Green leases (also called aligned leases, high-performance leases, or energy-efficient leases) are rental agreements in which tenants commit to or gain incentives by participating in water/energy conservation, waste reduction and recycling, use of nonhazardous cleaning products, or other sustainable actions.Watch a USGBC Educational Video on Green Leasing
Green leases also specify who is responsible for larger projects such as energy efficiency renovations and who benefits from the resulting savings. This type of lease is a way for tenants and landlords to work together to save money and reach building efficiency goals. As more people are faced with rising energy costs and become concerned about the environment, green leases are growing in popularity.
How Green Leases Work
Like any lease, a green lease is an agreement between a landlord and a tenant. They can be tailored to the particular needs of landlords, tenants, or buildings. It’s crucial for tenants and landlords to come to a consensus on sustainability goals, standards, and what will happen if one or more parties fail to meet those expectations. Various stakeholders and consultants should be included in lease negotiations, including brokers, real estate attorneys, architects, engineers, developers, design professionals, and contractors, some of whom must have a good understanding of green building principles. Using a process similar to this will increase the likelihood of setting realistic, measurable goals for the building and prevent green standards from becoming an obstacle to tenant retention or positive tenant-landlord relations.
One form of green leasing applies to tenants seeking LEED certification for their spaces, whether LEED for Commercial Interiors or LEED for Retail: Commercial Interiors. This type of project may go hand-in-hand with a landlord’s project to attain LEED for Core & Shell certification. In either case, it must be decided who pays for and benefits from improvements, and how ongoing building operations will continue to meet LEED standards. The U.S. Green Building Council sells guides to help landlords better understand the goals and possibilities of sustainable tenant build-out projects.
The BOMA Energy Performance Contracting model does not have the strict criteria that LEED certification requires. Under this model, green leases are set up in such a way that improvements in building efficiency or sustainability are paid for by the resulting savings. This includes a special agreement with energy service companies, who will in fact guarantee the savings. Such an arrangement allows landlords and tenants to invest more fully in their buildings without as high a financial risk.
Whether or not a green lease is based on a particular model, there are several steps in composing and agreeing upon its conditions. Once a tenant finds a potential building, taking into consideration site sustainability, the tenant’s team sends a Request for Proposal (RFP) to the landlord to obtain information regarding the length of the lease term, renewal options, rental rate, possibility of tenant improvements, and green practices. If a landlord is open to a green lease, the next step is a Letter of Intent (LOI). This is laid out by the tenant and landlord before an official lease is agreed upon, and should include an exhibit of build-out guidelines, requirements for building certification (if applicable), and standards related to ongoing green operations. Once these steps are undertaken, the landlord and tenant are ready to negotiate a lease. Templates can be used to simplify the lease negotiation process.
The following factors will affect the applicability of using a green lease, as well as the contents of the lease:
- Gross or net lease: With a gross lease, the landlord pays for all utilities. That is, utility costs are included in a tenant’s rent payments. Improvements in efficiency directly benefit the landlord by lowering energy costs. In this situation, tenants do not have an incentive to make energy improvements unless their rent subsequently decreases. With a net lease, on the other hand, the tenant pays for utilities and therefore has more of an incentive to make small improvements to lower energy costs.
- Building age: Older buildings have more potential for efficiency improvements.
- Single-tenant or multi-tenant building: Lease arrangements will require more negotiation if there are multiple tenants in a building.
- Length of lease term: Major building improvements (like HVAC) may only start to save owners and operators money after a significant amount of time, so longer leases provide more incentive to invest in large projects.
- Size of leased area compared to total building area: A tenant who is renting a larger percentage of a building’s square footage will have both more incentive and more influence to make improvements.
Advantages of Green Leases
Green leases are more complicated to negotiate than traditional leases and may require the expertise of additional people, but they offer several advantages:
- Higher productivity and better occupant health
- Promotion of a culture of sustainability among all building users
- Reduced environmental impacts
- Savings through reduced energy costs
- Higher future rent and building occupancy rates
- Improved public image and marketing tools for both landlord and tenant