Welch Allyn, a Skaneateles, New York-based manufacturer and distributor of medical supplies, purchased Protocol Systems in 2000. Since then, it’s leased 100,000 square feet of space in Beaverton, Oregon from PS Business Parks (pictured), which owns over 27 million square feet of office and industrial space across the country. In 2009, when its lease came up for renewal, the company was able to capitalize on the soft commercial real estate market by negotiating nearly $1 million in base building upgrades that should result in – at the very least – a Silver rating from USGBC under the LEED for Existing Buildings: Operations and Maintenance rating system.

“It was the worst business climate possible (in 2009), so building owners everywhere had to be as receptive to the terms in a long-term lease as they would ever be,” Peter Murray, vice president of operations at Welch Allyn and site executive for the Beaverton office told the Oregon Daily Journal of Commerce. “They knew they’d have to make these investments, even though getting a client to stick around for a certain price level is not a straightforward (return on investment).”

Specific retrofits that Welch Allyn successfully negotiated with PS Business Parks included the replacement of the building’s 28-year-old HVAC system, new lighting systems, and plumbing upgrades that are projected to save over 465,000 gallons of water annually. The tenant also created its own internal “green team” that monitors utility bills and banned personal space heaters (which were adding $20,000 to annual energy bills). The team continues to encourage behavior changes and promote ideas for new cost-saving projects.

Although it’s unclear how the landlord’s obligation to perform the retrofits was incorporated into the lease documents (if at all), the project demonstrates that economic conditions remain ripe for commercial office tenants to use both base building improvements and LEED certification as a tool in lease negotiations.

In Västerås, Sweden, just west of Stockholm, the nuclear technology company Westinghouse Electric Sweden AB recently signed a 10-year lease with the publicly traded Swedish property company Kungsleden AB. Kungsleden will renovate two buildings for Westinghouse that total 14,000 square meters of commercial and industrial space (pictured). Each had been vacant for nearly a decade and will be built out during 2012 for occupancy by the end of the year.

In a press release, Kungsleden characterized the transaction as a green lease, one where it “collaborates with its tenants to reduce environmental impact through decreased energy consumption.” Additional lease terms that would be of interest to us here at GRLEJ – other than an annual rent just north of $2 million – do not appear available.

Kungsleden’s portfolio includes 639 properties in 142 municipalities across central and southern Sweden, valued at SEK 26.5 billion. The company has been traded publicly on the NASDAQ OMX in Stockholm since 1999.

We’re starting to see an increase in press releases touting the environmental aspects of commercial real estate transactions – both domestically and abroad – which bodes well both for the commercial real estate market generally, and green leasing specifically, as we move ahead in 2012.

Earlier this year, New York City took an important step towards becoming the country’s leader in public green leasing practices when Mayor Bloomberg’s Green Lease Task Force released model green lease language aimed at addressing the split incentive in most commercial office leases. The language was incorporated with much fanfare by Silverstein Properties into its lease with the law firm WilmerHale at the LEED Gold 7 World Trade Center, as well as adopted by the City for all of its future leases.

Now, recently after it was named North America’s greenest city in a study published by Siemens, San Francisco has fired back by launching a Green Tenant Toolkit of its own, created at the recommendation of the San Francisco Mayor’s Task Force on Existing Commercial Buildings. Although designed primarily for San Francisco buildings, the free, on-line resource is being promoted as adaptable for any geographic location. It was developed by a 26-member group of real estate and environmental professionals representing brokers, property management, large tenant groups, attorneys, electrical utilities, and design and construction experts, assembled by San Francisco’s Business Council on Climate Change.

The Toolkit is divided into three sections: a general green leasing guide, tips on stakeholder engagement, and a checklist of items summarizing key sustainability metrics for any property. The toolkit isn’t written for lawyers. But it appears to be a good jumping off point for tenants and landlords that are unfamiliar with green leasing generally and want to get up to speed quickly, regardless of where they may find themselves in the leasing process. And it’s also worth noting that the New York City model language (along with our article discussing the WilmerHale lease at 7 WTC) is included in the Green Tenant Toolkit’s database of additional resources.

As you may recall, San Francisco led two major urban green building indices this year: the study from Siemens and, for a second consecutive year, the city topped Cushman & Wakefield’s Green Building Opportunity Index. We reviewed the Index’s analysis of New York City’s Midtown submarket – which placed second overall in the Index – over the summer here at GRELJ in significant detail.

*Attorney Paul D’Arelli has kindly provided us with a copy of his new e-book, Negotiating Leases in the Era of Green Building: Managing Risk and Merging Expectations in Pursuit of the Deal, to give away here at GRELJ. Just add a comment to this post before 5PM ET next Monday, June 13 and we’ll select one commenter at random to receive a free copy by email.

Negotiating Leases in the Era of Green Building is – as far as I can tell – the first publication of its kind and will be an important addition to your green real estate library. Although a handful of other books – including USGBC’s Green Leasing Guide – have been written about green leases, Mr. D’Arelli places his primary emphasis on discussing risk management as it relates to each step in the green leasing process. The book is written in an accessible voice that will appeal to non-attorneys. But even seasoned real estate practitioners will derive significant benefit from Mr. D’Arelli’s ability to explain the intersection of traditional leasing concepts and green building principles.

Here’s the teaser from the book’s website:

This informative 42-page guide provides a “plain English” presentation of issues and concepts that must be considered by landlords, tenants and their representatives in this new era of sustainability where traditional leasing is intersecting with green building pursuits and requirements.

