GREENING Commercial Leases:A Business Response to Climate Change & Environmental Goals

Professor Celeste HammondJohn Marshall Law School

ABA RPTE Professor’s Corner Commercial Leases

May 8, 2013

Old Buildings or New Construction

• I. Terminology

• II. Greening is a serious real estate development

• III. Implications for landlords & tenants in commercial buildings & their LEASES

I. What does “GREEN” Mean?

“The practice of (1) increasing the efficiency with which buildings and their sites use energy, water and materials and (2) reducing building impacts on human health and the environment, through better siting, design, construction, operation, maintenance and removal- the complete building life cycle”

GREEN LEASE?

• Any strategy that uses a lease to formalize the responsibilities between Tenants and Landlords with respect to a building’s green practices.

• Such leases ‘align’ the financial and energy incentives of GREEN buildings to that both Tenants and Landlords can work together. *

• * U.S. Department of Energy

Terminology• Reflects both Sustainability Concerns and Environmental goals• LEED = Leadership in Energy & Environmental Design

– (from United States Green Building Council –USGBC)• Green Globes• National Association of Home Builders (NAHB)• Energy Star Initiative

• Who decides what is “GREEN”? Private groups? Government?• What is GREEN Washing?

II. GREENING is Serious

• CLIMATE Change local, state, federal regulation and standards

• ENERGY Concerns – Political – where will we get increasingly needed

energy? – Economic - Who will pay for new energy

infrastructure & research?• CARBON FOOTPRINT

II. GREENING is serious

• Conserve NATURAL RESOURCES– Commercial real estate uses 40% of all energy!

• 72% electricity• 39% of energy use• 38% carbon dioxide emissions• 30% waste output (136 million tons annually)• 14% potable water consumption

• Most OFFICE space is leased• GREEN Professionals NOW includes Attorneys! – LEED: GREEN ASSOCIATES (GA)– Commercial Brokers Asso: Certified Green Brokers

Examples of Green

Water, waste • Diversion of construction,

demolition, and land-clearing waste from land fill

• Facilitate alternate site selection transportation near building, e.g., bike racks & subways

• Limit flow rates in toilets and sinks & max. flush rate

• Meter electricity separately for each premises

• Longer leases (10 years)

Reduce energy usage• Heating, Ventilation and air

conditioning (HVAC) limited to normal business hours/days ONLY

• Limit electricity to normal business hours/days to .025 kWh per rentable square foot.

• Daylighting measures to avoid lighting interior spaces

LEED United States Green Building Council

• Non profit TRADE organization• Founded 1993• Develops Leadership in Energy &

Environmental Design = LEED (2000) Green Building Rating system 2009 LEED 3.0– Certification of buildings– Accreditation of professionals

• USGBC chapters locally

LEED Assessment CRITERIA

• Sustainable site • Water efficiency• Energy & Atmosphere• Materials & Resources• Indoor air quality• Innovation

Levels of LEED certification DISCLOSURE

LEED LEVELS:• PLATINUM 52-69 points• GOLD 39-51• SILVER 33-38• CERTIFIED 26-32

PROCESS:

Registration

Design Review

Construction review Certification [APPEAL?]

LEED• New Construction (NC)

• Existing Buildings & Operations (EB:O& M)

• Interior Design & Construction (ID & C)

CLASSIFICATION:

Other Rating Systems

• Green Globes – owned by Jones Lang LaSalle• Energy Star – developed by Federal

Department of Energy and EPA • HAHB – Home Builders Green program

(competes with LEED for leases)• Earthcraft example of regional system

(Atlanta residential)

Benefits of Certification

• Verification

• Marketing

• Regulation

• Incentives

III. Implications for Landlords, Tenants and their Attorneys

• Standards set by TRADE groups/sometimes adopted by government:

Federal Government requirements for all it leases above certain size States eg. CALGREEN Local eg NYC

• Advantages• Costs• Drafting Objectives in Commercial Leases• Legal Issues Looming

Standards of Trade Groups (sometimes adopted by Government

• ICC commercial building code

• ASHRAE “Advancing HVAC & R to serve human and promote a sustainable world”

• CalGreen Code – first statewide code in country.

VALUE $$ of greening in Leasing

• Economic Benefits:• LEED: $9.06 square foot rental difference

5% occupancy difference• Energy Star: $4.73 square foot rental difference 2.5% occupancy differenceReputational / branding ==> marketingHigher employee productivityBetter tenant retentionTax incentives

COSTS $$ OF Greening

• Increased construction costs: 2% - 8%

• Site Selection – important to certification point system of LEED, but can be expensive

• Allocation between LL & T becomes critical

• Especially construction costs usually borne by LL

Drafting Objectives

• How will lawyers apply private standards of LEED?

• How will lawyers respond to requirements of building codes such as CAL Green Building Code and International Construction Code (IGCC)?

• How important is the “split incentive” issue to parties to the Lease?

“Split Incentive” Issue

What it is:Party doing capital improvement does NOT benefit from savings of efficient energy in the buildingExamples:Net lease Tenants responsible for energy bills; little incentive on part of Landlord to invest in energy savingsGross lease Tenants utilities usually included (and paid by Landlord) Thus, Tenants little incentive to save.

Drafting around “Split incentive” issue

• Brandywine Realty Trust:– Clause in standard lease allowing it to pass through capital

costs of efficiency improvements– Clause requires Tenants to submit monthly utility data OR allow

Landlord to install sub meters to measure utility usage.• New York City Form Lease: www.nyc.gov/eac

Guarantees LL will recover costs over projected payback period

Aims to assure T that those improvements will result in actual savings that even when split with LL will result in net benefit.

DRAFTING GREEN

• FORM Leases for new construction and new TENANTS:– REALpac = Real Property Owners of Canada – MODEL GREEN LEASE = Corporate Realty Design &

Management Institute– BOMA = Building Owners and Mangagers

Association International Guide• ADDENDA of modification to Existing Leases

Drafting GREEN

• What constitutes default?• What is the standard of damages for default? – To party (usually Tenant) harmed by non

compliance• What are the remedies for default? – Damages– Restoration by harmed party and reimbursement?

Legal Issues Loom• Insurance Coverage against potential “LEEDigation” for LEED

certified buildings– Professional liability insurance does NOT insure for warranties or

guarantees made by eg architects– Cover rebuilding to green standards?

• Defects – yet a building is NOT certified until after completion.

• Breach of Contract: Contract should clearly allocate GREEN Responsibility cf Shaw Development case where Developer lost $600K in tax credits!

GREENwashing

• Investors, tenants, lenders and public officials rely on if project is LEED, it will save energy, etc. Is this promise achievable?

• Are the touted advantages of GREEN real?• US Federal Trade Commission has begun

regulating GREEN marketing • Puffing, false representation & fraud are risks

GREEN Lease websites

• http://www.greenbuildinglawblog.com(Shari Shapiro, Cozen & O’Connor)• http://www.greenleaselibrary.com ( U.S. Department of Energy) http://www.nyc.gov/html/gbee/html/initiatives/clauseshtml (PlaNYC Green Buildings & Energy Efficiency)

More websites

http://www.usgbc.org (US Green Building Council- LEED ratings certification)http://www.greenglobes.com (Canadian Standards Association ratings system)http://www.energystar.gov (Federal EPA & DOE)FORM leases:http://www.realpac.ca/green-office (Canadian free)http://www.squarefootage.net/TMGL.html ( $)http://www.shop.boma.org ($)