What parts of your lease matter? Aside from cost, space requirements and lease length, most building occupants aren’t paying attention to the finer details of their commercial lease. Yet, lease terms determine many aspects of building operation and energy performance, which can have a large impact on a tenant’s overall experience. By adding or modifying a few key terms in a typical commercial lease, building operations can become much more efficient—providing value to the landlord and tenant. This new kind of lease, a green lease— also referred to as an energy-aligned lease—has been gaining in uptake by leading companies since it was introduced to the market around a decade ago.
The Impact of Green Leases
The Institute for Market Transformation (IMT), Washington, D.C., understands the major impact green leasing can have on the built environment. Its report, “Measuring the Potential Impact of Green Leases in the U.S. Office Sector”, shows that a green lease can reduce utility spend by up to 51 cents per square foot in an average office building, representing a $3.3 billion savings opportunity for office buildings in the U.S. This reduction in operating costs can lead to significant added value at the time of refinancing or sale if the building is properly appraised for being energy efficient. In fact, green clauses tend to share similar concepts with popular green rating systems, such as LEED and ENERGY STAR, and they can help expedite the process of obtaining the credits needed for these certifications.
For tenants, efficient buildings have many of the same benefits as green buildings, which are known to improve occupant comfort, reduce sick days and improve occupant productivity.
What’s the problem with existing commercial leases? While the specifics vary depending on the lease type—that is, whether a lease is full-service or some version of a net lease—most leases contain some form of the “split incentive”. The split incentive problem occurs when, because of the assignment of capital expenses and operating expenses in the lease, landlords have no motivation to improve the energy efficiency of their building while tenants bear the brunt of wasteful and poorly performing building systems (air-conditioning, heating, etc.).
For example, the financial savings of lower operating costs in a net-leased building accrue to the tenant while the landlord pays the capital costs for improvements. Because of this divide, the landlord has little incentive to make energy-efficiency improvements. Meanwhile, buildings with a full-service lease structure face the opposite problem: Although the landlord has incentive to keep energy costs down, the tenant is not penalized for wasteful energy consumption.
Green Lease Leaders
Although many companies were beginning to see the potential and need for addressing energy efficiency in the leasing process a few years ago, it wasn’t clear what defined a green lease and it was difficult to pinpoint who in the market was signing them. To set parameters and shine a spotlight on this issue, IMT and the Washington-based U.S. Department of Energy’s Better Buildings Alliance partnered to launch the Green Lease Leaders recognition program in 2014. Designed in collaboration with a cadre of commercial real-estate practitioners, serving as an industry advisory group, Green Lease Leaders awards property owners, tenants, and brokers who modernize lease language to account for energy efficiency and encourage tenant-landlord collaboration around sustainability goals.
During the past three years, 30-plus companies have been recognized, representing more than 1 billion square feet of commercial space. These companies— which include large landlords like TIAA and Forest City, as well as major tenants like PriceWaterhouseCooper and TD Bank—are proving that green leases are slowly gaining popularity in the U.S. as a tool to reach sustainability and business goals.
Those selected met the requirements of the Green Lease Leaders program by incorporating lease clauses that improve sustainability on many fronts, such as allowing for sharing of the costs of energysaving improvements; ensuring tenants build out to green standards; increasing transparency by sharing access to energy consumption data and ENERGY STAR scores between tenants and landlords; and encouraging cooperation on environmental initiatives, like recycling.
One Green Lease Leader, Atlanta-based landlord Jamestown Properties implemented green leases across its portfolio (view a case study), using its existing lease rolls to figure out where new lease terms could have the greatest impact on energy consumption in its buildings. Among other changes, Jamestown Properties now asks that incoming tenants outperform existing building codes by 10 percent in all new build-outs.