can with what you have by clearly differentiating tenant and landlord responsibilities.”
A healthy dose of realistic expectations is also a crucial part of the process, Teitelbaum says. “Remember that people don’t like being told what they shall and shalt not do, even if it’s good for them. But if you equally mandate tenant and landlord responsibilities, it becomes an easier conversation. Certainly provide incentives via lower operating expenses, but recognize that penalizing either landlords or tenants for not following through will, in reality, be hard to do. The honest truth is that tenants are rarely penalized or evicted for non-monetary defaults. Think of the BOMA Green Lease Guide as a menu of options: It doesn’t mean that people will adopt all of it, but it’s a start.”
Negotiations are also likely to go more smoothly, Steele advises, if landlords first solicit input from their more active and concerned tenants.
“We’re in the real estate business, and many of us think of our tenants as being fairly savvy in our business but they’re not,” says Steele. “So before you set about revising your lease or setting sustainability policy, find out what’s going on in your tenant’s business, how such decisions impact them, what they might be doing and what will work for them. It’s a big help to have that kind of intelligence up front so that the path you choose to green your building or lease will be collaborative.”
And finally, recognize that greening your lease may soon be unavoidable. Leading the charge toward greener buildings is the Energy Independence and Security Act (EISA), a federal mandate that states all federal agencies occupy space only in ENERGY STAR-designated buildings beginning in 2010, with some exceptions for renewals or for agencies utilizing minimal space. It is expected that more state and local governments will follow suit. Many municipal and county governments have also begun to require that new or heavily renovated buildings achieve certain green thresholds, with some states poised to establish similar requirements. And while economic conditions have slowed some companies from pursuing more capital-intensive green initiatives, and have slowed development of new buildings, interest in green buildings remains high, particularly among those in municipalities, counties and states that are offering incentives through tax abatements, tax credits or faster turnaround on permit applications.
Many tenants are also incorporating sustainability into their search and selection criteria with demand so persistent that the U.S. Green Building Council (USGBC) is developing, at press time, a process manual that will teach tenants how to find, negotiate for and build space in green buildings.
Anecdotally, Nick Katz, a broker with GVA Advantis who almost exclusively pitches green leases and works with commercial properties to identify low- and no-cost efficiency improvements, has seen a huge uptick of interest among tenants, with 80 to 90 percent of decision-makers wanting to hear more about green opportunities.
“People may not be jumping for LEED certifications as they were before the recession hit, but for an industry as obsessed with the bottom line as commercial real estate, it only makes sense that landlords and tenants are seeking higher efficiencies and lower costs through green leases,” Katz says.
“We’ve noticed a throttling back from LEED registrations,” Steele agrees. “When owners and tenants are cash-strapped, everyone is cautious about where the dollars are going. But as the economy recovers, the interest will come back. In the meantime, we’re focusing on properties where LEED is an important aspect of a tenant’s occupancy, and we’re very cognizant that local code in many of our markets will impose sustainability.
“A last piece of the puzzle,” Lord points out, “is that the cost of retrofitting a building is dropping. Vendors are stocking more green products, price premiums are disappearing, and innovations, such as plumbing and lighting fixtures, are advancing. As more manufacturers focus on making green the norm, technology has improved, and it’s become much less expensive to retrofit. It’s increasingly difficult to find excuses for not greening a building.”
“The bottom line,” Katz said, “is that whether one views green leases from an environmental standpoint or an economic standpoint, they’re inextricably tied. And when green leases are done correctly, they’re mutually beneficial to both parties. By going green, you get to keep more green. It’s really that simple.”
About the Author
Stephanie J. Oppenheimer, APR, formerly the assistant vice president of communications for BOMA International, is principal of Skylite Communications, a freelance writing and editing company based in Falls Church, Va.
