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GREEN LEASING A LEGAL PERSPECTIVE. Overview Green Building & Evolution of Green Lease –What is “Green Building”? –Who Determines if a Building is “Green”?

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Presentation on theme: "GREEN LEASING A LEGAL PERSPECTIVE. Overview Green Building & Evolution of Green Lease –What is “Green Building”? –Who Determines if a Building is “Green”?"— Presentation transcript:

1 GREEN LEASING A LEGAL PERSPECTIVE

2 Overview Green Building & Evolution of Green Lease –What is “Green Building”? –Who Determines if a Building is “Green”? –What is LEED? –What is a Green Lease, and Why Do We Need It? –Green Lease Drafting Issues –Barriers to Green Leases Salient Green Leasing Issues –Regulating Behavior –Cost Recovery & Benefit Allocation –Compliance, Risk Allocation, Remedies & Dispute Resolution Green Leasing in LEED – EB Context Summary & Conclusions

3 Green Building & Evolution of Green Lease What is “Green Building” –“The practice of increasing the efficiency with which buildings use resources – energy, water and materials – while reducing building impacts on human health and the environment during the building’s lifestyle, through better siting, design, construction, operation, maintenance and removal.” – EPA –“Design and construction that uses building techniques that minimize environmental impacts and reduce the energy consumption of buildings while contributing to the health and productivity of the occupants.” – USGBC

4 Green Building & Evolution of Green Lease Who Determines if a Building is “Green”? –Currently, no federally-legislated definition –Voluntary rating organizations: USGBC – LEED Green Globes Energy Star –Local ordinances (often by reference to rating organization standards)

5 Green Building & Evolution of Green Lease What is LEED? –Voluntary, consensus-based national standard for developing and operating high performance sustainable buildings –9 rating programs (including pilots) Most relevant: NC; CS; EB; CI Inter-Relationships of Rating Systems –Leading third party certification program in U.S. (standard for many current and proposed governmental ordinances)

6 Green Building & Evolution of Green Lease Green Lease – What is it? –Lease which has additional provisions set out within it, whereby the Landlord and Tenant undertake specific responsibilities and obligations with respect to the sustainable operation of a building (e.g., energy efficiency measures, waste reduction/management and water efficiency).

7 Green Building & Evolution of Green Lease Green Lease – Why do we need it? –New level of necessary behavioral regulations & control, as each party’s actions or inactions impact performance of building and the ability to achieve/maintain LEED certification –New cost & benefit allocation issues –Risk Allocation –Compliance, Default, Remedies & Dispute Resolution

8 Green Building & Evolution of Green Lease Green Lease – Drafting –Must define “Green”, and properly allocate responsibility for achieving and maintaining sustainable objectives. Which LEED? –Deal and building specific by nature, so doesn’t lend itself to a “form” lease, although some are starting to appear (e.g., BOMA) –Approaches: Paternalistic: Obligations for reduced consumption of energy or resources, and environmentally responsible behavior, are mandated by Landlord or Tenant. Cooperative: Mutual objectives are set out in Lease for both parties to achieve, leading to responsibilities and liabilities for both parties.

9 Green Building & Evolution of Green Lease Barriers to Green Leases –Landlord Barriers Long pay-back periods for certain improvements Lack of skill or knowledge; risk aversion Indifferent tenants; lease restrictions (lighting; materials; building improvements) Inability to pass-through “green” costs

10 Green Building & Evolution of Green Lease –Tenant Barriers Lack of skill or knowledge Fear of unfair rent increase based on “green cost” pass-throughs Inability to produce, or procure from Landlord, premises – specific water & energy consumption data (submeter) Energy & water costs assessed on p.s.f. basis, rather than direct consumption, so no savings incentive Lease restrictions (alterations; inability to compel recycling or energy management programs; inability to compel record-keeping)

11 Salient Green Leasing Issues Regulating Behavior –Importance Critical to achieving/maintaining LEED certification Direct impact on building performance (operating costs; building value) Ancillary impacts (tenants; financing; tax abatements or other incentives; reputation)

12 Salient Green Leasing Issues –Tenant Behavioral Controls Build-Out; Future Alterations, Improvements & Repairs –Enhanced need to restrict and control Tenant’s build-out, and future alterations and repairs, to ensure compliance with green standards of building Construction waste management Adherence to green features (low-VOC paints; energy efficient appliances; water efficient fixtures; HVAC & lighting controls; energy management program)

13 Salient Green Leasing Issues –Ensuring Compliance Approval over Tenant’s plans & specifications Approval over Tenant’s design & construction team/contracts (LEED expertise/experience) Must use Landlord’s contractor (liability issue?) General compliance with certain LEED rating system Specify green standards & requirements in lease or in attached work letter Approval over all Tenant alterations, improvements and repairs (caution: carveouts for deminimus work) If casualty, Tenant must rebuild to certain LEED standard

