August 5, 2009 Randal Farber Michael K. Kuhn Vytas Petrulis Jackson Walker L.L.P. Houston BOMA Green Leases and the Legal Aspects of Being “Green”

2 WHY ALL THE FUSS ABOUT GREEN LEASING? Commercial buildings in the U.S. account for: –70% of electricity use –39% of all carbon dioxide emissions –30% of landfill waste –12% of potable water consumption States (not Texas yet), cities, counties and governmental agencies have enacted various LEED initiatives

3 LOCAL GREEN BUILDING INITIATIVES Houston –All city-owned buildings and facilities over 10,000 sq. ft. are to use LEED to the “greatest extent practical and reasonable.” –Target: LEED Silver. Harris County –Partial tax abatement for construction costs for LEED certified buildings: –“LEED Certified” Building = tax abatement of 1% of construction costs. –“LEED Platinum” Building = tax abatement of up to 10 percent of construction costs.

4 WHY GO GREEN? Government “carrots” and “sticks” –Growing use of building code revisions to spur green efforts Reduction in operating costs for LEED buildings vs. non-LEED –Energy use: 25 – 30% lower –Water use: 20 – 30% lower Higher rents (therefore, higher value) –Higher demand for “green” buildings Good corporate citizen –Landlords, Tenants, their staffs and employees are contributing toward a better environment

5 WHAT IS A “GREEN” LEASE? No single answer BOMA “green” lease adds 15 new provisions to its standard form Definition of “green” lease depends on: –Your definition of a “green” building –What “green” standard are we using? LEED? Energy Star? Other? –What does each party want to achieve by entering into a “green” lease?

6 WHAT IS A “GREEN” BUILDING? Broad definition: A “green building” seeks to achieve: –Less energy and water use –Using recycled building materials –Integrated waste management practices (construction and operation) –Use of certified cleaning products –Avoidance of VOC materials –Location that allows efficient access by public or other alternative transportation process –Promoting a comfortable, productive and healthy indoor environment

7 “GREEN” BUILDING CERTIFICATION United States Green Building Council’s “Leadership in Energy and Environmental Design” or “LEED” –More than 40,000 projects accredited through end of 2007 –By 2010, at least 10% of commercial construction starts expected to be LEED-certified –Different LEED standards for different projects EPA’s “Energy Star” –Joint program of EPA and Department of Energy –More than 62,000 buildings in program Green Building Initiative’s “Green Globes” –Popular in Canada

8 HOW DOES LEED WORK? Point-based certification system admin’d by U.S. Green Building Council (not a gov’t agency). A “family” of rating systems, not just one. Six LEED credit categories: –Including: new construction core & shell, interior construction, existing building O&M. Accreditation is through document submittal & review. Criticisms: “low hanging fruit”; no ongoing monitoring; little recognition of regional variances.

9 CHALLENGES IN GREEN LEASING: What “green” standard are we seeking? How to obtain & maintain standard? –Being “green” affects numerous aspects of the lease relationship. How are costs of achieving “green” allocated between landlord & tenants? How to achieve in an existing building with multiple tenants?

10 MORE CHALLENGES IN GREEN LEASING: What if “green” standard changes? What happens if certification is lost due to landlord’s, contractor’s or tenant’s failure? Are the “green” building elements insurable?

11 GREEN INITIATIVE COST ALLOCATION BETWEEN LANDLORD AND TENANT

12 TYPE OF LEASE Gross – Incentivizes Landlord Net – Incentivizes Tenant

13 TENANT IS MORE LIKELY TO BEAR THE COSTS UNLESS Altruistic Landlord Large Tenant Government Intervention

14 COSTS GENERALLY Construction Cost Operational Cost

15 CONSTRUCTION COST INCREASED Landlord Costs Tenant Build-Out Costs

16 LANDLORD COSTS Soft costs Capital expenditures Energy efficient systems/ appliances and other green materials Separately metering

17 TENANT BUILD-OUT COSTS Soft costs Recycled materials, green systems Decrease demolition costs Energy efficient systems/ appliances and other green materials Documenting compliance

18 OPERATIONAL COST More Efficient Building Systems More Efficient Designs and Construction Landlord/Tenant Behavior Green Insurance Utilities – Submetering

19 WHAT TO INCLUDE IN OE? LEED certification/re-certification monitoring, audit & studies cost Green capex; costs of retrofitting and retro-commissioning of Building systems/equipment to reduce energy usage

20 WHAT TO INCLUDE IN OE? (cont’d) Green insurance Recycling plan

21 ADDITIONAL CONSIDERATIONS Landlord’s Right to Elect use of Green Power Future Carbon Taxes Base Year “Comparable Building” or “First Class” Standard

22 TRANSITION TO “GREEN” LEASING What Green Standard is Landlord Seeking? Creating an Environmental Management Plan (EMP) Educating Tenants Introducing Green Concepts into Existing Leases

23 What Green Standard is Landlord Seeking? –LEED Existing Buildings: Operation & Maintenance (EBOM) –LEED Commercial Interiors (CI) –Green Globes Continual Improvement of Existing Buildings (CIEB) –ENERGY STAR –Other (“User Defined”) TRANSITION TO “GREEN” LEASING

