CREJ

April 2020 — Property Management Quarterly — Page 7 www.crej.com Green Are your tenants uncomfortable? We can help. www.cmimech.com 303.364.3443 We love solving complicated mechanical problems. C hanging attitudes toward energy efficiency, sustainability and environmental respon- sibility have created a rising demand for “green leases.” Colorado is emerging as a leader in the green leasing revolution. In December, Colorado implemented a Green Lease Policy intended for state leases, execu- tive branch agencies and institutions of higher education to achieve “envi- ronmental performance objectives for new, existing and renewing lease agree- ments.”The Green Lease Policy requires that new or renewing lease agreements above 5,000 gross square feet evalu- ate all potential buildings pursuant to a Green Lease Matrix that measures a building’s sustainability practices. In 2016, the city of Boulder formally adopted expansive climate goals intended to “reduce communitywide greenhouse gas emissions 80% from 2005 levels by 2050; reduce emis- sions from city operations 80% below 2008 levels by 2030; and achieve 100% renewable electricity communitywide by 2030.” Denver has a similar 80x50 Climate Action Plan aimed at decarbonizing buildings, including the 103 million sf of leased space representing approxi- mately 9% of total greenhouse gas emissions within the city. For Colorado and its cities and towns to be success- ful in its expansive energy and sustain- ability goals, it will invariably require equally expansive green leasing in the commercial real estate context. Traditionally, the term“green leases” has loosely been used to describe leases with environmentally friendly clauses or provisions implementing LEED or Energy Star certification. But landlords and tenants have become increasingly more creative in their pur- suit of greener leases. In addition to focus- ing on build-outs and construction involving recycled or renewable materi- als, lease parties also are considering how their own operations can be sustainable and energy efficient. For example, a green lease can require that a tenant use plant-based ink, recycled paper or energy-efficient office equipment. Meanwhile, a landlord’s maintenance obligations can require high-efficiency lighting or the use of “green” cleaning products that exclude harmful chemicals or pesticides. Monetary benefits also have been a motivating factor in furthering the pursuit for greener leases. Lease parties can take advantage of tax incentives and/or reduced operating costs realized from energy-efficient improvements. From a landlord perspective, a green investment may not only increase a property’s value but also appeal to a larger potential tenant base.The num- ber of tenants self-imposing greener leasing requirements for reputational and public policy purposes has seen a dramatic rise. In other instances, potential tenants are bound or incen- tivized by law or regulation to ensure their leased space meets certain energy and sustainability thresholds. Tenants also can look to indirect ben- efits such as increased employee pro- ductivity and well-being where green leases improve building efficiency – an expressly stated benefit in Colorado’s Green Lease Policy. While the green leasing concept has gained focus and local attention, the commercial leas- ing markets have had less success in incentivizing both landlords and ten- ants to invest in energy efficiency. In a standard gross lease, the land- lord bears the operating costs. In a standard triple net lease, the tenant bears those costs. A prime example of a green lease solution is to imple- ment a modified gross rent lease in which capital costs from efficiency investments pass through to tenants if such green investments reduce operating expenses. Taking it one step further, tenants can protect themselves by limiting the pass- through costs to the actual amount of reduced operating costs netted or until the full amortization of the green investment. Another method landlords and tenants can use to reap joint benefits in green leasing is to implement a fixed-fee com- mon area maintenance structure. The landlord will be reimbursed for its green investment via the net ben- efit of reduced operating costs and the tenant will benefit from a fixed and predictable operating cost. Less obvious but equally important con- siderations can include lengthening initial lease terms, thereby incentiv- izing both sides to invest in greener capital improvements with planning certainty; obligating build-outs to be constructed in accordance with sus- tainability practices or the purchase of on-site renewables provided by the landlord; or incorporating green leas- ing standards in the standard build- ing rules and regulations. “The key is to ensure that lease parties have the green leasing conversation regard- less of where they are in the process,” said Jake Dowling, a representative of the Denver Smart Leasing Program. Stakeholder groups such as brokers, attorneys and architects can mean- ingfully contribute throughout the leasing process, including site selec- tion, lease negotiation, build-out and operation to achieve green leasing goals. In addition to Colorado, green leas- ing is gaining momentum nationally as major cities throughout the United States have implemented green leasing guides and principles. New York City has developed its Model Energy Aligned Lease Language to provide concrete examples of leas- ing language aimed at solving the split incentive issue. Boston, Seattle and Cleveland have each published comprehensive green lease guides to inform interested parties about the benefits of green leasing and to assist in drafting green lease clauses. And the California Sustainability Alliance has a Green Leasing Toolkit created to support landlords and tenants in the education, development and implementation of green leasing. If Colorado is to stay at the fore- front of environmental responsibil- ity, green leasing can significantly contribute to reaching sustainability goals while also providing high-per- formance buildings that align land- lord and tenant interests. s Shared leasing incentives lead to greener pastures Jennifer Guzman Associate, Hogan Lovells Dennis Rein Trainee solicitor, Hogan Lovells