Rather than attempt to move the industry toward some new model of green leasing – a difficult proposition given the variation in local leasing customs – this guide provides an issue-focused approach that can be used as a basis for informed negotiation geared toward accommodating the needs of the parties regardless of local lease preference.

This conversational guide, while written by an attorney who has been at the forefront of the green legal movement, is fortunately not a legal treatise but an easy read about an increasingly complicated subject.

If you can’t wait to find out the results of our giveway, you can download the book for $15 here. Good luck! And congrats to Paul on a well-written, important piece of work.

It’s been a while since we talked about green leasing here at GRELJ. That’s not because it’s an issue we’re no longer interested in – far from it – but frankly there has not been all that much new to report on the front, notwithstanding the ongoing market rebound.

Recently, though, New York City announced that the law firm WilmerHale signed a lease at LEED Gold-certified 7 World Trade Center. Deals at the first commercial office building in the country to earn LEED certification are always worth noting, but WilmerHale’s lease is of particular import because it is the first to incorporate form green lease language developed by the Mayor’s Office of Long-Term Planning and Sustainability. By our own (admittedly informal and unofficial) count, New York now joins Portland (Oregon), Winnipeg, and various municipalities in Australia where green lease arrangements between private sector players have been publicly disclosed.

The lease, which WilmerHale signed with 7 World Trade Center landlord Silverstein Properties, aims to address the much-discussed split incentive, which remains prevalent in most commercial office leases in New York City. As you may know, the “split incentive” refers to the scenario where a landlord pays for building capital improvements but does not benefit from any reductions in operating expenses that are created because its tenants pay for operating expenses pursuant to the terms of the lease. In addition, although many leases do allow landlords to pass the costs of capital improvements through to tenants, the time frame for recouping those costs – typically over the working lifetime of the improvement, which can extend for decades – creates a practical impediment to owners actually making any energy-efficient capital improvements to their buildings in the first place.

The new New York City lease language, whose development was spearheaded by the NRDC’s Green Lease Forum, was derived from two fundamental concepts. First, to give them an incentive to make such investments in the first place, the language guarantees landlords that they will recover the costs of any energy-efficient capital improvements from their tenants over the projected payback period for the improvement – not over the useful lifetime of the improvement.

Second, the language aims to assure tenants that those improvements will actually result in cost savings that – even when split with the landlord – will still result in a net benefit to the tenant. Accordingly, once improvements are made, tenants will not only realize actual savings, but will pay the landlord 80 percent of the projected savings as assessed by an independent, NYSERDA-approved engineer (creating a buffer in case savings are not as projected) as part of building operating costs. After the payback period compensates the landlord for the investment, the tenant will continue to enjoy the benefits of the energy savings.

Here’s the most pertinent section of the model clause, which sets forth the landlord’s ability to include capital improvements within the lease’s definition of building operating expenses:

Commencing with the first Comparison Year following the year in which such Capital Improvement is completed and placed in service, and continuing for the duration of the Adjusted Payback Period (as hereinafter defined), Landlord may include in Operating Expenses a portion of the aggregate costs of such Capital Improvement equivalent to eighty percent (80%) of the Projected Annual Savings, so that the aggregate costs of such Capital Improvement will be fully amortized over one hundred twenty-five percent (125%) of the simple payback period (such period of time, the “Adjusted Payback Period”). By way of example: If the aggregate costs of such Capital Improvement are $2,000,000, the Projected Annual Savings are $500,000 and the simple payback period for such Capital Improvement is forty-eight (48) months, then Landlord may include $400,000 of the aggregate costs of such Capital Improvement (i.e., an amount equivalent to 80% of the Projected Annual Savings) in Operating Expenses for five consecutive Comparison Years (i.e. sixty (60) months or 125% of the simple payback period).

According to Mayor Bloomberg, the lease “breaks new ground in the field of energy conservation – and we expect it will be a pioneering model for commercial leases. This is part of our broad campaign to increase the energy efficiency of large buildings all across the city. When it is fully realized, this ‘Greener, Greater Buildings Plan’ – the first of its kind in our nation – will be the equivalent of making a city the size of Oakland, California completely carbon neutral.”

More interestingly, all of New York City’s commercial office space leases are negotiated by the Department of Citywide Administrative Services, and DCAS has agreed to add the green lease language to all of its new lease negotiations. The language has also been endorsed by REBNY.

WilmerHale’s lease is particularly important to note because much of what has been written and discussed about green leasing generally over the past few years has been almost entirely theoretical. For a number of reasons, it has been difficult to identify, and subsequently analyze, green lease language which the real estate industry has implemented. While it remains to be seen what types of capital improvements (if any), whose costs Silverstein Properties will seek to pass through to WilmerHale or any other 7 World Trade Center tenants (the building was completed in 2006), the Mayor’s Green Leasing Language should demonstrate to the rest of the New York City real estate industry – and landlords and tenants in other markets – that green leasing principles can be applied in the most high profile of Class A settings.

It is also worth noting that the basic concepts behind the language echo those that underpin the Model Green Lease (which is drafted as a full-service gross lease with an escalation clause and base year expense stop clause). As part of its definition of building operating costs, the MGL allows the landlord to reasonably amortize the cost of projects that will reduce operating costs and treat that amortization cost as an operating cost, so long as that amortization cost does not exceed savings to the tenant. The tenant’s obligation in the MGL is to “pay its pro rata share of any increase in Building Operating Costs over the Base Year.” The actual language in the MGL includes within the definition of “Building Operating Costs” the

[c]osts of any capital improvement made to the Building that reduces Building Operating Costs, the costs of such improvements shall be amortized over the minimum period acceptable for federal income tax purposes, and only the yearly-amortized portion thereof shall be treated as a Building Operating Cost. In no event shall this charge for yearly amortization be more than the actual reduction in the Building Operating Costs.

