Tuesday, July 22, 2014

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BNA INSIGHTS: The Fundamentals of Green Leasing in a Market That Increasingly Values Efficiency

Thomas CoyneMichael Zimmer

By Thomas Coyne and Michael Zimmer, Thompson Hine LLP.

The opinions expressed here do not represent those of BNA, which welcomes other points of view.

As commercial real estate markets recover from the ongoing recession, green building construction, retrofits, and renovations likely will be a major factor over the next decade, at least in certain asset classes. These projects will pose significant challenges and opportunities for real estate development, operations, and management. With respect to the lease of green facilities, some key questions in the initial assessment include:

  • What are the sustainability objectives for both landlord and tenant as far as construction and alterations? What certifications or rating systems will be used?
  • What is the proper treatment of sustainability requirements in building operations and maintenance?
  • If performance goals are achieved, how will the relevant costs and benefits be allocated or shared? How will expenses, grants, subsidies, and tax credits be treated in pass-through clauses in the lease?
  • How will overall green lease provisions be integrated into the lease?

Green lease objectives and standards should be addressed early in the leasing process, with qualified professional support, well before the drafting of lease documentation. The development of sustainability goals and guidelines regarding green improvements, features, and policies will offer the platform to address and match the commercial intentions of the parties. This approach will ensure a smoother and more efficient negotiation and drafting of the green lease thereafter.

What Is a Green Lease?

A green lease may be described as a lease that contains special terms to promote energy efficiency and sustainability to generate a lower carbon footprint and foster a cleaner environment. A green lease applies to so-called “green buildings” or other buildings proposed to be converted to green buildings over time.

A green building may be described as a building that has green features or, more formally, a building that adheres to certain green certification standards. Examples of such standards include (a) Leadership in Energy and Environmental Design (LEED), developed by the U.S. Green Building Council (USGBC), which is the most popular standard used in the United States; (b) Green Globes, developed by the Green Building Initiative; and (c) ENERGY STAR, promulgated by the Environmental Protection Agency and the Department of Energy (such standards, including any other applicable federal, state, and other governmental standards, collectively are referred to herein as sustainability standards). Certain certifications are based on a “snapshot” of the building at a particular point in time and do not provide for continuing compliance requirements to maintain certification. Other standards provide for ongoing compliance or operations and maintenance requirements. USGBC’s LEED for Existing Buildings: Operations and Maintenance, for example, includes a compliance requirement for reporting once every five years to maintain an existing certification. Also, under 2009 LEED revisions, a certification may be revoked from any LEED project based on noncompliance with minimum program requirements, which raises a whole host of issues well beyond the scope of this article. In any event, it is clear sustainability standards are under continuous evolution and modification…

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