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How Green is Your Lease?
Green leases allow owners and managers of leased buildings to pass through expenses for sustainability improvements that lower operating costs. Photo by Scott Webb/Pexels.
Is your lease green enough? Commercial real estate owners are increasingly adopting “green leases”—a way of structuring lease language to allow both owners and tenants to reap the benefits of sustainable building improvements.
Green leases can save money and increase building comfort and sustainable credibility for both owners and tenants, so if you haven’t updated your standard lease language in a while, it might be time for a review.
Here’s what you need to know about green lease language.
What is a Green Lease?
A green lease can cover many areas, but tends to focus on cost-sharing provisions that allow tenants and landlords to share both the costs and benefits of sustainable improvements, such as energy-efficient equipment, explained Katherine Noonan, partner with Ballard Spahr and author of BOMA International’s Green Lease Guide.
This is important because conventional leases tend to saddle the landlord with the costs of efficiency improvements that allow tenants to reap the benefits in the form of lower operating costs, disincentivizing investment in performance enhancement for the building.
This is often referred to as the “split incentive,” said Brenna Walraven, a BOMA Fellow and founder of Corporate Sustainability Strategies.
“The split incentive is that the landlord would pay for capital improvements to make a building more efficient or more green, and the tenant would get the benefit of not only more comfortable space, but lower operating costs associated. Why should I have to spend capital so you can have lower costs?” Walraven explained. “The tenant would go, ‘Why should I invest in capital improvements in a building I don’t own?’ You can see where this misalignment of interests would be a dissuader.”
Green leases include language that creates a partnership between tenants and landlords in this regard, Walraven said. Many leases now at least allow landlords to charge capital improvements that lower operating expenses through to the tenants. But there’s much more you can do to a lease to improve a building’s sustainability credibility and lower your operating costs in the process.
[Related: The Benefits of Green Leases]
What Belongs in a Green Lease
Green lease language can take many forms and fit into many clauses. Some of the most common requirements in green leases include:
Benchmarking. Several cities and states have adopted energy disclosure ordinances that require building owners and managers to meter energy use and report their findings. In leased buildings, this usually means tenants must be separately metered. Leases in these markets need specific provisions around data and information sharing.
Green certification. Leased buildings that have a green building certification often need tenants’ help to maintain that certification. This might mean requiring a tenant to participate in recycling programs, for example.
Renewable energy. As interest in deploying renewables grows, so too will lease clauses governing how buildings install and use renewable energy sources.
Tenant improvements and buildouts. The lease might have specific provisions about the types of materials and finishes tenants can use to build out their spaces. This could include LED lighting, sustainably sourced ceiling tiles and carpet, and more.
Building rules. Tenants are required to abide by building rules, which can then be updated without having to renegotiate the lease, Walraven explained. “You’re going to put details about your sustainability practices, like recycling requirements and things of that nature, in the building rules,” Walraven said. “That allows you to update those periodically without having to do a whole new lease.”
How to Green Your Leases
Ready for a greener lease? Start the update process by determining your goals for the property use and operations, Noonan recommended.
“You have to have that overall direction set, and then in the document implement it,” she said. “There are large and small ways to do that. If the landlord decides to have more green space, that’s potentially going to cost leasing space for the landlord or have other bottom-line effects, but to the tenant, that might be more attractive. Look at what the potential is and weigh that together.”
Next, look at your standard lease language. Walraven suggested starting with making sure you can charge through capital expenditures that reduce operating costs. “If you have that provision, you have a green lease,” she said. “A higher quality of green lease might say you need data sharing, which would be a nice next step in a self-audit. After that, it’s about what’s important to you as an organization.”
Green lease language can transform your lease—and your building—with clauses that allow both landlords and tenants the opportunity to implement sustainable improvements. The choice is yours—how green will your lease be?
Read next: Implementing Green Leases