Take the LEED in Sustainability with a Green Lease

Mention the term "green building" and the average person is likely to envision a pristine new structure with a green roof and solar panels. But a green building doesn't have to be new. In fact, there's a saying in energy conservation circles that "the greenest building is the one already built."¹

And for good reason. It can take up to 80 years to make up for the environmental impacts of demolishing an old building and constructing a new one, even if the new one is super energy efficient.² The problem is commercial buildings are the single largest users of energy in California, accounting for more than 38% of California's electricity consumption and 25% of its natural gas use.³

That presents a strong case for making existing buildings more energy efficient. Given that 90% of California's commercial office space is leased, achieving energy efficiency requires cooperation between building owners and their tenants.⁴

Unfortunately, the way most traditional leases are structured can make that difficult to achieve. Under a net lease, the tenant pays for energy costs. Conversely, under a gross lease, the building owner usually pays the energy expenses. This dynamic makes energy efficiency a challenge, since those who pay for retrofits may not directly benefit. This is commonly referred to as the "split incentive" barrier to energy efficiency.⁵

One answer to that barrier is a green lease. Green leasing is a general term that refers to any strategy that uses a lease to formalize the responsibilities between tenants and landlords with respect to a building's green measures and practices.

Also known as energy aligned leases, high-performance leases or energy efficient leases, these approaches align the financial and energy incentives of building owners and tenants so they can work together to save money, conserve resources and ensure the efficient operation of buildings.⁶

Green leases also go hand in hand with the Environmental Protection Agency's ENERGY STAR program as well as Leadership in Energy & Environmental Design (LEED) program. LEED is the green building certification program administered by the U.S. Green Building Council. It recognizes best-in-class building strategies and practices and LEED certification results in healthier, more productive places to work. In fact, 88 of the Fortune 100 companies are already using LEED.⁷

One of the goals of the California Energy Commission's Existing Buildings Energy Efficiency Action Plan is to make green leases standard for commercial and multi-family buildings by 2020.⁸ Achieving that will require cooperation among tenants, owners, real estate and leasing agents, as well as property appraisers.

Following is a list of best practices that landlords and tenants should follow when negotiating a green lease.⁹

Get to know the building
Before negotiating a green lease, the landlord and tenant must assess the basic requirements for the space that is to be leased. Variables to consider include previous energy use in the space to be occupied; the percentage of total leased space that tenants will occupy; building age and condition; the presence of other tenants; and the property's previous efforts with sustainability.

Know what "green" means
A green lease can include specifications that the space must meet third-party certification standards (e.g., ENERGY STAR, LEED or both). The lease also could define an energy-cost or cost-savings sharing agreement for energy efficiency improvement projects undertaken by the property owner or tenant, and could include the "energy aligned" lease language. The tenant or owner also could choose to define required energy efficient practices, such as providing automated building controls (e.g., occupancy sensors, building management systems and HVAC controls) in leased space, or requiring that janitorial services be provided during the workday, thus eliminating unnecessary energy use for nighttime lighting.

Be ready to negotiate
Commercial real estate leases typically are long-term transactions (five to 10 years), and the evolving field of green leasing can add new wrinkles to the process; therefore, negotiation should be expected. Tenants and owners should be clear in communicating goals and criteria for the lease process. The economic conditions will also be a factor. For example, a "buyer's (lessee's) market" tends to make building owners and brokers more willing to negotiate new or unconventional provisions in lease structures.

Measure and verify
An effective measurement and verification plan can document the benefits of green leases and enable involved parties to correct unsuccessful leasing practices and replicate successes. The parameters and measurement methods will vary depending on the types of measures included in the lease.

When building owners and lessees work together on saving energy and reducing greenhouse gas emissions, it’s a win-win for them and the state of California. To learn more about sustainable business practices, download PG&E’s “20 Sustainable Products to Help Businesses Save Money and Energy” eBook.

1. U.S. Department of the Interior
2. National Trust for Historic Preservation
3. California Sustainability Alliance
4. California Sustainability Alliance
5. U.S. Department of Energy
6. U.S. Department of Energy
7. U.S. Green Building Council
8. California Energy Commission
9. U.S. Department of Energy