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.

Much like the rest of the green building industry, green leases contain a collection of legal risks that landlords and tenants have not previously had to consider. This article considers a small sample of such problems, specifically in relation to certification requirements, cost issues, insurance provisions and green product issues.

Many companies and government agencies require their space to satisfy an applicable LEED for Commercial Interiors certification level. These entities look for a lease to specify that the space will meet such standards. Landlords are not generally in the position to guarantee such certification level. The project architect, general contractor, subcontractor and USGBC all have a much greater impact on whether the space meets the required certification level. The landlord will thus need to make sure it is working with contractors and architects that understand the issues and are able to work towards achieving the necessary certification levels. It will need to protect itself in its applicable project contracts. The landlord and tenant must work together in attempting to craft a lease that adequately protects each of their respective interests and avoids liability outside of either of their control. Crafting lease incentives such as free rent periods or rental abatements are the best way to incentivize a property owner to deliver a green lease space without undue penalty for items outside of its control.

In addition, green building is generally more costly and timely than the standard building process. Landlords and tenants must realize this when determining the tenant improvement allowances detailed in the lease. Although green space is obviously important for a company, having a finished space is a far more important issue.

The improvements must also be are properly insured. A party entering into a green lease must carefully consider the increase in both (a) the replacement cost and (b) the rebuilding period following a casualty event, due to specific green building issues. As detailed above, the cost of green building products are generally more expensive than standard materials. There will also be additional costs incurred if the space needs to re-obtain its LEED certification level following a casualty event. It is important that each of those points is considered when determining replacement value and how that is detailed within the lease. If the casualty event is not the fault of the tenant, the lease should also consider who will be responsible for the costs of the LEED re-certification. The rebuilding of the space will also take longer due to both (i) the installation of many energy efficient systems and (ii) the LEED re-certification process following the casualty event. Such issues must be considered in the sections of the lease detailing the rebuild obligations of the parties following a casualty event.

The use of certain green products can also create unforeseen issues for both the landlord and the tenant. Some specific examples were detailed in Frank Musica’s “Don’t Let Green Design Cause Red Ink” presentation at the 2007 AIA National Convention in San Antonio.

The first example to consider is one in which a design firm specified cork flooring in kitchen areas. Unfortunately, this product had not been properly tested for use in high traffic kitchen areas. As a result, the cork flooring eventually saw growth of mold created by the high traffic and water spillage of the kitchen area. Another example was a tenant that provided the government with military systems designs and terrorism identification systems. The tenant invested in green design and extensive daylighting systems, including skylights and large window systems. Upon inspection of the new space by the government, it was determined that the tenant was putting confidential information at risk. The tenant faced a threatened revocation of its contractor’s security rating and cancelation of existing contracts. These outcomes show why tenants must work with their landlords in the installation of green building products and systems within their spaces in order to avoid potential liabilities that may have been unforeseeable for the landlord, contractor or architect.

In conclusion, green leasing, much like the green building movement itself, is here to stay. There are a multitude of new legal issues and risks that both a landlord and a tenant must consider if they elect to lease green space. These potential risks are further reasons to work with the most skilled professionals in the green building and leasing industry, whether that is an architect, contractor or attorney in site selection, plan preparation, lease negotiation and the final build-out of the space in connection with a green lease.

Geoff White is a Senior Associate in the Commercial Transactions and Real Estate Group at Frost Brown Todd. He is a contributing author to Green Real Estate Law Journal. He also oversees the Green Building Series on the Frost Brown Todd’s Construction Law News website. Mr. White is licensed to practice law in Kentucky and Ohio and is a member of the Kentucky Chapter of the U.S. Green Building Council. Learn more about Geoff at http://www.frostbrowntodd.com/geoffwhite