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Green Leases: Evolving Legal Issues Green Leases: Evolving Legal Issues for Commercial Landlords and Tenants Negotiating and Crafting Cost‐Effective and Environmentally Friendly Lease Terms

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, OCTOBER 13, 2011

Today’s faculty features:

Steven A. Teitelbaum, Senior Real Estate Advisor, Department of Planning & Joint DevelopmentWashington Metropolitan Area Transit Authority, Washington, D.C.

Louise C Adamson LEED-AP ID&C Partner K&L Gates San FranciscoLouise C. Adamson, LEED AP, ID&C, Partner, K&L Gates, San Francisco

Jon F. Leyens, Jr., Shareholder, Baker Donelson Bearman Caldwell & Berkowitz, New Orleans

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CURRENT DEVELOPMENTS INCURRENT DEVELOPMENTS INGREEN LEASING, 2011

Steven A. Teitelbauml dSenior Real Estate Advisor

Washington Metropolitan Area Transit Authority

[email protected]

Author:

BOMA Guide to Writing a Commercial Real EstateBOMA Guide to Writing a Commercial Real Estate Lease, Including Green Lease Language, 2008

BOMA Guide to Sustainable and Energy Efficient L i f Hi h P f B ildi 2011Leasing for High‐Performance Buildings, 2011

2008 ‐ “THE BIRTH OF THE GREEN LEASE”

• CoStar names “the birth of the green lease” one of the ten 10 events of the year for sustainable buildings, yet the subject is still new to many

• The first widely‐published green lease forms were circulated

REALPAC ‐ National Standard Green Office Lease for Si l B ildi P jSingle‐Building Projects

BOMA ‐ Guide to Writing A Commercial Real EstateCommercial Real Estate Lease, Including Green Lease Language

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WHAT IS A “GREEN LEASE”?

It’s definitely NOT a standard lease in a

It can be a lease that addresses

Most likely, it is a lease that addresses

green building sustainability in a non‐green building

sustainability in a green (or wannabe green) building

The key is that a “green lease” addresses sustainability issues in aaddresses sustainability issues in a forward‐looking manner

“To infinity, and beyond!”

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GREEN BUILDING vs. GREEN LEASING

d h d lLeadership in Energy and Environmental

DESIGNDESIGN

8

GREEN BUILDING vs. GREEN LEASING

d h d lLeadership in Energy and Environmental

PERFORMANCEPERFORMANCE

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LEED for Existing Buildings: Operations & Maintenance

Most LEED certifications are oriented to design and construction issues

• LEED‐NC, LEED‐C+S, LEED‐CI/ID&C

There is one LEED certification that addresses operations:

• LEED for Existing Buildings: Operations & Maintenance (LEED‐EB:O&M)

• Fastest‐growing LEED certificationg g• Building must have an operating history before it can be certified

• Building must be at least 50% occupied (reduced in late 2009 from 75%)

• Alternatives include Green Globes for Continual Improvement of Existing Buildings and BOMA 360

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Buildings and BOMA 360 Source: U.S. Green Building Council

ENERGY STAR

• Energy efficiency is only one of several factors that LEED considers

• If energy efficiency is your interest, look not to LEED but to the U.S. G t’ E S ti tGovernment’s ENERGY STAR rating system

• Administered by U.S. Department of Energy and U.S. Environmental Protection Agency

U li P tf li M t l• Uses on‐line Portfolio Manager tool ‐‐self‐reporting and free

• Compares your building’s actual usage to the usage of the CBECS databaseto the usage of the CBECS database

• Score of 1 (the lowest) to 100• 75 or above is ENERGY STAR “labeled”• LEED – EB: O&M requires an ENERGYLEED EB: O&M requires an ENERGYSTAR score of only 69

Th CBECS d b i d b k 2003 Th f

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• The CBECS database now in use dates back to 2003. Therefore, current performance is being compared to buildings in a database that predates the modern push to energy efficiency.

