“Green” Leasing: Landlords and Tenants Can Save Some Green

Posted by Joe Weagraff on in Tenant Coordination

Retail leasing is moving beyond just square footage and location to include sustainable design and conservation of resources—including cash. The market for sustainable buildings currently exceeds $30 billion, and experts say it is expected to double in the next five years. This data suggests that there is a significant effort to not only minimize the impact we have on our environment but also lower the costs of operating a well­designed and managed sustainable building.

Retail “green” leasing is becoming more popular these days as landlords and tenants realize that they are dependent on each other when it comes to reducing our impact on resources.

An increasing number of tenants are looking for ways to drive down operating costs where possible. Landlords are also searching to construct more efficient buildings and will need to be more creative in writing up lease agreements. For the tenant the two most important cost factors are the monthly rent per square foot and the monthly operating expense charge.

Typically, a net lease is more common compared to the gross lease. In a net lease, rent and operating expenses are separate payments that are charged to the tenant. With tenants paying for energy, how can landlords become more vested in the effort for greater efficiency? The best incentive, aside from the ability to advertise more competitive operating costs, is a financial one. Under an expense stop arrangement, if building operations can make the building more efficient than the baseline estimation and rate set forth in the lease, the landlord retains the difference. This could be the simplest and most practical strategy for building managers to take the necessary steps to reduce how much electricity, gas, and water are consumed in the building.

Energy reduction upwards of 25 percent in many newer buildings will require a lot of involvement from tenants. After all, it’s usually the tenant that up­fits the vanilla envelope with appliances, office equipment and lighting of choice, and it’s the tenant that determines the usage. It’s important to recognize that the presence of energy­hungry devices and the inclusion of elaborate controls aren’t the only determining factors for a building’s performance. The biggest hurdle to realizing energy savings is human behavior. With the right training, even the simplest controls can be implemented and significant savings can still be achieved.

If the landlords were the only ones to see the cost savings from efficient designs it would be unlikely that tenants would make much effort to reduce their consumption. One solution is for landlords to incentivize lessees to meet target reductions, through the sharing of costs and benefits. Who should be responsible for fronting the cost of an occupancy sensor that turns off lights and HVAC supply in a tenant area? The tenant will achieve a lower energy bill, but the landlord achieves a facility with greater value and functionality. The landlord should be able to apply some of the tenant’s prospective savings toward the investment. There’s no better time for a landlord and tenant to work together on efficiency than when planning the space upfit, and this should be accounted for in the leasing contract.

Occupancy sensors, tighter building envelopes, energy management controls, frequent HVAC commissioning, low­power light fixtures and daylight harvesting are examples of expenses that most tenants can’t easily implement. But with the involvement of the building owner, these things can help make operating expenses more appealing for the lessee, and at the same time maximize the value of the landlord’s building. Additional benefits for the owner include reduced vacancy, increased flexibility in economic slumps, and greater tenant satisfaction.

Green leases simply seek to minimize the energy and resource consumption of the overall structure. As simple as that sounds, there are many ways to implement that philosophy into a lease. The landlord and tenant should work together to make the needed investments and system changes, and they can share the rewards.

For further information, check out these resources:

United States Green Building Council

Building Owners and Managers Association International

California Sustainability Alliance

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