WilmerHale will be relocating from 399 Park Avenue to 210,000 square feet on the 41st through 45th floors of 7 World Trade Center, which is now 90 percent leased thanks to the deal.

A copy of the Mayor’s Green Leasing Language is available here for download.

Last month during our summer sabbatical here at GRELJ, Model Green Lease Task Force head Alan Whitson forwarded us an article he published in a recent issue of Office Insight magazine. In “How to Add Value and Avert Lawsuits: Avoid the Conflicts Between LEED-EB:OM and LEED-CI,” Mr. Whitson describes how the interplay – or lack thereof – between these two different LEED suites may create unanticipated liabilities for landlords and brokers who market LEED-EB:OM-certified space to tenants that subsequently seek to pursue LEED-CI.

Quoted in the article is Alex Spilger, who serves as Sustainability Manager for BCCI Construction in San Francisco. Mr. Spilger observes that

“[i]t’s a common misconception among tenants, real estate brokers, and building owners . . . that LEED-EB:OM certification guarantees LEED-CI certification. It’s easy to imagine there would be some cross-over between the LEED-EB:OM and LEED-CI rating systems. Green strategies put into action in the base building should help a tenant earn points for LEED-CI and vice versa. But, this is not always true since there is little overlap between the two rating systems – they are structured differently.”

Some of the examples which Mr. Whitson presents in the article are particularly noteworthy because they suggest the dangers that may arise out of an indiscriminate marketing strategy implemented by the landlord and its leasing team. For example, a building that scores in the 98th percentile for energy efficiency will earn 18 points under LEED-EB:OM, but a tenant in pursuit of LEED-CI will not receive any points for the base building’s exemplary energy performance. A base building can also receive up to 15 points under LEED-EB:OM for alternative transportation where employees carpool to work; under LEED-CI, unless the base building is sufficiently close to mass transit, the tenant will not receive any alternative transportation points, even if its employees all carpool.

Indeed, Mr. Spilger also describes in the article a recent project where a tenant leased space in a LEED-EB:OM Gold-certified building with the expectation that – it too – would earn LEED-CI Gold for its own interiors. Rather, because LEED-CI’s prerequisite water efficiency requirements are higher than those for LEED-EB:OM, the tenant was unable to pursue a LEED-CI rating without completely replacing the bathroom fixtures. Mr. Whitson notes that

“[i]f the requirements for LEED-CI were considered before upgrading the building’s restrooms, fixtures with higher water efficiency could have been selected at little or no extra cost, while creating a competitive advantage for the building. Imagine the liability a real estate broker or interior designer with a LEED AP designation might have if they fail to explain the ramifications to their client before the lease is signed, or if this blows a lease deal for a building owner.”

Risk management, of course, is not strictly the province of outside counsel; LEED consultants and real estate professionals need to understand the mechanics of each individual LEED rating system – and how they interact, or fail to interact, with one another – when presenting certification alternatives to their clients. For example, we wrote previously here at GRELJ about how a base building’s green features can offer tenants up to 21 points for tenants seeking LEED-CI certification. However, Mr. Whitson’s remarks above should ring all the more salient in a construction environment where controlling costs continues to remain paramount, and USGBC continues to place an increased emphasis on existing buildings.

We’re back here at GRELJ after a break for the July 4 holiday. I hope you enjoyed yours as much as I did; my wife and I spent a very relaxing long weekend down in southwestern Virginia with her family.

The night before we left town last week, I sat on a green leasing panel here in Midtown that was sponsored by the Greater New York Chapter of the International Facility Management Association’s Sustainability Committee. In addition to discussing some general issues – legal and otherwise – arising out of the green leasing process, there was significant input from the brokers in attendance about the state of the local green leasing market. More particularly, the discussion focused on how smaller tenants (in the 10,000 to 20,000 square foot range), who do not have the leverage of some of the larger companies (like Deutsche Bank, represented on the panel ) which have successfully demanded green concessions from potential landlords, might nevertheless be able to insist on similar provisions in their leases. Although the panel stressed both landlord and tenant education as what will ultimately drive green practices into these smaller leases, we did not reach any real practical consensus on how green leases might gain more traction in this context.

I point this out in light of a recent report from Portland, Oregon that two small commercial tenants have signed green leases with Unico Properties at the historic 13-story Commonwealth Building, located downtown at 421 SW 6th Street between Washington and Stark Streets. The Northwest Energy Efficiency Alliance (“NEEA”) and Green Building Services (“GBS”) took 20,000 and 10,000 square feet, respectively. According to a Unico press release, “[b]oth NEEA and GBS required green lease provisions which contractually bind both tenant and landlord to choose green products and practices. Green leases are relatively new in the Portland market and they include . . . following strict sustainability LEED-CI guidelines for tenant improvement projects.” In the release, Unico’s general manager for its Portland portfolio, Brian Pearce, said that “[a]lthough Unico does many of these things voluntarily, we want our tenants to know that sustainability is not an option for us- we are fully committed to it.”

