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Citing Costs, San Francisco Officials Grapple with City’s LEED Lease Requirements

As Greenbuild takes place this week in San Francisco, the city’s LEED-driven Green Building Ordinance is making waves for other reasons too: over the last month, two pending public commercial office leases have raised eyebrows over the perceived costs of LEED certification for each space’s build-out, which is required by local-level legislation that the City of San Francisco enacted last year.

Not only does the Ordinance require San Francisco commercial buildings over 25,000 square feet and taller than 75 feet to be certified LEED Gold, but Gold certification is also required for all of the city’s leased office space larger than 5000 square feet. It’s that latter requirement which is causing some consternation among city officials charged with approving the two deals, who cited LEED certification costs in a recent article reported by the San Francisco Examiner.

The first lease is for the city’s Department of the Environment to take 25,000 square feet at 1455 Market Street, a 22-story tower near Twitter’s new downtown headquarters in the city’s fledgling technology sector district (pictured). Owned by Hudson Pacific Properties, the tower is also home to Square – the mobile credit card service recently launched by Twitter co-founder Jack Dorsey. In a $5.1 million deal set for seven years, the Department was to pay $28 per square foot and spend $2 million for tenant improvements, requiring a $244,000 loan from the landlord at an 8 percent interest rate.

Similarly, the San Francisco Municipal Transportation Agency recently signed a 20-year, $71 million lease with Prologis in Daly City for the agency’s vehicle towing operation. (Part of the angst with that deal appears to be that Prologis purchased the site for $21 million last summer after the agency’s bid for it fell short).

But both deals share a common denominator: by statute the tenant improvements must earn LEED Gold certification. The city’s Board of Supervisors told the Examiner that although it wasn’t necessarily against “investing city funds” in LEED certification, it “would like to have a sense of what the larger impact of that is throughout the city.” More specifically, one Supervisor told the Examiner that the extra layer of LEED-related costs for the DEP’s tenant improvements “doesn’t seem worth it.” Importantly, the Board will now require LEED-related costs to be “highlighted in future lease proposals.”

In defending the buildout costs, DEP told the Examiner that its new space is currently a “cold shell” and “that is one reason why the cost sounds high. The LEED process is very complex. … [W]e are doing everything that we can to maximize LEED points.” The Examiner also reported that DEP gave up going after five HVAC-related points because it would have cost $200,000 and “we don’t have that money.”

With today’s prevailing economic climate shrinking budgets at every level of government, we can expect that this type of scrutiny will become more comonplace. It’s also likely that other municipalities across the country will similarly examine green- or LEED-related premiums driven by legislative activity. More practically, this type of legislation – requiring LEED certification for tenant spaces in commercial office buildings – is important for brokers, contractors, and design professionals to review in order to adequately assess and address the risks that a certification mandate implicates.

The Board was scheduled to vote on the DEP lease earlier this week – we’ll follow up with any further developments of interest.

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