14 Salient Green Leasing Issues Operations –Landlord must ensure tenant participation in any green measures applicable to the building Recycling/Energy Management Programs Energy conservation measures –Utilities Landlord right to purchase green or renewable energy Ability to measure consumption, charge for overconsumption, regulate consumption

15 Salient Green Leasing Issues Record-Keeping/Reporting –Tenants must be required to provide the necessary energy/IAQ/water use data to Landlord for purposes of Landlord’s reporting requirements Rules & Regulations –Landlord must have the ability to ensure tenant compliance with the “green” rules and regulations for the building

16 Salient Green Leasing Issues –Landlord Behavioral Controls Benchmarks & Targets –Tenant must ensure “green” benchmarks and targets are clearly defined in lease. Performance Standards –Specifications & procedures for measuring environmental performance should be set forth in lease. –Caution in using of old standards to define Landlord obligations – e.g. “first class operations” or “reasonable landlord” standards Operation & Maintenance Obligations –Landlord’s ongoing operation & maintenance obligations with respect to green features should be specified.

17 Salient Green Leasing Issues Green Programs –Any tenant-required green programs for the building should be set forth in lease.

18 Salient Green Leasing Issues Cost Recovery & Benefit Allocation –Cost Recovery Breadth of Operating Expenses –Green features (e.g., vegetated roof, water collection system) –Amortized costs of green equipment/systems and operational enhancements –Costs related to LEED certification Lease Economics –Net Lease vs. Gross Lease –Allocation of benefit/risk of reduced operating costs –Base year issues

19 Salient Green Leasing Issues –Benefit Allocation White Tags & Carbon Offset Credits Energy Savings Tax Rebates Reduced Insurance and Financing Costs

20 Salient Green Leasing Issues Compliance, Risk Allocation, Remedies & Dispute Resolution –Compliance Specific obligation to obtain/maintain targeted LEED certification Definition/measurement of success Time period for performance Obligation of each party to perform

21 Salient Green Leasing Issues –Risk Allocation Failure to achieve targeted LEED certification Performance and durability of new technologies Insurance –Coverage for green features –Coverage for recommissioning & recertification fees –Endorsement for upgrading conventional to “green” –Available products: Fireman’s Fund – “GreenGuard” Insurance Program (Green upgrade coverage; Green certified building coverage; Building commissioning coverage) AON – “Green Building Property Program” (Green replacement and upgrade coverage; Covers costs to hire LEED-AP design professionals; Covers LEED certification costs)

22 Salient Green Leasing Issues –Remedies Termination of lease Self-Help Rent Reduction or Abatement –Alternative Dispute Resolution Expedites resolution of disputes over why a particular target or objective is not being met (lack of compliance with policies & regulations; excessive energy use; failure of green features or technologies)

23 Green Leasing in LEED – EB Context 9 Prerequisites; Minimum 34 Points Required for Certification Applies to Whole Building, Including Tenant Space Building Must Be At Least 75% Occupied for 12 Months

24 Green Leasing in LEED – EB Context Credit Categories: –Materials In –Materials Out –Building Administration –Green Cleaning –Site Management –Occupant Health & Safety –Energy Metrics –Operational Effectiveness

25 Green Leasing in LEED – EB Context Must File for Recertification At Least Every 5 Years –Must be able to demonstrate adherence to environmental policies & procedures –Must track occupants purchasing and waste streams to verify performance goals –Must maintain minimum required occupancy, and track occupant satisfaction

26 Green Leasing in LEED – EB Context At Least 28 Points (Maybe More) Require Some Level of Tenant Participation (Excluding Cost Allocation Issues): –Alternative transportation –Light pollution reduction –Water efficiency –Sustainable purchasing –Solid waste management & reduction –Occupant comfort –Tenant construction IAQ and waste –Daylighting & views –Green cleaning

27 Summary & Conclusions Growing Need for Green Leases –Rising costs of energy, water, materials and insurance, as well as increased governmental environmental and air quality regulation, will drive green buildings –Tenants seeking to reduce carbon footprints and meet corporate sustainability reporting requirements –Tenants and Landlords seeking to manage energy consumption costs –Tenants need assurance that Landlords will provide what they need to meet green objectives, and vice-versa

28 Summary & Conclusions Green Lease is a Double-Edged Sword –Increased regulation & expense pass-throughs = share in cost savings and additional remedies (cooperative approach) –Should achieving higher levels of certification = higher rents? –Landlord and Tenant held to higher standards with respect to features and performance of building Green Leases are Property and Transaction Specific; No Single Form Works for Every Deal

29 Robert E. Stanley, Esq Peachtree Street, Suite 750 Atlanta, GA (404)


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