I had the opportunity to speak with Mr. Pearce about the green obligations in each of the two leases. Interestingly, NEEA actually approached Unico about inserting certain green provisions into its lease, including dedicated recycling space, access to bicycle storage, changing rooms, and showers, and a definition of building operating expenses that allows Unico to recover the costs of any capital improvements to the building which increase the tenant space’s energy efficiency. “The $65,000 question is whether any other tenants come along like NEEA,” Mr. Pearce said. Unico has also set LEED-CI certification as a “green benchmark” for all of its tenant improvements. “LEED-CI certification is important to these types of tenants, so baiting them with Certified spaces made sense for us,” he noted, “but if tenants want to go beyond Certified, that’s on their nickel.” Mr. Pearce also explained that although Unico has – in other deals – provided allowances to certain tenants for various levels of LEED certification or other green improvements, the two leases in the Commonwealth Building were turn-key. During our conversation, I was particularly interested to hear that both NEEA and GBS also asked Unico to commit in their leases to pursuing a LEED-EB rating for the property, but for many of the legal reasons which we have stressed here at GRELJ previously, Unico refused to make that representation. “Certification is handed down by a third-party entity over which we have no control,” Mr. Pearce said.

The property itself is now 75 percent leased; other tenants include the National Fish and Wildlife Foundation, IMAGINiT Technologies, RAND Worldwide Company, and Element Power which recently earned LEED-CI Gold for its interiors space. Notwithstanding Unico’s concerns about third-party certification, the Commonwealth Building should earn a 2010 Energy Star label and is pursuing formal LEED-EB certification. Unico recently upgraded its HVAC system, installed submeters in individual tenant spaces (including NEEA’s and GBS’s), and the tower is located adjacent to the Portland light rail line. Colliers International represented NEEA in the transaction, Cushman & Wakefield represented GBS, and Pacific Real Estate Partners represented Unico.

Just as a brief aside, the Commonwealth Building was designed by Pietro Belluschi and constructed between 1944 and 1948, debuting as the Equitable Building and headquarters of the Equitable Savings and Loan Association. It was added to the National Register of Historic Places in 1976 for its place in architectural history as one of the first glass box towers ever built; it actually predates Gordon Bunshaft’s seminal Lever House here in Manhattan and was the first building in the country to feature double-glazed windows and be fully sealed and air-conditioned.

One topic we discuss with particular frequency here at GRELJ in the green lease context is the obligations within the lease – imposed upon either landlord or tenant – to operate the demised premises, or the base building and common areas as the case may be, in a sustainable manner. The roadmap for that operation is generally found in an environmental performance objective clause, or in other provisions that may not explicitly set forth green building requirements but are instead merely aspirational. One interesting legal question that could arise in this context is exactly how a court would construe such aspirational clauses in the event the parties dispute exactly how “aspirational” those clauses should be. For example, consider the following form clause from the Model Green Lease:

Environmental Performance Objective Clause: Landlord will “operate and maintain the Building and the Premises to minimize (i) direct and indirect energy consumption and greenhouse gas emissions; (ii) water consumption; (iii) the amount of material entering the waste stream; (iv) negative impacts upon the indoor air quality of the Building and the Premises.” Landlord will “use its reasonable efforts to cause other tenants of the Building to conduct their operations in the Building and their premises in conformity with the Environmental Performance Objective.”

In the event that – at some point in the future – litigation arose out of this type of clause’s aspirational requirements, how might a trier of fact construe the landlord’s “reasonable efforts” and obligation to “operate and maintain” the building in a sustainable manner? The same question exists if the landlord places those same aspirational requirements on its tenants. There are no decisions (which I have been able to identify through a Westlaw search) that directly address this topic. However, at least under New York law, use restrictions in commercial leases will be strictly construed, although courts will construe leases in their entirety in order to ascertain the intent of the parties as to the demised premises’ use. It is therefore arguable that an aspirational green lease clause could be – in the event of a dispute – considered to be a requirement rather than strictly aspirational. Landlords and tenants considering green lease implementation should therefore consider the law of the jurisdiction governing the lease in order to appropriately assess how other clauses throughout the document may impact a court’s construction of their respective obligations.

An illustrative New York case is Qwakazi, Ltd. v. 107 West 86th Street Owners Corp., 123 A.D.2d 253, 506 N.Y.S.2d 162 (1st Dep’t 1986). There, the Appellate Division held that a commercial lease’s restrictions on the tenant’s use for a particular purpose had to be strictly construed under New York law. The lease clause in question was that the “Tenant shall use and occupy demised premises for sale of comic books, toys, posters, books solely.” Nevertheless, the tenant proceeded to sell video cassettes. The Appellate Division noted that “[a] landlord has a legal right to control the uses to which his building may be put by appropriate lease provisions, which to be effective must be enforced.” The court also stated that the tenant “was aware of the growing video cassette industry when it negotiated its present lease but did not include the sale and rental of video cassettes in the agreement as a permitted use. [The tenant] should not now be permitted to engage in a use of which it was aware but failed to include in its agreement.”

The scenario I imagine is where a tenant – who may not share the same green goals as the landlord – or vice versa – moves into space and doesn’t follow the environmental performance objective clause with any real precision. In the event of a dispute, how would a court construe the parties’ obligations? I’m also struck by the Appellate Division’s language in Qwakazi; if a tenant knows that leases are beginning to incorporate green requirements but fails to expressly incorporate them into its lease, that failure could be the basis for the landlord to argue that such uses are simply not permitted – even if they are included within broad, aspirational language.