24 Creating an Environmental Management Plan (EMP) –Setting out Landlord’s Sustainability Practices for the Building Desired Certification Construction and Maintenance Methods and Procedures Material Purchases Disposal of Waste Recycling Programs TRANSITION TO “GREEN” LEASING

25 Environmental Management Plan (cont.) Alternative Transportation Options Chemical Use Indoor Air Quality Energy Efficiency Water Efficiency Carbon Reduction Exterior Maintenance Programs TRANSITION TO “GREEN” LEASING

26 Environmental Management Plan (cont.) Systems Upgrades to meet Green Building Performance Standards for: –Energy –Water –Indoor Air Quality –Lighting Data Collection Assessment and Reporting TRANSITION TO “GREEN” LEASING

27 Educating Tenants –Green Tenant Manual providing day-to-day guidelines –Seminars, Meetings and Newsletters explaining the Building’s Environmental Objectives and how Tenants can contribute TRANSITION TO “GREEN” LEASING

28 Introducing Green Concepts into Existing Leases –Amend Rules and Regulations Incorporate Environmental Management Plan –Building Hours –Recycling Program –Green Cleaning Products (Green Seal) –Approved Supplies (e.g., Energy Efficient Light Bulbs and Tubes) –Janitorial Service –Space Heaters and other Energy Intensive Equipment TRANSITION TO “GREEN” LEASING

29 Existing Leases (cont.) –Revise Tenant Construction Standards Update Work Letter –Compliance with Rating Criteria (e.g., LEED-CI) Update Contractor Rules and Regulations –Indoor Air Quality Management Plan –Housekeeping Practices –Removal of Waste Materials Provide Specifications for: –Use of Recycled Materials –Energy Star Appliances TRANSITION TO “GREEN” LEASING

30 Existing Leases (cont.) Specifications (cont.) –Water Sense Plumbing Fixtures –Green Seal Low or No-VOC Paints and Adhesives –CRI Green Label Plus Carpets Require Use of LEED or Green Globe Accredited Professional TRANSITION TO “GREEN” LEASING

31 Existing Leases (cont.) –Use Definition of Building Standard “The type, brand, quantity or quality of materials, equipment, services, insurance coverages, methods, scheduling and usages Landlord designates or determines from time to time to be standard for the Building.” TRANSITION TO “GREEN” LEASING

32 Existing Leases (cont.) –Use Definition of Reserved Rights “To take such other measures Landlord deems necessary or advisable for the ongoing operation, maintenance and protection of the Project. Tenant shall fully cooperate with all of such further measures undertaken by Landlord.” TRANSITION TO “GREEN” LEASING

33 Existing Leases (cont.) –Use Definition of Applicable Law –Use Right to Submeter –Use Landlord Approval Process Tenant Alterations Above Building Standard Services Third Party Service Providers Assignments and Subleases TRANSITION TO “GREEN” LEASING

34 VIOLATION OF A “GREEN” LEASE What constitutes a “default” of a “green” obligation? How is performance determined? –What is the “performance” to be achieved? –How is “failure” defined? –What are the detailed specifics that amount to a failure to achieve performance?

35 ENFORCEMENT OF THE “GREEN” LEASE What is the appropriate remedy for a default of a “green” provision? Threshold issues: –What is the “green” objective that gave rise to obligation? How important How material –Is the “green” obligations also a legal requirement? –Single-tenant vs. multi-tenant building? –Effect on certification?

36 REMEDIES Termination or rescission (by landlord or by tenant) –Proportionality of remedy to breach –Landlord’s right to terminate if tenant causes “green” violation resulting in loss of certification –Tenant’s right to rescind if building isn’t “green” –What about the lender? Will the lender approve a “green” failure termination right for the offense in question?

37 REMEDIES (cont’d) Money damages –How would money damages be calculated? –What should be the result if the violation actually saves money? –How is tenant injured if landlord’s violation reduces operating expenses?

38 REMEDIES (cont’d) Injunctive relief –How practical? Self-help –By landlord: Is it practical? Materiality and scope? –By tenant: Is it practical? What expertise does tenant have? What problems will landlord allow tenant to remedy? –Single-tenant vs. multi-tenant –Size of tenant

39 REMEDIES (cont’d) Liquidated damages –Can a dollar amount be arrived at to fit the wide range of possibilities? –Are all “green” violations of equal dignity? –How would fixed charge be calculated for: –Non-green tenant construction? –One violation of a “green” building rule? –Multiple violations of a “green” building rule?

40 REMEDIES (cont’d) Tenant forfeits other “privileges” –Rights often dependent on tenant not being in “default”: Renewal Early Termination Right to Expand Right to Contract Receipt of tenant improvement allowance Rent abatement Is the forfeiture proportionate to the offense?

Michael K. Kuhn Jackson Walker L.L.P McKinney Street, Suite 1900 Houston, Texas Michael K. Kuhn Jackson Walker L.L.P McKinney Street, Suite 1900 Houston, Texas Vytas Petrulis Jackson Walker L.L.P McKinney Street, Suite 1900 Houston, Texas Vytas Petrulis Jackson Walker L.L.P McKinney Street, Suite 1900 Houston, Texas Randal Farber Jackson Walker L.L.P McKinney Street, Suite 1900 Houston, Texas Randal Farber Jackson Walker L.L.P McKinney Street, Suite 1900 Houston, Texas THANK YOU!