ENERGY STAR

To address perceived deficiencies in ENERGY STAR, the U.S. DOE in September requested private sector input on a proposed voluntary“National Asset Rating Program for Commercial Buildings”National Asset Rating Program for Commercial Buildings

• Would complement, not replace, ENERGY STAR

• Would fill in gaps, such as by rating buildings that are vacant or h i ’t ffi i t t lif f E S tiwhose occupancy isn’t sufficient to qualify for ENERGY STAR ratings

• Also would distinguish between intrinsic base building systems and operational choices so that building structures could be measured

l t li d t b h i ld b id tifi dapples‐to‐applies and occupant behavior could be identified

• Would identify energy‐saving opportunities

• Would apply to both new and existing buildings

• Builds on State‐wide systems, such as California and Massachusetts

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GOVERNMENTAL MANDATES & INCENTIVES

The first two legs of the stool have been LEED or its competitor rating systems and ENERGY STAR

B th ti l l t• Both entirely voluntary

Increasing role of governmental mandates and, to a lesser extent, incentives in greening building operations

• Traditionally, governmental mandates focused on design and construction issues

• Enforced through traditional building code‐type requirements

• Therefore required green buildingsmore than green operations

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District of Columbia Green Building Act of 2006 applies LEED to private sector buildings – Effective 2012

R i l LEED C tifi d ti• Requires only LEED Certified rating

• Private sector market has already eclipsed it, before statute goes into effect, by effectively making Silver the minimum standard for Cl A b ildi ith Pl ti b ildi l d i tiClass A buildings, with some Platinum buildings already existing

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California Green Building Standards (CALGreen)

• Took effect January 1, 2011

• Independent of LEED, although it follows many of the same paths

Requires 20% reduction in water usage, 50% diversion of construction waste50% diversion of construction waste from landfills, use of low‐pollutant paints, carpets and floorings, separate water meters for indoor and outdoor use in commercial buildings, mandatory inspection of HVAC and other energy systems, and building commissioning and post‐occupancy systems management

• Thus, CALGreen marks a step towards operational standards and qualitative improvements and not merely design and construction

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qualitative improvements and not merely design and construction requirements


Municipal level

• Heavily LEED dependent

• Some require LEED certification, which raises questions of due process, but others require that local building inspectors make independent determination of LEED compliance

• Some allow “LEED or equivalent,” raising question of what is an “equivalent”

•Not even USGBC intended LEED to be a statutory minimum or baseline

• Intended to be a leadership standard for top 20%

• Sliding scale of points and allowing choices of various categories from which to assemble points means that neither LEED nor Green Globes are well‐suited to statutory implementation

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ASTM Standard 189.1:

Standard for the Design of High‐P f G B ildiPerformance Green Buildings Except Low‐Rise Residential Buildings

R l ld St d d 90 1• Replaces older Standard 90.1‐1099

• More code‐oriented and sets d t i imandatory minimums, no

smorgasbord of options

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International Green Construction Code

• Code‐like in that it establishes mandatory sustainability standards (lik t i d i i i )(like metering and commissioning)

• But like LEED, provides for electives (like energy reporting)

• Unlike LEED, the decision on which electives to pursue is made by local government, not by developer, so electives become mandatory

• Allows for use of ASTM 189.1 as alternate compliance path

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New requirements for ongoing operations

• District of ColumbiaDC E A i ll b ildi b b h k d• DC Energy Act requires all buildings be benchmarked against ENERGY STAR and report their ratings

• DC Government will publish them on website• Other cities and states• Other cities and states• less sweeping requirements• CA, WA require disclosures to buyers, tenants and lenders in nonresidential transactionsand lenders in nonresidential transactions

• Austin and Seattle also require disclosures of certain property types in certain circumstances

• New York Cityy• Energy audit and retro commissioning required of most large privately‐owned buildings

• Capital improvements required if payback in 7 years

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or less


Incentives

• Few and ineffectual

• IRC income tax deduction of up to $1.80/sf for improvements to a building’s lighting, HVAC and envelope

• Available to both landlords and tenants ‐‐ whoever pays for the work gets the deduction

• Expedited permitting and/or waiver of fees

• Tax credits• Often capped and therefore

often not availableDi t h i ti• Direct cash incentives

• Not useful when governments have no money available

• Density bonuses

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• Density bonuses• Property tax deductions


Note absence of references to Federal regulations

• None apply to private sector buildingspp y p g• General Services Administration has aggressively tried to use its market power as a tenant to require sustainable buildings

• LEED Gold (for buildings it builds or renovates)LEED Sil (f b ildi it l )• LEED Silver (for buildings it leases), with some minor exceptions

• Some States and municipalities have similar requirementshave similar requirements

• No cap and trade – previous efforts have failed

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GREEN LEASES IN THE MARKETPLACE

Various forms in the marketplace that can be used as starting points

• Usually promulgated by trade associations and entrepreneurs

• Vary considerably in their approach and utility

• Shared concept: the key is greening operations, not merely greening design and construction