For example, this issue recently arose tangentially in my practice where a developer client – whose project is seeking LEED for Core and Shell certification – decided that it wanted to require potential tenants to sign some sort of green lease. One potential tenant resisted, and our client approached us asking whether that tenant might jeopardize the client’s ability to earn its desired level of LEED certification (compelled, incidentally, by a corporate commitment to building all of its facilities to a predetermined level of LEED certification). As we discussed with the client, while potential tenants will have little impact on a LEED-CS application, if the building were to ongoing certification under LEED-EB:OM, an uncooperative tenant might play a role in impacting the project’s application – which could have serious consequences if the project seeks tax incentives or must otherwise comply with other emerging regulatory requirements. For that reason, we suggested precise lease language that identified the tenant’s specific obligations rather than broad aspirational strokes that might eventually leave the landlord without remedy in the event that its goals for third-party certification went unrealized due to circumstances created by the tenant.

These concepts are still largely legal theory at this point, but until aspirational green lease clauses are interpreted by the courts or more fully analyzed by legal scholars, landlords and tenants alike may be treading in dangerous waters when it comes to lease provisions that fail to specifically allocate the parties’ rights and responsibilities. These dangers are more acute in situations where the parties have competing visions and objectives when it comes to sustainable goals for the demised premises.

I was also surprised to note that only one of the deals was for space in an Energy Star-rated building; this could, of course, be purely a function of the market – timing, space requirements, etc. – but thought it was worth pointing out. The fact that an increasing number of commercial real estate transactions are taking place in buildings that have earned (or are pursuing) third-party certification emphasizes the import of many of the risk management issues that we continue to discuss here at GRELJ. Here’s the list, with other pertinent information of interest following where appropriate:

#5: 200 Park Avenue (Not pursuing any third-party certification but notable because the tenant originally intended to take space in Boston Properties’ LEED Gold-hopeful, credit crisis casualty 250 West 55th Street, which remains on hold).

Terms: 261,847 square feet
Tenant: Gibson, Dunn & Crutcher
Landlord: Tishman Speyer
Broker: CBRE
Submarket: Columbus Circle

#12: 1633 Broadway (Registered under LEED-EB: OM on June 19, 2009; also received 2009 Energy Star label).

Terms: 202,495 square feet, 15 years
Tenant: Showtime Networks Inc.
Landlord: Paramount Group
Broker: CBRE
Submarket: Times Square

#15: 1 World Trade Center (Pursuing Gold under LEED for New Construction).

Terms: 190,810 square feet
Tenant: China Center (only private tenant thus far to sign for space at Freedom Tower; will create business and culture center across 64th through 69th floors)
Landlord: The Port Authority of New York and New Jersey
Broker: Jones Lang LaSalle
Submarket: World Trade Center

#16: 731 Lexington Avenue (Registered under LEED-EB: O&M in September of 2007).

Terms: 176,000 square feet (renewal and expansion; sublease from Citigroup)
Tenant: Bloomberg L.P.
Landlord: Vornado Realty Trust
Brokers: CBRE, Cushman & Wakefield
Submarket: Plaza District

#17: 1251 Avenue of the Americas (Registered under LEED-EB 2.0 in May of 2008).

Terms: 169,200 square feet (renewal)
Tenant: Mizuho Corporate Bank, Ltd. (looked at space in LEED Gold-certified 7 World Trade Center and LEED Gold-hopeful 11 Times Square before renewing)
Landlord: Mitsui Fudosan America
Brokers: CBRE, Newmark Knight Frank
Submarket: Plaza District

#18: 1271 Avenue of the Americas (Registered under LEED-EB 2.0 in May of 2008).

Terms: 166,094 square feet
Tenant: Lehman Brothers Holdings Inc.
Landlord: Rockefeller Group Development Corp.
Brokers: CBRE, Studley
Submarket: Plaza District

• ‘Renewal’ Year’s Magic Word (NYO)

21 of  the available LEED-CI 2009 points are available under the Sustainable Sites Credit Category (40-49 total points earn a project LEED Certified status, 50-59 Silver, 60-79 Gold, and 80-110 Platinum); points available on account of base building features are as follows:

• SS Credit 1: Site Selection. 1 to 5 points are available. In addition to earning 5 points for leasing space in a LEED-certified building, tenants can also earn up to 5 points for leasing space in non-LEED-certified buildings if they satisfy one or more of 12 compliance Paths, including brownfield redevelopment, stormwater runoff management, and light pollution reduction. Tenants will want to incorporate pointed questions within their RFP (i.e., is the building developed on a site documented as contaminated by an ASTM E1903-97 Phase II Environmental Site Assessment or a local voluntary cleanup program?) that tracks the specific language set forth in each of SS-1′s 12 Paths if the prospective building is not LEED-certified. Moreover, they will also want to perform sufficient due diligence to ensure that landlords are not giving them lip service with respect to their building’s LEED certification status; as we have noted frequently here at GRELJ, these types of misrepresentations (whether innocent or not) remain a persistent problem across the real estate industry.

• SS Credit 2: Development Density and Community Connectivity. 6 points are available under two different options. Option 1, Development Density, requires the tenant to select space in a building located in an area with a minimum density of 60,000 square feet per acre net. Option 2, Community Connectivity, requires that the building is (i) located within 1/2-mile of a residential area or neighborhood with an average density of 10 units per acre net; ii within 1/2 mile of at least 10 basic services (as described within SS-2); and (iii) offers pedestrian access between the building and the services.

• SS Credit 3.1: Alternative Transportation – Public Transportation Access. Again, 6 points are available under two different options. Option 1, Rail Station Proximity, requires the building to be within a 1/2 mile walking distance of an existing (or planned or funded) commuter rail, light rail, or subway station. Option 2, Bus Stop Proximity, requires the building to be within 1/4-mile walking distance of 1 more stops for 2 or more public campus or private bus lines that the tenant’s employees or occupants can utilize.

