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.

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.

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.

Green building and leasing is increasingly becoming a best business practice for many of the largest retailers in the country. The generally perceived benefits of leasing a green building or tenant space is (i) increased worker productivity, (ii) profitability through long-term utility cost savings, and (iii) reputation enhancement, to both customers and potential employees. Although far from an exhaustive list, companies such as PNC Bank, Wal-Mart, McDonald’s, Subway, Target, Staples, Kohl’s, and Best Buy have either all opened “green” stores, or are currently constructing a “green” store or branch.

As noted in the New York Times article linked above regarding best business practices, many of these companies view green building as a tool to reduce costs during this challenging economic time. In December of 2007, President Bush signed the Energy Independence and Security Act (“EISA”) of 2007, which set goals and standards to reduce energy use in federal buildings, including buildings in which the federal government leases space. These are the types of tenants that developers need to be able to attract during challenging times. As a result, green leasing will likely exponentially expand in the years ahead.

What is a green lease?

Much like the term green building, green lease is a term without a widely accepted definition. (Editor’s note: this is a critical point that we will be exploring in detail in future articles in this series). A green lease can take many forms. However, the key concepts in any green lease are: (i) rent structure and operating expenses; (ii) build out of tenant improvements; (iii) sustainable development principles and regulations (throughout the building or larger development); (iv) the use and disposal of hazardous materials, including cleaning supplies; (v) recycling; and (vi) environmental management plans. A green lease will generally detail environmentally friendly products to be used, water and energy conservation methods and targets, the use of alternative sources of energy on-site, such as solar or wind, indoor air quality standards, and dispute resolution procedures.

The two most prominent green leasing standards currently available are promulgated by the United States Green Building Council (“USGBC”) and the Building Owners and Managers Association International (“BOMA”) USGBC’s Leadership in Environment and Energy Design (“LEED”) program utilizes widely accepted standards in the green building movement to certify tenant spaces through its Commercial Interiors certification process. This process is able to provide all parties with a framework and a third party classification following the construction of the tenant space. As detailed above, many tenants are now requiring certain levels of LEED certification as it provides a clear and industry wide accepted benchmark as to the company’s commitment to going green.

BOMA was founded in 1907 and is made up of members that are building owners, managers, developers, leasing professionals, facility managers, asset managers and the providers of the products and services necessary to operate commercial properties. Its 16,500 plus members own or manager more than nine billion square feet of commercial properties in North America alone. In the summer of 2008, BOMA released its Guide to Writing a Commercial Real Estate Lease, including Green Lease Language (the “BOMA Guide”), which was designed to facilitate the ongoing implementation of sustainable building practices. The BOMA Guide provides both property owners and tenants with a framework to enter into a green lease, although without the rigidity of the USGBC classification and certification process. Although the BOMA Guide will not be universally adhered to, it provides building professionals with the tools necessary to craft greener leases. These smaller steps are also critically important for the movement, as it will allow more property owners and tenants to be able to consider more sustainable features in leases without undertaking the rigorous LEED certification process.

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/.