• Form biases

• Most are pro‐landlord for simple reason that landlords are most often the draftsmen and/or consumers of lease forms

• Exceptions: California Sustainability Alliance and USGBC’s own recommendations

• But if the tenant is the motivating party to going “green,”But if the tenant is the motivating party to going green, then the tenant can propose its own allocations of responsibility and cost

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Green Leases Toolkit

California Sustainability Alliance

www.sustainca.org

• Assumes that the tenant is the driving force in going green

• “Green Request for Proposal”

• Asks landlord for a very thorough explanation of the green elements of its buildingelements of its building

• “Due Diligence Scorecard” to compare buildings

• “Lease Provision Database”

V di t• Very rudimentary

• Aspirational, like many early adopters

• Probably more useful in issue‐spotting than in crafting an actual

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lease


National Standard Green Office Lease for Single‐Building Projects

Real Property Association of Canada

www.realpac.ca

• First actual lease to promulgate green lease languagep g g g g

• Puts most green provisions in separate rider

• Great illustration of the rapid shift in green leasing from aspirational to a hard‐nosed business approacha hard nosed business approach

• 2008 version was expressly aspirational

• Expressly made it not a default for a party to violate the green riderrider

• March 2009 reissuance largely abandoned that approach and is hard‐nosed and extremely pro‐landlord

F b 2010 i d l ti tl t h i l

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• February 2010 reissuance made evolutionary, mostly technical, upgrades


BOMA (Building Owners and Managers Association International)

www.boma.org

2008 – Guide to Writing a Commercial Real Estate Lease, Including Green Lease Language

2011 – Guide to Sustainable and Energy Efficient Leasing for High‐Performance Buildings

• BOMA Guides incorporate the green language directly into the text

• Very detailed, comprehensive, approach to greening a building’s operations and also requiring that tenant build‐out be greenoperations and also requiring that tenant build out be green

• Contain lots of explanatory text and commentary discussing both the green and non‐green provisions

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Natural Resources Defense Council (NRDC) “split incentive,” 2008‐2009

• “Split incentive” arises in a net lease contextdl d f l• Landlord pays for capital improvements

and tenant pays the building’s operating expenses

• Disincentivizes the landlord from• Disincentivizes the landlord from spending its capital on green measures that reduce operating expenses because it is the tenant that benefits from theis the tenant that benefits from the reduced operating expense

• A bit oversimplified because:• In most net leases tenants do pay some capital expensesIn most net leases tenants do pay some capital expenses• Landlords have other incentives to improve their buildings, e.g. marketability to tenants and resale

• Argument starts from assumption that “green” is capital intensive,

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the so‐called “cost premium”


Natural Resources Defense Council Lease Energy Efficiency Guidance

• Provides conceptual framework for addressing split incentive

• Advocates greater transparency and information‐sharing between landlords and tenants

• Traditionally anathema to landlords

• But anticipated USGBC’s move to require energy efficiency reporting by certified buildings

• Allows landlords more favorable amortization of capital costs incurred in saving energy than traditional “useful life”

• Does not provide actual lease language

• Available at http://cycle‐7downloads.com/downloads files/EnergyAvailable at http://cycle 7downloads.com/downloads_files/Energy %Efficiency%20Lease%Guidance%203‐18‐09.pdf

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NYC Government & Real Estate Board of New York (REBNY)• 2011 – sample lease language adoptedAdd l th “ lit i ti ”

Proposes:

• Addresses only the “split incentive” issue, not qualitative issues

• Tenant to share capital expenses to the extent of projected, not actual, operating cost savings

• Costs amortized over anticipated “payback” period for the savings, not more customary “useful life” of improvementnot more customary “useful life” of improvement

• Projections made by independent expert engaged by landlord• Carrot to tenant is that landlord’s recovery via this pass‐through is limited to 80% of projected savingslimited to 80% of projected savings

• Available at http://www.nyc.gov/html/planyc2030/downloads/pdf/110517a_energy aligned lease official packet.pdf

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y_ g _ _ _p p


Model Green Lease, 2009

• Since the split incentive arises only in net leases, Model Green Lease tries to encourage use of “gross lease”

• In true gross lease, tenant pays fixed rent, regardless of actual operating costs, and Landlord pays all actual operating costs

• Landlord incentivized to save operating costs

• party who pays for the improvement should reap the rewards

• Model Gross Lease really uses a modified gross lease, with a base year or expense stop, so effect isn’t all that differentyear or expense stop, so effect isn t all that different

• Brevity, very pro‐landlord

• Potential FASB effect on gross leases?