• SS Credit 3.2: Alternative Transportation – Bicycle Storage and Changing Rooms. 2 points are available. In order to earn these points, the base building must provide secure bicycle racks and/or storage within 200 yards of a main entrance for 5 percent or more of the tenant’s employees or occupants as measured at peak periods. In addition, the base building must also provide shower and changing facilities in the building or, again, within 200 yards of a main entrance, for 0.5 percent of occupants.

• SS Credit 3.3: Alternative Transportation – Parking Availability. 2 points are available. For projects with an area less than 75 percent of the total base building area, the parking spaces provided to the tenant must meet – but not exceed – the minimum number required by local legislation, and preferred parking must be provided for carpools or vanpools capable of serving 5 percent or more of tenant occupants. Alternatively, the base building must not provide or subsidize any parking for tenant occupants. (Note that the text of LEED-CI suggests tenants include “limited parking” provisions in their leases as a potential strategy for achieving SS-3.3). For projects with an area greater than 75 percent of the total building area, parking capacity must meet – but not exceed – the minimum required by local legislation and preferred parking must be provided for carpools or vanpools capable of serving 5 percent of the base building’s total occupants. Alternatively, no new parking can be added for rehabilitation projects and preferred parking must be provided for carpools or vanpools capable of serving 5 percent of the base building’s total occupants.

USGBC’s Green Office Guide suggests that these considerations, among others that relate more specifically to the prospective tenant space that the base building is offering, be built into a questionnaire which the tenant – or its broker – should forward to the building’s property manager or leasing agent in advance of – or as a part of – the RFP process. In addition, tenants should also request – to the extent the building will make the data available – information that will allow it to assess the base building’s ability to earn 5 points from the 12 Paths under SS-1 (i.e., does the building meet the 30 reduction in water use requirement for the entire building under Path 10 for 1 point, or does it employ on-site renewable energy systems under Path 11 for up to 2 points?)

The significant number of points available under the Sustainable Sites category that are purely a function of the base building make the RFP process – and working concurrently with knowledgeable brokers and counsel – an imperative for tenants who intend to seek Commercial Interiors certification under LEED 2009.

Perhaps unsurprisingly, then, I had difficulty identifying specific buildings or spaces where the breach of specific green obligations in a lease give either party the ability to declare a default and terminate the lease. However, and as Schnapf suggests, I was able to find some details on the leasing structure for the New South Wales Police Headquarters Building, just outside of Sydney in Parramatta, Australia, which provides a specific remedy for the tenant in the event that the landlord fails to satisfy certain terms of the green lease. Designed by architects Bates Smart and completed in 2003, the 15-story tower’s lease document between the landlord, the Department of Commerce, and the New South Wales Police Service requires the landlord to earn a 4.5 star NABERS rating (National Australian Built Environment Rating System, an environmental self-reporting system that’s roughly equivalent to our Energy Star program) over the lifetime of the lease. The rating is evaluated annually and, if the landlord fails to earn 4.5 stars, the tenant’s rent is reduced by the amount of any increased energy and water costs that arise as a result.

This is an interesting arrangement which we haven’t heard much about here in North America. Is it conceivable that a tenant could demand that the landlord build in a rent rebate provision into its lease in the event the building or space fails to earn (or maintain) the rating required by the terms of the lease? I think it would be difficult to quantify the difference in operating expenses between a LEED Silver building and a LEED Gold building, but the concept is interesting to consider. (Of course, such an arrangement would depend on whether the lease is gross (the landlord pays for building operating expenses) or net (the tenant pays)). What about tying a reduction in rent to a lower level of third-party certification? Again, the question would be how to quantify such a reduction, but I would think a landlord would only agree to using its “reasonable efforts” to pursue the third-party rating anticipated by the tenant. Nevertheless, in a soft leasing climate where deals are far and few between, tenants may be able to insist on stricter language in green leases during negotiations.

Just as a side note, the USGBC’s Green Lease Guide suggests, under its form Defaults and Remedies section, that “[t]he remedies included in a lease for breaching environmental objectives will reveal how critical these obligations are to the parties. If the objectives are aspirational, the lease will include something less than an absolute obligation to comply, such as reasonable efforts. On the other hand, if the objectives are critical, the lease will include an absolute obligation to comply.” For example, if a tenant is required to occupy space in a LEED-certified building or LEED-CI-certified buildout (as is the case for the General Services Administration, which must occupy LEED Silver-certified space pursuant to federal legislation), the landlord’s failure to deliver that space at the required level may necessitate the tenant insisting on a right to terminate in the body of its lease. Conversely, for the landlord pursuing LEED-EBOM certification pursuant to a similar mandate or, more significantly, in order to comply with applicable legislation, certain green lease provisions may need to have more teeth.

Has anyone come across arrangements in leases similar to the New South Wales Police Headquarters or other provisions where green obligations were more than merely aspirational?

One of the reasons why New York City’s Greener, Greater Buildings Plan, which our City Council passed earlier today, does not (as originally drafted) require owners to pay for capital improvement projects that boost energy efficiency is that, under most local leases, landlords who pay for those improvements can’t pass along associated costs to their tenants, who benefit from the resulting decrease in operating costs. USGBC’s Green Lease Guide, which was published earlier this fall, does much more than just discuss the split incentive that’s a major barrier to implementing a truly green lease; it provides tenants with a form environmental impact questionnaire designed to assist them in vetting potential properties, as well as eleven pages of sample green lease provisions (many of which we’ve written about here at GRELJ previously). The Guide is primarily written for commercial office tenants, but landlords will find its background information – which describes LEED’s accreditation and certification processes – useful as well. More specifically, here’s how the Guide breaks down:

Section 1 – Why Green the Leasing Process?

