Green Lease

7 Questions to Ask Your Building Owner When Considering a Green Lease

By Megan Porter

Rent, length of lease agreement, upfront investment, build-out allowances and property upkeep are some of the first issues that are raised when a business negotiates a lease with a building owner. But many California businesses are also exploring green leasing. A green lease can make a big difference to a business's long-term profits, and it can reduce a business's carbon footprint.

In a green lease, a new commercial tenant, or one that is renegotiating a lease in its current space, brokers things like energy efficiency benchmarks and eco-conscious sustainability programs into the agreement. It's a way for landlords and tenants to work together to realize energy efficiency goals, and it's one of the most effective ways that companies can reduce the environmental impact of their business.

Sustainability, particularly as it applies to energy consumption, is one of the hottest buzzwords in commercial real estate. California has been at the forefront of the movement to construct sustainable buildings and retrofit older buildings with sustainable measures.

Green leases in California that focus on greater sustainability have become increasingly essential for many businesses in the state. The environmental benefits of California green leases are the driving force behind their growing popularity, but their short- and long-term financial benefits also are a significant contributor to the implementation of green leases.

Business owners who are in the process of negotiating a new lease should consider these seven questions as they consider a green lease agreement:

1. What are the current energy benchmarks for the property?
Before negotiating a green lease in California, it is essential to understand the past or expected energy consumption of the property.

Businesses that are moving into a previously occupied space should ask for utility bills from the previous 12 months. Recent bills can be used to establish an energy baseline. Businesses that are moving into new buildings should ask about expected utility costs and secure written estimates.

With those benchmarks in hand, tenants can work with their landlords to lay out energy usage reduction goals. The Department of Energy (DOE) recommends setting reduction milestones of at least 10%.1 Businesses in Pacific Gas and Electric Company's (PG&E) territory can use MyEnergy to track their energy usage.

Considerations should also be given to regulations that can impact energy usage and energy reduction goals. The past several years have seen a wave of rules and regulations that govern sustainable buildings. Measures like updates to Title 24, also known as the California Building Standards Code, may dictate some of the steps landlords and tenants must take to improve sustainability. Ask the landlord about factoring Title 24 and similar regulations into any green lease energy reduction goals.

2. How can working with public and private organizations help achieve sustainable energy efficiency goals?
Many landlords and tenants want to go green but aren't sure how to do it. Fortunately, there are scores of public and private organizations that offer guidance on designing a green lease. ENERGY STAR, which is a part of the DOE, remains the most widely referenced resource for this process. Leadership in Energy and Environmental Design (LEED) certification is another popular avenue for landlords and tenants to follow.

Pursuing the ENERGY STAR label, LEED certification or the endorsement of another group with experience and expertise in the sustainable buildings field provides a road map of sustainable practices. It can also serve as a powerful tool to show customers and business partners that both the landlord and tenant are serious about instituting sustainable programs.2

3. How can a commercial tenant work with its neighbors to achieve sustainable energy efficiency goals?
When it comes to green leases, and environmental sustainability in general, working with others is one of the keys to success. Business owners who operate out of multi-tenant buildings should open lines of communication – face-to-face, email lists, etc. – to discuss energy reduction goals. By working with other tenants, business owners can also ensure that green lease terms are carried out across the building and leverage their collaboration to improve those terms.3

4. How can a California green lease affect a business's marketability?
Green leases can go a long way toward improving a business' profitability. Reduced utility costs represent the foremost example of improved profits. But communicating the environmental benefits of sustainability to stakeholders and customers is also important in that effort.

By marketing documented evidence of energy efficiency, business owners can burnish their brand and give potential customers and business partners yet another reason to work with them.

5. Who should a business owner partner with to ensure that a green lease is binding and effective?
Working with the right attorneys and real estate brokers is essential to designing a successful green lease and sustainability program. A lease is a legally binding contract, so the attorney a business owner chooses to help negotiate the terms of a green lease will have ripple effects that go on for years.

Commercial real estate brokers are the primary intermediary in most green lease negotiations. Working with a broker who has experience with green leases can smooth the initial process and lay the groundwork for future sustainability.

6. How will a green lease affect rent, utility bills and other monthly expenses?
Cost is always going to be a major concern for any business. The initial outlay for a green lease in a sustainable building might be a little bit higher than it would be with less efficient buildings. However, businesses can save more than 10% on overall operating expenses by instituting sustainable programs.4

Ask the landlord, broker, attorney and other tenants about how much can be expected to be saved by signing a green lease. Use those numbers to calculate the return on investment from signing a green lease. Energy prices continue to fluctuate, so locking in long-term energy reduction measures can make determining operating costs much easier years into the future.

7. What kinds of incentives and energy efficient practices can be written into a green lease to make it more effective at reaching energy reduction goals?
Incentivizing energy efficient behavior is an incredibly effective way to adhere to energy reduction goals. Landlords and tenants can write terms into a green lease that offer discounts on rent or bills when certain benchmarks are reached. Business owners can encourage their employees to use energy more responsibly by offering prizes and awards.

Some of the most common incentive practices include5 recycling programs; reducing use of lighting, heating, cooling and ventilation by setting lights and thermostats; and implementing and tracking computer power management plans.

Interested in learning more about calculating your business's energy baseline, payback period and financing options for energy efficiency projects? PG&E has developed a free guide to help your business identify steps to securing financing for energy efficiency projects. Download PG&E's "Insider's Guide to Financing Energy Efficiency Projects."

Referenced in article:
  2. U.S. Department of Energy
  4. Jones Lang Lasalle

A green lease can make a big impact on a business’s long-term profits. Read on to learn more from @PGE4Me:
  • SMB Blog Author
    Megan Porter
    Senior Program Marketing Manager at PG&E, is a recognized leader in solutions marketing for small and medium-sized businesses. Megan uses her proven and practical expertise to bring energy efficiency education to businesses in every industry. In this vital role, she develops and oversees highly successful initiatives that result in the adoption of more efficient long-term energy management behaviors.

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