A il bl f h t f t t

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• Available for purchase at www.squarefootage.net


Green Office Guide – USGBC, Summer 2009

www.usgbc.org

• More of a gentle guide to greening buildings• Addresses both build‐out and operational matters

• Includes good questionnaires RFP language and scorecards

• Really useful for uninitiated tenants

• Includes good questionnaires, RFP language, and scorecards

• Provides sample green lease language

• presented on a stand‐alone basis, without context

• Assumes tenant is the motivating force, therefore pro‐tenant language

• Lease clauses are somewhat aspirational

• States that there is no expectation that an alert landlord will agree

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to a significant amount of this

CONCLUSION

• Multiplicity of tongues indicates that there is no one universal truth

• Still evolving standards, still evolving expectations

• Evolving emphasis on prospective operations and not merely design and construction issues

• Any approach should be customized to individual building and interests of the parties

• Not all buildings are alike or can accommodate same standard, physically, legally or in the marketplace

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Elements of an Effective Green Lease Program

G L E l i L l I f C i l Green Leases: Evolving Legal Issues for Commercial Landlords and Tenants

October 13, 2011

Louise C Adamson LEED® AP ID&CLouise C. Adamson LEED®-AP ID&CPartnerSan [email protected]© 2010 Louise C. Adamson

Presentation overviewPresentation overview

THE CONTEXT OF GREEN LEASES Sustainable development drivers

Building impacts; Green buildings; Corporate perspectives on sustainability; LEED 101

GREEN TENANT LEASESGREEN TENANT LEASES How to structure an effective green lease

Client case study; What are the elements of an effective l ? I f h RFP d LOIgreen lease program? Importance of the RFP and LOI

Lessons learned Materials and resources

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Materials and resources

Environmental impacts of buildingsEnvironmental impacts of buildings

U.S. Building Impacts

34

U.S. Dept. Energy

Comparative sector impactsComparative sector impacts

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http://www.greenerassets.com

Green BuildingsGreen Buildings

USE 24% to 50% less energy

EMIT 33% t 39% l b di id i t th EMIT 33% to 39% less carbon dioxide into the atmosphere

USE USE 40% less water

SEND 70% less solid waste to landfills and incinerators

36

U.S. Green Building Council

37

Corporate Perspectives on SustainabilityCorporate Perspectives on Sustainability

Global survey of over 400 building occupiers prepared by Jones Lang LaSalle and CoreNetshows that 90% of corporate occupiers surveyed consider sustainability a near-term critical business issueissue

Most major corporations have now developed public sustainability policy statementsy p y

Sustainability has become part of the corporate vernacular and remains a high priority

38

When will sustainability become a When will sustainability become a critical business issue?critical business issue?critical business issue?critical business issue?

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Why green building?Why green building?

Opportunity and incentive toOpportunity and incentive toimplement environmentally implement environmentally sustainable practicessustainable practicessustainable practicessustainable practices

Improved bottom line; Improved bottom line; increased occupant increased occupant wellwell--being and productivity; being and productivity; reduced absenteeism; qualifyreduced absenteeism; qualify

Valuable opportunity to Valuable opportunity to communicate commitment communicate commitment to responsible environmental to responsible environmental stewardship to the marketplacestewardship to the marketplacereduced absenteeism; qualifyreduced absenteeism; qualify

for growing number of for growing number of state/local initiativesstate/local initiatives

stewardship to the marketplace, stewardship to the marketplace, employees, community and employees, community and shareholdersshareholders

40

What is the LEEDWhat is the LEED®® Green Building Rating SystemGreen Building Rating System™™??LEED is an acronym for “Leadership in Energy And LEED is an acronym for Leadership in Energy And Environmental Design”. The LEED Green Building Rating System is promulgated by the US Green Building Council

LEED has become the established

LEED is designed to guide the development of

as beco e e es ab s edindustry benchmark for the certification of sustainable building projects

the development of high performance sustainable building projects; “points” are accrued for i l i f ffi i The mission of LEED is to encourage implementation of efficiency and design measures; certification awarded basedon number of points earned

The mission of LEED is to encourage the global adoption of sustainable green building and development practices

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on number of points earned

USGBC Rating System PortfolioUSGBC Rating System Portfolio

LEED Rating System

Portfolio

LEED for NewConstruction &

Major Renovations

LEED for Existing BuildingsOperations & Mgmt

LEED for Interior Design &

Construction

LEED forCore & Shell

LEED for Neighborhood Development

LEED f

42'USGBC' and related logo is a trademark owned by the U.S. Green Building Council