- How Buildings Affect the Environment and Tenants
- Primer on LEED

Section 2 – Greening the Leasing Process

- Environmental Strategies for the Leasing Process
- Implementing Environmental Strategies at Renewal and in New Space Searches
- Greening the Lease
- Best Practices for LEED for Commercial Interiors Project Management, Design, and Construction
- Implementing Environmental Strategies Under Existing Leases

Section 3 – Tools for Greening the Leasing Process

- LEED for Commercial Interiors Scorecard
- Basic Environmental Impact Questionnaire
- Sample Criteria for Qualifying Project Team Professionals
- Sample Green Building RFP Guidelines
- Building Questionnaire for Tenants Seeking LEED for Commercial Interiors Certification
- Sample Green Lease Provisions
- Sample Environmentally Preferable Purchasing Policy for Tenant Operations

Resources

Copies of the Green Lease Guide are available for purchase here; our thanks again to USGBC for providing us with a complimentary copy to give away here at GRELJ. We’ll have much more to say on various specifics of the Guide moving forward, particularly with respect to its discussion of aspirational green lease provisions and enforcement mechanisms. In the interim, if you have any questions or require assistance in connection with greening your leasing documents, the Arent Fox Green Building & Sustainability Practice Group would be happy to help you out.

First, although Michael Brooks of REALpac (who participated in last month’s green leasing panel at the Urban Green Expo here in New York City) is quoted in one of the articles, it is not clear that Mr. Malbranck’s lease is derived from any of the forms which were discussed during that panel, including REALpac’s, the Model Green Lease, or the BOMA Green Lease Guide. As Mr. Brooks notes, “it’s impossible to say how many commercial buildings in Canada are using green leases because no one, including REALpac, tracks that at the moment.” It’s certainly a relatively small number, but as an increasing number of landlords attempt to implement green leasing practices, questions about the uniformity of green lease provisions could become an issue. I’m also intrigued about the idea of tracking green leases and whether any other organizations have attempted to do so (none have, to my knowledge).

In terms of other landlords applying similar blanket green lease requirements across available space in their buildings, I thought it was interesting to note that Mr. Malbranck admits that “a number of leasing agents and prospective tenants have inquired about the space, but backed off when they found out about the green leases. ‘They didn’t come right out and say it, but you got the sense it was an issue with them.’” However, the lone tenant that has signed up to date with Mr. Malbranck was attracted by the green lease concept; the owner of Lux for Sprouts, a children’s clothing and toy store, states that she specifically selected 4100 square feet of space on the first floor based on (1) the image that occupancy in a green building should create for her company; and (2) her belief that green buildings make it easier to attract and retain employees. Here, I would suggest again the importance for landlords to closely scrutinize broad, aspirational representations in green leases about green building benefits or performance, particularly if such representations are overstated or ultimately unrealized by tenants.

I was also reminded of Mr. Brooks’ remarks on our panel about enforcement of green lease provisions; although the articles reporting on 1735 Corydon Avenue did not get into this level of detail, I do think it’s worth repeating what Mr. Brooks noted about green leasing practices in Australia (where he had met a landlord whose form lease included a variety of green provisions which- if breached- entitled it to terminate the lease and evict the offending tenant). If more landlords apply mandatory blanket green leases, it will be curious to see what types of specific enforcement mechanisms (if any) are included in those documents. Given that Mr. Malbranck has only signed up a single tenant, I would be surprised if he ultimately exercised any right to terminate based on the breach of any green lease provisions, but the fact that potential tenants have balked at his requirements may suggest that such enforcement mechanisms are included in the scope of his green lease.

Finally, I also think that 1735 Corydon Avenue suggests it’s not unreasonable to consider the possibility that, eventually, the LEED system (or some other third-party green building rating system) will require owners to exclusively negotiate and execute green leases in order to earn certification, whether as an individual credit, for example, under LEED’s New Construction or Core and Shell rating systems, or perhaps even as a mandatory Minimum Program Requirement that serves as a prerequisite to formal LEED certification. For example, USGBC recently released its Green Office Guide: Integrating LEED Into Your Leasing Process and, although I have yet to review it, it’s clear that USGBC is beginning to pay closer attention to the intersection of green leasing and LEED.

We’ll try to flesh out more details about 1735 Corydon Avenue and follow up here at GRELJ as appropriate.

• Green Leases Give Building Manitoba First (Winnipeg Sun)
• Green Leases Seen as Wave of Future (Winnipeg Free Press)

Unlike the BOMA Green Lease Guide (created by Jones Day partner Steve Teitelbaum, who also participated on the panel), the Model Green Lease is an extremely compact document, drafted from scratch, which is fundamentally based on the theory that, in order to make a more compelling business case for green buildings, leases must be crafted as gross (i.e., the landlord is responsible for building operating expenses, unlike in a net lease, where the tenant pays for its own share of those costs). The document, which also includes a corresponding reference guide, comprises just 17 pages plus exhibits and incorporates ten essential elements that aim to support a specific definition of a green building created by the Task Force for purposes of the project: “[a] building that is environmentally responsible, profitable and a healthy place to live or work.”

The ten essential elements of the Model Green Lease as developed and subsequently drafted by the Task Force are as follows:

• Environmental performance objective clauses (broad aspirational provisions that purport to provide context and clarity to the lease, which also recognize that the parties who draft the lease may not be the parties that ultimately operate the building);
• Gross lease rent structure (acknowledging that the landlord is in the best position to optimize building performance, provided it has the financial incentive to do so);
• A fixed per square foot energy allowance for tenants;
• Objective building performance standards;
• An annual building performance reporting requirement; and
• Provisions related to green cleaning and recycling, building rules and regulations, tenant fit-out guidelines, and a tenant manual and development guidelines.

