Advice provided by: Rob Freeman Jr, LEED AP, Green-Buildings.com

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As an owner, once you've decided to green your building or portfolio, it makes sense to consider introducing a standard form of green lease for your properties. After all, you've most likely made a significant investment of time and money to improve your buildings to make them more environmentally friendly. Perhaps you have even achieved a formal green building certification, such as ENERGY STAR or LEED. In any case, making sure the operation of your building is consistent with your sustainability objectives is a smart thing to do and will most likely be helpful in setting the proper tone, not only for new tenant prospects, but also for existing tenants when it comes time to renew.

Creating a green lease is a rather simple and straightforward process. It involves walking through your existing lease item by item and looking for opportunities to improve the language, introducing green best practices wherever reasonably possible. Some common sections to focus on are:

1) Description of Operating Charges
2) Permitted Uses
3) Recycling and Waste Management
4) Assignment and Subletting
5) Repairs and Maintenance
6) Description of Services Provided (such as cleaning, char, janitorial, etc.)
7) Building Rules and Regulations
8) Contractor Workletter/Rules and Regulations for Tenant Improvements
9) Sublease Agreement

While it is a good idea to consult with an experienced LEED AP or other green building professional to make sure you consider all of the various options available for improvement, this initial blue-sky drafting may not require an attorney. Of course, when you do call in for legal advice, if your attorney is also a LEED AP, so much the better.

Much as drafting the green lease itself is a rather simple and straightforward process, a broader strategic question must be answered as well, namely, what type of green lease results in maximum operating performance for both the tenants and the owner.

Contemplating sustainability-related investments requires rethinking conventional leasing approaches.

Net or Triple Net leases may introduce unwanted tension between the tenants and the owner. Such tension arises due to a misaligned incentive structure where building owners are required to invest money in capital expenditures (Cap Ex) and/or repairs and maintenance (R+M) to make a building more efficient (green), but the benefits of these investments, such as cost reductions, are overly weighted toward the tenant. Indeed, if the lease does not specifically call for such expenses and investments to be passed through or does not include green items in common area maintenance (CAM), these costs will not be properly distributed and owners will be less willing to put capital at risk.

For instance, suppose an owner's operating costs for his office building are $9.50 per square foot and assume energy costs are $2.00 of that, or about 20%. If the owner makes the building more energy efficient, reducing his operating costs by 40%, he will be saving .80 cents per square foot (.80 cents = 40% of $2.00). In a Net Lease arrangement (where the tenant pays for all electric/energy charges) the owner does not have an economic incentive to make these investments because the savings go to the tenant, as opposed to his bottom line. However, by shifting from a Net Lease structure to a modified "green Gross Lease" approach, where the tenant pays a rent that has certain expense items, such as water and electric, built in, the duty of responsibility for managing these costs can be shifted away from the tenant and back to the landlord, who reaps the benefits of his capital improvements and the efficiencies/savings they produce.

Indeed, from an owner's perspective, by having the right type of green lease in place, the resulting efficiencies will produce value in both the short and long term. By capitalizing (or "capping") the .80 cents of energy savings at a 11% cap rate (or expected return) you've created about $7.27 in additional value per square foot for your building. Do this with a 100,000 square foot building and that small improvement has added $727,000 of value to your property.

Related Advice:

• Green Building Lease Terminology



• Green Lease Clauses - Part 1: Alterations and/or Tenant Improvements



• Green Lease Clauses - Part 2: Repairs and Maintenance



• Green Lease Clauses - Part 3: Assignment and Subletting



• Calculating the Return on Investment for Green Initiatives