LEED forRetail: New

ConstructionLEED for Schools

LEED for Homes

LEED for Healthcare

LEED ID&C certification is awarded at the following LEED ID&C certification is awarded at the following levels:levels:

CERTIFIEDCERTIFIED 4040--49 points49 pointsSILVERSILVER 5050 59 i t59 i t SILVERSILVER 5050--59 points59 points

GOLD GOLD 6060--79 points79 points PLATINUMPLATINUM 80 points and above80 points and above PLATINUMPLATINUM 80 points and above80 points and above 7 “must7 “must--have” prerequisites. Balance of credits have” prerequisites. Balance of credits

selected on “pick and choose” basis across various selected on “pick and choose” basis across various

43

categories categories

'USGBC' and related logo is a trademark owned by the U.S. Green Building Council

LEED for Interior Design and ConstructionLEED for Interior Design and Construction

Certification for the tenant build-out is covered by LEED for Green Interior Design and Construction LEED-ID&C (formerly LEED-CI) which is premises-based NOT (formerly LEED-CI) which is premises-based NOT building-based

Recognizes that tenant will typically have limited ability to control or leverage landlord behavior and requires the implementation of sustainable practices within the premises ONLY

LEED-ID&C is all about the art of the do-able!

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LEED ID&C is all about the art of the do able!

LEEDLEED--ID&CID&CLEEDLEED--ID&C addresses performance in the following ID&C addresses performance in the following categories:categories:

Sustainable SitesSustainable Sites Water EfficiencyWater EfficiencyWater EfficiencyWater Efficiency Energy & AtmosphereEnergy & Atmosphere Materials & ResourcesMaterials & Resources Indoor Environmental Quality Indoor Environmental Quality Indoor Environmental Quality Indoor Environmental Quality Innovation in DesignInnovation in Design Regional PriorityRegional Priority

45

46

Green Lease EvolutionGreen Lease Evolution

Early green buildings were owner-occupied – trend is toward investor-owned buildings

Initial focus on initial building design/construction rather than Initial focus on initial building design/construction rather than ongoing operation

Corporate sustainability goals and CSR reporting I i b f t l d t & i ti Increasing number of governmental mandates & incentives

Green buildings are redefining what constitutes Class A office space

Owners and investors fearful of obsolescence – failure to respond to demands for green building may lead to a competitive disadvantage particularly once economy recovers

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Client Case StudyClient Case Study

Assignment was to “green” standard multi-tenant lease form f l b l t h l ith 25 illi ft tf li for global technology company with 25 million sq. ft portfolio (56% owned, 44% leased)

No “green” tenant leases existedg Not simply a matter of plugging in a few green provisions into

the lease form (“green washing”) Requires identification and communication of sustainability Requires identification and communication of sustainability

goals from very start of building selection and lease negotiation processes

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Client Case Study Client Case Study (continued)

Input received from all members of the client transaction team

Developed a unique green lease program that integrates sustainability in a holistic way starting with site selection and continuing through RFP LOI and leasecontinuing through RFP, LOI and lease

Differentiator: Lease tracks LEED-ID&C requirements so that lease itself facilitates certification of the premises on a stand-lease itself facilitates certification of the premises on a stand-alone basis (regardless of typically uncertified status of building)

Client has adopted new green lease forms and pursuit of LEED

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Client has adopted new green lease forms and pursuit of LEED certification is now default assumption for new leases

What are the elements of What are the elements of an effective green leasing program?an effective green leasing program?g g p gg g p g

1. Development of sustainability goals2 Communication of goals to team (i l di L dl d)2. Communication of goals to team (including Landlord)

3. Site selection guidelines (informed by LEED reqs)

4 Request for Proposal (i l d LEED ti i )4. Request for Proposal (include LEED questionnaire)

5. Letter of Intent (include sustainability standards exhibit)

6 Lease (incorporate green lease terms that track LEED ID&C 6. Lease (incorporate green lease terms that track LEED-ID&C requirements

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Effective Green Lease ModelEffective Green Lease Model

TraditionalTraditional

Site SelectionSite Selection

RFPRFP

LOILOI

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LeaseLease


TraditionalTraditional “Green Washing”“Green Washing”

