The evidence supporting human-induced climate change continues to mount as we experience its effects in the form of record temperatures and wildfires. While it feels as though environmental concerns have taken a backseat as we battle COVID-19 and attempt to stabilize the global economy, the need to take meaningful strides toward a more sustainable future is not going away.
Despite the scale of the task ahead, there is a lot that can be done to approach big problems with small steps that leverage existing technology. Many of the practices for improved sustainability already exist, they just require adequate buy-in from stakeholders to have an impact. One example of this is how formalized stakeholder buy-in can drastically reduce GHG emissions through a well-known agreement: the humble lease.
Commercial buildings account for approximately 20% of energy use in the United States and are a major contributor to GHG emissions. With 50% of commercial buildings encumbered by a lease, there is an opportunity to use the inter-organizational governing power of leases to create mutual incentives for landlords and tenants to improve the efficiency of buildings.
Common commercial leasing practices often do not create financial alignment that would encourage these parties to adequately invest in sustainability-focused improvements for their commercial spaces; but a new type of lease has emerged.
“Green Leases” use new lease clauses that realign cost structures to allow tenants and landlords to save money, conserve resources and operate buildings efficiently. Green leases encourage cooperation between building owners and tenants to mutually achieve emissions reductions in the commercial sector.
Negotiating green leases can be an iterative process requiring flexibility, strong communication, and higher levels of trust between tenants and landlords. The payoff, however, can be substantial. The Institute for Market Transformation (IMT) estimates that green leases can reduce energy consumption in U.S. commercial buildings by 22%, yielding significant reductions in utility expenditures while helping companies reach ESG goals.
There are many nuances to structuring green leases but the goal is to overcome the “split-incentive” barriers between landlords and tenants to align the financial and environmental benefits of sustainable practices in commercial buildings.
How Are They Structured?
There are a few focus areas for understanding how new structures can enable sustainable leasing practices. The following four areas serve as starting points for evaluating how green clauses can create stakeholder alignment to improve the quality of the lease and its objectives:
Energy Efficiency Passthrough Clauses
Lease amendments that allow passthrough of energy efficiency investment costs to tenants.
Green Operational Clauses
Lease sections which allow the building to operate more efficiently and/or reduce environmental impacts.
Establishing rules about the types of materials which can be purchased for use in tenant and common area spaces.
Sharing data on building energy use and progress towards goals through benchmarking or other systems agreed upon between the landlord and tenant.
For more detailed information on the substance of a green lease, check out this document from A Better City.
Informing all parties of green lease provisions, establishing objectives, and understanding the specific building rules and regulations will provide a foundation for exploring green leases. The IMT and U.S. Department of Energy’s Better Building Alliance have launched the Green Lease Leaders program which provides resources and guidance on the topic. The program also recognizes forward-thinking real estate companies that modernize their leases to spur collaborative action on sustainability in buildings. They have a Green Lease Library and Lease Audit tools for both landlords and tenants on their website.
Challenge & Opportunity
There are also a number of complexities for implementing green leases. For starters, much of the language and clauses are new to brokers and lawyers which can make negotiations difficult. Having multiple tenants with various lease renewal schedules may complicate the coordination of building-wide efforts.
Enforcing, monitoring, and verifying green lease clauses can also pose difficulties, but despite these challenges, property owners in certain markets like Boston are making real progress toward adopting the eco-friendly agreements. Recent surveys indicate that a third of commercial property owners in Boston have added efficiency cost-sharing clauses to recent leases. This trend is creating interest in Boston for other areas of green leasing such as tenant build-outs and energy data sharing.
Only a fraction of commercial leases have begun taking advantage of these cooperative agreements, but despite the challenges in the current environment, it may be a good time for tenants and landlords to explore green lease options. As the office and retail sectors navigate the rough waters of 2020, tenants and landlords are already in communication as they renegotiate and work towards creative solutions to cut costs and stay in business.
Now could be a great opportunity for landlords and tenants to deepen their cooperative efforts by implementing green lease clauses that create a more secure and eco-friendly relationship for the future. The companies that continue to adapt and think ahead, despite the challenges, will be the ones that survive and thrive. Green leasing may prove to be a tool for the future that enables the commercial real estate community to do just that.