green-lease-agreementIn this post Steve outlines how “green leasing” plays an important role in achieving the goal of sustainable buildings. He begins by pointing out just how much this sector consumes and how the early hopes of green buildings performing much more sustainably than the norm have been tempered by the realities of only modest improvements as measured by performance data in many cases. The problem is that building operations must themselves be “greened”. This is where “green leasing”, by introducing sustainable goals and commitments into building operations and into the lease itself, is beginning to make an impact.

by Steven Teitelbaum, Partner, Jones Day. Connect with Steve on Linkedin.

Often obscured in the debates over greenhouse gas reductions and renewable energy is the effect our building stock has on the environment. Buildings in the U.S. consume 72 percent of our electricity, produce 60 percent of our nonindustrial waste, and account for 40 percent of our primary energy use, 39 percent of our CO2 emissions (nearly half of that from commercial buildings), and 13 percent of our potable water consumption. Buildings emit more CO2 than either transportation or industry. If the efficiency of buildings could be improved, the effect on the environment and operating costs should be dramatic. So why isn’t there more focus on this issue?

One obvious problem is that it takes far longer to improve the building stock than to improve automobile fleets. Indeed, early experience shows that those most interested in the environmental performance of their buildings, such as governments, hospitals, and universities, often own and take very long-term views of their real estate investments. “Greening” the for-profit building stock, particularly a building stock that is tenanted, is proving more difficult.

Although some large institutional and corporate real estate users have adopted sustainability policies, as have some private-sector landlords, the universe of users and the universe of landlords are each so dispersed that landlords and tenants with commitments to sustainability don’t often intersect. Even when they do, their interests in various components of sustainability don’t always coincide.

The problem is that the inherent interests of landlord and tenant are different, yet each physically controls a portion of the building and each affects the other. Landlords have an interest in maximizing the financial return from their investment. Tenants’ interests lie in their use and enjoyment of the space, and its cost. This disparity is why we have leases and lease negotiations. The “green” aspects of this relationship are no different.

It is not sufficient that landlords construct “green” buildings, usually by having them rated as such by third-party organizations. The most familiar of these are various levels of “LEED®” certification issued by the private-sector U.S. Green Building Council. Despite early optimism that buildings designed and constructed with sustainable materials and features would automatically outperform noncertified buildings, such has proven to not be the case. It turns out that building operations themselves must be “greened” as well. This is where “green leasing”—the introduction of sustainable goals and commitments into building operations and into the lease itself—is beginning to make itself felt.

Do the parties have congruent sustainability objectives on matters such as energy efficiency, water efficiency, construction materials and methods, parking, green cleaning, recycling, indoor air quality, sources of energy, and hours of operation? Are they willing to commit to those objectives, or are the objectives merely aspirational? Are the objectives building-wide, or do they apply only to the individual tenant? What are the consequences of nonperformance? Who pays the various costs, which can be minor or considerable, of “greening” the building’s operations, and who gets the financial benefits, including anticipated savings in operating costs, governmental incentives and tax benefits, and potential cap and trade benefits?

The “green lease” should address and memorialize these issues, lest they be left to the legally unenforceable handshake agreement of the initial negotiators and their subsequent goodwill, selective memories, and continued personal participation. Since a commercial lease term usually lasts between five and 15 years, and whatever is written in (or omitted from) the lease will govern the parties’ relationship over that period, a party that does not address these issues at the outset may find itself unable to do much about them well into the future.

To read about how Green commercial leases provide incentives to reduce energy use and water, and increase recycling and the use of sustainable materials, read our post “Using Green Leases to Improve Building Performance.

The leasing market has only started to respond to these initiatives. Sample form “green leases” have begun to reach the market, including this author’s “Guide To Writing A Commercial Real Estate Lease,” produced by the Building Owners and Managers Association International. But, because no two buildings, landlords, or tenants are alike, no sample form will suffice without intelligent customization. As the real estate industry recovers over the next several years—against a backdrop of continuing climate change debate and increases in energy and other operating costs—sustainability issues may assume additional prominence in lease negotiations.

© 2011, Steven Teitelbaum. All rights reserved. Do not republish.

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Author: Steven Teitelbaum (1 Articles)

Steven Teitelbaum is a Partner at Jones Day where his practice focuses on solving transactional real estate problems for owners, buyers, sellers, and users of real estate. An emerging area of his practice is environmentally sustainable real estate projects. He speaks frequently on real estate topics, particularly leasing, and has become a leading lecturer on "green" leases. Connect with Steven on Linkedin.