Green Leases – Silver Bullets?
The United States is full of an aging stock of tenant-occupied buildings that lack energy efficiency and need capital investment.
Many existing leases are “net leases,” where the tenant is required to pay operation cost while the landlord pays the capital expenses. The challenge with this type of lease is that the landlord is separated from the cost of operating a building, and may have no desire to invest their own money into making a system more efficient when they don’t benefit from the merits of reduced energy cost.
On the other hand, gross leases are where the owner of the building pays for both building operation and capital expenses, regardless of utilities tenants use, and the tenant only pays to occupy the space. The landlord will see advantages to updating the building, but the only change the tenant may see is increased rent.
In both cases, there is a divide between interests of the landlord and tenant, but Green Leases align those interests by creating goals and shaving cost and savings. They are legal agreements that outline how buildings are to be occupied, managed and operated in such a way that promotes accountability for sustainability.
Fundamentally, Green Leases create a sharing formula where the tenants pay additionally in proportion to some negotiated percentage of their new energy savings until improvement is amortized. This creates a win-win situation, as tenants benefit from reduced operating costs and owners benefit from necessary capital improvements, potential improved tenant retention and renewal, and increased building value.
To understand more how Green Leases work, consider this example. Before a Green Lease is implemented, the projected payback period (the amount of time that the new savings pays for the upgrades that have taken place) is calculated. Let’s say a building needs $20,000.00 worth of work, and the projected annual savings are $5,000.00. The payback period for the project is 48 months, or four years, which is found by diving the estimated cost of the building updates ($20,000.00) divided by the projected annual savings of $5,000.00. The tenant would agree to pay 75% of the monthly savings (about $312.50) until the renovations are paid off, at which point the savings go to tenant, while the owner enjoys improved tenant retention and satisfaction, and investment into his building.
According to a CoStar study on environmentally-friendly buildings, in a commercial green lease agreement, tenants will see increased productivity in their employees (almost a 5% increase), while landlords will find that their buildings are more attractive to potential renters.
Green leases are not a panacea for neglecting HVAC equipment; however, by supplementing them with a proactive preventative maintenance plan, they are a priceless tool in saving cost. They align interest with tenants and owners who are looking to save money, improve sustainability, and increase the value of their building. There are many model leases and lease languages that have already been legally vetted and successfully implemented. The biggest impediment to utilization is awareness and unfeasibility.