Site SelectionSite Selection Site SelectionSite Selection

RFPRFP RFPRFP

LOILOI LOILOI

Lease

52

LeaseLeaseLease

With Plug-inGreen Terms


TraditionalTraditional

Establish sustainability goals

Green LeaseGreen Lease

sustainability goals

Communicate goalsto team

Site SelectionSite Selection Site Selection(with LEED parameters)

RFPRFP RFP (withLEED questionnaire)

LOILOI Letter of Intent(includes green standards)

Green Lease

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LeaseLeaseGreen Lease

(incorporates green terms;may track LEED reqs)

Communication of Sustainability Goals Communication of Sustainability Goals to Teamto Teamto Teamto Team

Communication of sustainability objectives to ALL Communication of sustainability objectives to ALL parties participating in the leasing process is key parties participating in the leasing process is key ––i l d b k l dl d hit t t t i l d b k l dl d hit t t t includes brokers, landlords, architects, contractors includes brokers, landlords, architects, contractors and attorneys, many of whom may have a limited and attorneys, many of whom may have a limited

understanding of green building practices understanding of green building practices g g g pg g g p

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Site Selection ChecklistSite Selection Checklist

Site selection checklist – Defined by tenant’s sustainability criteria and goals; may include LEED requirements

Example: LEED l ti f i l t d ithi Example: LEED encourages selection of premises located within buildings that

implement sustainability best practices (e.g. LEED certified b ildi b ildi h i i bl f )building or building that incorporates sustainable features)

are located in areas of maximum density in established urban communities with access to public transport

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Green RFPGreen RFP

“Green” RFP sets out core sustainability requirements AND solicits green information. May include a separate LEED questionnaire if tenant interested in seeking certificationquestionnaire if tenant interested in seeking certification

Questions alert landlord to importance of sustainability issues. Responses to RFP allow tenant to compare the

h i i f b ildi d i l f green characteristics of buildings and assess potential for certification in a given market

CAUTION: Important not to “spook” potential landlords but p p palso important to realistically assess sustainability potential of particular building (including potential for LEED or other sustainability certification) early in process

56

y ) y p

Sample Green RFP GuidelinesSample Green RFP GuidelinesAfter narrowing the field of potential buildings, the next step is to request additional information by including the following in a Request for Proposal (RFP):

LEED certification Confirm tenant’s desire to pursue certification for premises; confirm Landlord’s p p ;

willingness to cooperate in certification process Tenant’s environmental standards

Specify tenant’s environmental standards (applicable to build out and ongoing operations)

Building’s environmental standards Building s environmental standards Landlord to confirm the building characteristics and operational practices that are

environmentally friendly Landlord project team

Landlord to confirm if members of Landlord project team have experience with green p j p gprojects and/or certification process or green credentials (such as LEED-AP/Associate)

Landlord compliance Confirm that Landlord will be required to comply with tenant’s environmental

standards

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standards

Sample Green RFP GuidelinesSample Green RFP Guidelines

Operating and Capital Expenses Current-year expenses related to green capital improvements to be delineated in

year end statement Electrical Expenses & Metering

Confirm usage data for prior 3 years; confirm separate metering for utilities; confirm if any renewable energy

Parking and alternative transportation Parking and alternative transportation Number of spaces and parking ratio; bike racks and storage; any preferred

parking for car pool/fuel-efficient vehicles Health/changing facilities

Showers changing rooms lockersShowers, changing rooms, lockers Building Hours/HVAC

Hours of operation/after hours use Environmentally Preferable Purchasing Policy Water/energy conservationWater/energy conservation

Confirm building conservation strategies Commissioning

When was the last commissioning/energy audit? Architectural/engineering services & general contractors

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Architectural/engineering services & general contractors Confirm service providers of record; confirm prior LEED project experience

LEED Questionnaire

Include Building Questionnaire with RFPInclude Building Questionnaire with RFP

If Tenant Wants to Pursue LEED ID&C Certification for Premises include a Building Questionnaire with RFPQuestionnaire with RFP

Questions are based directly on the LEED rating system point checklist

CAUTION: Lengthy and detailed – Landlords unfamiliar with green or LEED issues may find overwhelming or even threateningg g

Use with more sophisticated Landlords Good example of a comprehensive building

questionnaire is included in USGBC Green

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questionnaire is included in USGBC Green Office Guide

Letter of IntentLetter of Intent

Include a separate Sustainability Standards Checklist as an exhibit to your LOI Provides a comprehensive summary of tenant’s

sustainability and LEED requirements (related to building systems)g y )

