CREJ - Property Management Quarterly - April 2020
Changing attitudes toward energy efficiency, sustainability and environmental responsibility have created a rising demand for “green leases.” Colorado is emerging as a leader in the green leasing revolution. In December, Colorado implemented a Green Lease Policy intended for state leases, executive branch agencies and institutions of higher education to achieve “environmental performance objectives for new, existing and renewing lease agreements.” The Green Lease Policy requires that new or renewing lease agreements above 5,000 gross square feet evaluate all potential buildings pursuant to a Green Lease Matrix that measures a building’s sustainability practices. In 2016, the city of Boulder formally adopted expansive climate goals intended to “reduce communitywide greenhouse gas emissions 80% from 2005 levels by 2050; reduce emissions from city operations 80% below 2008 levels by 2030; and achieve 100% renewable electricity communitywide by 2030.” Denver has a similar 80x50 Climate Action Plan aimed at decarbonizing buildings, including the 103 million sf of leased space representing approximately 9% of total greenhouse gas emissions within the city. For Colorado and its cities and towns to be successful in its expansive energy and sustainability goals, it will invariably require equally expansive green leasing in the commercial real estate context. Traditionally, the term “green leases” has loosely been used to describe leases with environmentally friendly clauses or provisions implementing LEED or Energy Star certification. But landlords and tenants have become increasingly more creative in their pursuit of greener leases. In addition to focusing on build-outs and construction involving recycled or renewable materials, lease parties also are considering how their own operations can be sustainable and energy efficient. For example, a green lease can require that a tenant use plant-based ink, recycled paper or energy-efficient office equipment. Meanwhile, a landlord’s maintenance obligations can require high-efficiency lighting or the use of “green” cleaning products that exclude harmful chemicals or pesticides. Monetary benefits also have been a motivating factor in furthering the pursuit for greener leases. Lease parties can take advantage of tax incentives and/or reduced operating costs realized from energy-efficient improvements. From a landlord perspective, a green investment may not only increase a property’s value but also appeal to a larger potential tenant base. The number of tenants self-imposing greener leasing requirements for reputational and public policy purposes has seen a dramatic rise. In other instances, potential tenants are bound or incentivized by law or regulation to ensure their leased space meets certain energy and sustainability thresholds. Tenants also can look to indirect benefits such as increased employee productivity and well-being where green leases improve building efficiency – an expressly stated benefit in Colorado’s Green Lease Policy. While the green leasing concept has gained focus and local attention, the commercial leasing markets have had less success in incentivizing both landlords and tenants to invest in energy efficiency. In a standard gross lease, the landlord bears the operating costs. In a standard triple net lease, the tenant bears those costs. A prime example of a green lease solution is to implement a modified gross rent lease in which capital costs from efficiency investments pass through to tenants if such green investments reduce operating expenses. Taking it one step further, tenants can protect themselves by limiting the pass-through costs to the actual amount of reduced operating costs netted or until the full amortization of the green investment. Another method landlords and tenants can use to reap joint benefits in green leasing is to implement a fixed-fee common area maintenance structure. The landlord will be reimbursed for its green investment via the net benefit of reduced operating costs and the tenant will benefit from a fixed and predictable operating cost. Less obvious but equally important considerations can include lengthening initial lease terms, thereby incentivizing both sides to invest in greener capital improvements with planning certainty; obligating build-outs to be constructed in accordance with sustainability practices or the purchase of on-site renewables provided by the landlord; or incorporating green leasing standards in the standard building rules and regulations. “The key is to ensure that lease parties have the green leasing conversation regardless of where they are in the process,” said Jake Dowling, a representative of the Denver Smart Leasing Program. Stakeholder groups such as brokers, attorneys and architects can meaningfully contribute throughout the leasing process, including site selection, lease negotiation, build-out and operation to achieve green leasing goals. In addition to Colorado, green leasing is gaining momentum nationally as major cities throughout the United States have implemented green leasing guides and principles. New York City has developed its Model Energy Aligned Lease Language to provide concrete examples of leasing language aimed at solving the split incentive issue. Boston, Seattle and Cleveland have each published comprehensive green lease guides to inform interested parties about the benefits of green leasing and to assist in drafting green lease clauses. And the California Sustainability Alliance has a Green Leasing Toolkit created to support landlords and tenants in the education, development and implementation of green leasing. If Colorado is to stay at the forefront of environmental responsibility, green leasing can significantly contribute to reaching sustainability goals while also providing high-performance buildings that align landlord and tenant interests.