- The “Green” Lease: A Growing Phenomenon
- September 8, 2010
- Law Firm: Dressman Benzinger LaVelle psc - Crestview Hills Office
As concern and awareness grows for the environment and its resources, interest in "green" leases increases. Because green leasing is such a novel concept, it is difficult to define. Green leasing requires a whole new shift in thinking. A green lease seeks to promote processes that are environmentally responsible and resource efficient. In order to do so, the Green lease better aligns the benefits to the Landlord with the benefits to the tenant. In this way, both the tenant and the landlord have an incentive to operate with maximum efficiency and environmental responsibility. Such benefits may include a reduction in operating expenses, an increase in the building’s value, a building more desirable to tenants, and healthier working spaces for tenants.
One way that green leases seek to align the benefits of the landlords and tenants is to incorporate operating expenses into the tenants’ base rent. Currently, many leases are net leases and do not include operating expenses in the base rent. Instead, tenants are required to pay the operating expenses on their own, creating no incentive for the tenant or the landlord to control expenses. A green lease, however, uses a gross lease rather than a net lease. The base rent includes building taxes, insurance, utilities, and other operating expenses. This motivates the landlord to minimize costs. To further perpetuate green benefits, the green lease may provide the tenant with an energy allowance. If a tenant exceeds this energy allowance, the tenant must pay for the excess amount. Other examples of green lease requirements may include submission of electricity consumption data to the landlord, submission of light purchases to the landlord, and participation in a building-wide recycling program. To assist the tenant with the requirements of a green lease, the tenant is provided with a manual. This manual instructs the tenant as to compliance with the green lease as well as how to get the most out of its space and building.
To support the growth of the green lease phenomenon, insurance companies have created insurance policies specifically used for green leases. For example, an insurance policy for a green-certified building may include additional coverage not typically found in traditional building policies. Such coverage insures the existing green building characteristics. However, if a building is not green certified, the coverage may not be as broad. Nonetheless, coverage for a non-green-certified building may still include some increases in costs for replacing non-green products and processes with green ones.
It is important to note that green leases are not limited to leases of new buildings; they can be used with any building. Such programs slowly integrate green leasing into the building. In order to develop a successful green lease, the landlord must: (1) constantly monitor the tenants’ progress and compliance with the green lease; (2) practice preventive maintenance; (3) work toward continuous improvement; and (4) effectively communicate to, and with, the tenant.
Interest in green leasing continues to grow. Building owners, property managers and tenants alike can benefit from learning and understanding the intricacies of green leasing in today’s real estate market.