Allows technical sustainability-related issues to be addressed separately from balance of lease issues

Negotiated sustainability standards can then be incorporated into a comprehensive exhibit which will

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incorporated into a comprehensive exhibit which will be attached to Lease

Letter of IntentLetter of Intent

If seeking LEED certification Sustainability If seeking LEED certification, Sustainability Standards exhibit should include and identify LEED prerequisites together with additional optional points needed to achieve desired level of certification

TIP: Sustainability Standards Checklist highlightedto show which are the “must have” LEED prerequisitesprerequisites

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Lessons LearnedLessons Learned

Start the conversation early! Successful green lease transaction depends as much on a

structured and integrated approach (site selection, RFP, g pp ( , ,LOI) as it does on negotiation of specific lease terms

Use a qualified team: A functional green lease requires qualified advisors and

ttattorneys A broker who is familiar with sustainability issues can play a

crucial role in educating landlord and tenant Use an accredited attorney!Use an accredited attorney!

Be realistic: don’t spook landlord by asking for too much; recognize that landlord may be constrained by commitments to others; decide on your priorities

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Lessons LearnedLessons Learned

Be flexible and creative in order to achieve “must have” goals Pick your fights: Some issues are more important than others (e.g.

certification financing financial incenti es s bike racks) certification, financing, financial incentives vs. bike racks) This is a brave and unfamiliar new world! Make sure that the

lease proactively and expressly addresses issues related to green issues in the same way as other material business terms in order to ylimit potential for misunderstanding; avoid vaguely-defined sustainability standards

Integrate green terms into lease itself instead of using a rider (except for technical specs for building systems)(except for technical specs for building systems)

Remember – LEED-ID&C certification can be obtained for the premises on a stand-alone basis regardless of the typically uncertified status of the building

But If tenant wants to pursue certification need to determine early But – If tenant wants to pursue certification need to determine early in the process if you can meet prerequisites and likely points

Green leases provide valuable opportunity to implement sustainable practices; meet sustainability goals; communicate

i i bili k dd l

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commitment to sustainability to market; add value

Green Lease ResourcesGreen Lease Resources

Green Office Guide: Integrating LEED into Your Leasing Process – US Green Building Council (USGBC), 2009 (tenant oriented)(tenant oriented) Comprehensive manual designed to assist tenants green the

leasing process Addresses site selection, negotiations, build-out, ongoing , g , , g g

operations; great checklists and sample lease language, BOMA Guide to Sustainable and Energy Efficient Leasing

for High Performance Buildings – Building Owners and Managers Assoc. Int. (BOMA), 2011 (landlord oriented) Form of commercial lease agreement that integrates green

provisions

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Real Property Association of Canada (REALpac) (updated 2010) (landlord oriented – green rider approach) Form of commercial lease plus rider, available at no charge

www.realpac.ca

Model Green Lease Reference Guide — (2009)(landlord oriented) Promotes gross lease approach; simplistic and brief; lacks Promotes gross lease approach; simplistic and brief; lacks

nuance/commentary; available for purchase at www.squarefootage.net

Green Leases Toolkit California Sustainability Alliance (2008) Green Leases Toolkit –California Sustainability Alliance (2008), available at no charge www.sustainca.org

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Louise C. AdamsonLouise C. AdamsonLEEDLEED AP ID&CAP ID&CLEEDLEED®®--AP ID&CAP ID&CPartnerPartnerSan FranciscoSan [email protected]@klgates.com415.882.8200415.882.8200

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Green Leases: Evolving Issues forGreen Leases: Evolving Issues for Commercial Landlord and Tenants

October 13, 2011

Jon F. "Chip" Leyens, Jr.p y ,Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

504.566.8628 | [email protected] | New Orleans, LA| j y | ,

Greening a Lease: Where do I start? g

Green Lease Models:• BOMA Green Lease Guide: http://shop.boma.org ("BOMA")• REALpac Office GreenLease National Standard Lease for Single

Building Projects Version 1.03 -2010 http://www.realpac.ca/green-u d g ojects e s o 03 0 0 ttp // ea pac ca/g eeoffice-leases/ ("RealPac")

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Predominant Issues for Greening a Lease g

• Construction/Design Phase• Sustainability and Energy Efficiency Standards• Allocation of Operating Expenses and Operating Expense Pass-

Throughsoug s• Operation and Maintenance Obligations• Insurance

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Construction/Design Phase / g