With respect to the gross lease rent structure and addressing the split incentive, defining the scope of building operating expenses is a major green leasing challenge, particularly with respect to landlord-initiated capital improvements to the building’s infrastructure during the term of the lease. The Model Green Lease addresses this issue by including within its definition of building operating expenses the amortized cost of any capital expenditures that reduce those expenses, but only to the extent that they create actual savings for the tenant. One important related point which we did not delve into on the panel is whether the ongoing costs of certifying the building under a third-party green building rating system – such as LEED-EB: OM, Green Globes or Energy Star – should be included in the definition of building operating expenses; the Model Green Lease does not include these costs, the BOMA Green Lease does (within its Section 4.2 definition of building operating expenses).

One of the many interesting issues that were raised during the course of the panel discussion that followed the presentation of each leasing effort was a hypothetical proposed by one of our audience members. Suppose Tenant A leases space in a multi-tenant LEED-certified or Energy Star-rated building. Tenant A’s lease is green, Tenant B’s is not. In the course of conducting its business, Tenant B does something that jeopardizes either the building’s LEED rating (under LEED-EB: OM or with respect to one of the new Minimum Program Requirements under the LEED 2009 system) or pending Energy Star application (by using an increased amount of energy over what is contemplated by the lease). Now suppose that Tenant A is a public company with a shareholder mandate to occupy space in a LEED-certified building, or for similar reasons relied on the landlord’s representations regarding Energy Star. Could Tenant A sue the landlord for Tenant B’s actions based on violating certain provisions in its green lease?

As the panel pointed out in response, it’s rare that a lease would obligate either party to perform in a certain manner with respect to other third parties, but a broadly drafted environmental performance objective clause might provide the tenant’s attorney with, at a minimum, the ability to assert a claim that might either assist the tenant in renegotiating more favorable lease terms, or rescinding the lease outright. Nevertheless, as we noted previously here at GRELJ, the Model Green Lease puts the onus on the landlord in Section 5.02.3 to “use its reasonable efforts to cause other tenants of the Building to conduct their operations in the Building and their premises in conformity with the Environmental Performance Objective.” Accordingly, everyone on the panel stressed that form green leasing documents are tools and not designed for imminent signature; it’s clear that these types of issues will need to be discussed and vetted in detail as green leasing practices continue to disseminate.

I also thought that the discussion on enforcement of green lease provisions was particularly insightful; the panel discussed whether certain breaches might be more egregious than others from a sustainability perspective. The Model Green Lease, for example, provides tenants with an allowance for electricity. If the tenant exceeds that allowance, it is required to reimburse the landlord the extra per kilowatt hour cost; the landlord, however, is not given the right to terminate the lease. (Of course, a significant boost in energy consumption might be indicative of the tenant violating the lease’s use provision (Section 4.01 in the Model Green Lease), which would give the landlord the right to terminate). Little consensus was reached during this line of discussion.

However, one final thought about enforcement struck me as particularly noteworthy; Michael Brooks of REALpac explained that while studying green leasing practices in Australia, he met a landlord whose form lease included a variety of green provisions which- if breached- entitled it to terminate the lease and evict the offending tenant. Although this is a drastic remedy, and the panel agreed that most landlords would likely not want to create such a self-imposed gap in their building’s net operating income, it could suggest the direction in which green lease enforcement might head in a rapidly shifting domestic regulatory climate.

The legal issues associated with green leasing are fascinating, emerging, and present an opportunity for the real estate community to make a major contribution to the more efficient operation of commercial and industrial buildings. As energy efficiency continues to rank as a high priority, and retrofit work expands as the economy slowly turns around, the four green leasing tools presented at last week’s Urban Green Expo will become increasingly important for landlords and tenants alike to review, implement, and build upon. Simultaneously, the requirements of LEED 2009 and other third-party systems will need to be translated into or otherwise sufficiently addressed by such documents in order to safeguard the rights and remedies of the parties. We’re looking forward to continuing the discussion here at GRELJ about these critical issues, with particular continued emphasis on the legal implications of various green lease provisions.

• It’s Not Easy Leasing Green (GlobeSt.com)

For example, at his presentation at last year’s Greenbuild in Boston, Alan Whitson proposed language whereby a landlord “shall operate and maintain the Building and the Premises to minimize (i) direct and indirect energy consumption and greenhouse gas emissions; (ii) water consumption; (iii) the amount of material entering the waste stream; (iv) negative impacts upon the indoor air quality of the Building and the Premises.” As we’ve done previously here at GRELJ with respect to construction agreements, let’s assume for a moment that the Building- perhaps through no fault of the landlord- does not perform at the level suggested by this form language. Is the landlord at risk for a claim by the tenant that it breached this roadmap provision, which will likely sit in a very conspicuous location at the very front of the lease, by failing to “operate and maintain” the building as required by the lease? Perhaps. I think that the point here is, once again, that form language in green leases can be just as dangerous as form language in construction agreements, and both landlords and tenants should guide themselves in the green lease context accordingly. We’ll have much more to say on specific green lease provisions as we continue to move forward through our Green Leasing Series here at GRELJ.

Just as an interesting side note, the BOMA Model Green Lease does not include any similar environmental performance objective language in either the preamble to the lease or in the body of the lease itself.