• Work Letter• Rules and Regulations

o Building Rules and Regulationso Contractor Rules and Regulationso Contractor Rules and Regulations

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The Work Letter

• Memorialize Plans• Establish Performance Parties and Requirements• Allocate Costs• Resource: Exhibit E to BOMA Form• Resource: Exhibit E to BOMA Form

o Separate Forms Depending on the Party Constructing the Buildout

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Rules and Regulations g

• Building Rules and Regulationso Governs Tenant Conduct Generally

• Prohibitions Against Extensive Energy Usage• Requirement of Compliance with Sustainability Requirements• Requirement of Compliance with Sustainability Requirements• Resource: Exhibit C to BOMA Form

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Rules and Regulations g

• Contractor Rules and Regulationso Governs Tenant/Contractor Conduct in Connection with Tenant

Buildout and Operationso Green Building Acknowledgemento G ee u d g c o edge e to Erosion/Sediment Controlo Construction Plan for Indoor Air Qualityo Products Used During Constructiono Products Used During Constructiono Resource: Exhibit D to BOMA Form

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Sustainability and Energy Efficiency Standards y gy y

• The Environmental Management Plan• Incorporation into Rules and Regulations and Work Letter

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The Environmental Management Plan g

• Establishment of Environmental Objectiveso General Objectiveso Specific Objectives

• Implementation of Environmental Objectives• Implementation of Environmental Objectives• Environmental Assessment and Reporting• Resource: Schedule E to RealPac Form

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The Environmental Management Plan g

• Incorporation Into Other Parts of the Leaseo Work Lettero Rules and Regulations

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• Allocation of Operating Expenses and Operating Expense Pass-Throughs• The "Split Incentives" Problem• What Operating Expenses Should be Passed Through?at Ope at g pe ses S ou d be assed oug• Potential Resolutions to Split Incentives Problem

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Introduction to the Split Incentives Problem p

• Owners Pay for Upgrades, but Tenants Benefit, so why bother?

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• What Operating Expenses Should be Passed Through?o Who Measures?o What if Rates Go Up?o Variable Expenseso Variable Expenses

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Resolving the Split Incentives Problemg p

• Gross vs. Triple Net Leaseo Debunking the Myth: Potential Advantages of the Triple

Net Lease• Vacanciesaca c es• Gross-Up Provisions may not Fully Insulate Landlord• Building Value Increases Regardless of Lease Structure

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Resolving the Split Incentives Problem g p

• New York City: the Mayor's Office of Long-Term Planning and Stabilityo Two Innovations in Lease Language:

• Uses Savings over Length of Projected Payback Period Uses Sa gs o e e gt o ojected aybac e odRather than Useful Life of Improvements

• Provides Significant Assurances to Tenants that Improvements will Actually Result in Cost Savings that will p y gBenefit Tenants

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Operation and Maintenance Obligationsp g

• Certification Requirements Should Dictate Lease Language• Landlord Perspective• Tenant Perspective

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Operation and Maintenance Obligations p g

• Certification Requirements Should Dictate Lease Language

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Operation and Maintenance: Landlord Perspective p p

• Performance and Maintenance Obligations of Tenant should be expressly provided in Rules and Regulations and Work Letter

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Operation and Maintenance: Tenant Perspective p p

• If Certification hinges on Tenant operations and maintenance (such as LEED O&M), Tenant should require Landlord to operate and maintain building in accordance with required standards

• Examples:o Separate utility meteringo Reducing lighting levelso Establishment of waste management programo Establishment of waste management programo Regulation of energy usage in connection with signageo Establishment of mass transit program

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Insurance

• Issues Unique to Green Buildingo Distribution of Liabilities Among Construction Professionalso Liability for Component Failureo Failure to Satisfy Certification Thresholdo Failure to Satisfy Certification Threshold

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Insurance

• Products Related to Green Buildingo Endorsements to Builder's Risk Insuranceo New Casualty Coverageo Green Reputation CGL Endorsemento Green Reputation CGL Endorsement

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Endorsements to Builder's Risk Insurance, incl dingincluding:

• Added soft costs associated with green development• Cost to flush out space with fresh air• Re-registration fees• LEED accredited professional expenses• LEED accredited professional expenses

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New Casualty Coverage, including: y g , g

• Losses associated with LEED certification• Debris removal costs associated with recycling rather than

landfill disposal• The cost of hiring LEED professionals for new constructione cost o g p o ess o a s o e co st uct o• Registration and Re-Certification Fees• Increased Business Interruption Insurance

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Documents

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