Should Your Business Opt for a Green Lease?

12 September 2022

As the environmental, social and governance movement continues to gain momentum across industries and practices, green leases are likewise gaining popularity among commercial landlords and their tenants. If your business is considering entering into such an arrangement, you'd benefit from first brushing up on the current environment for green leasing.

Increasing Demand

Green leases are sometimes also known as aligned, energy-efficient or high-performance leases. Regardless of the label, they generally use financial incentives to align the sustainability interests of landlords and tenants. The leases typically involve provisions related to cost recovery, submeters, data sharing and minimum efficiency standards. Done right, they can cut costs, conserve critical resources and improve building operations.

Although green leases have been around for more than a decade, they're far more prevalent these days. The newly enacted Inflation Reduction Act, with its billions of dollars directed toward climate measures, is only one example of the greater focus on reducing carbon emissions. The World Green Building Council estimates that buildings are responsible for 39% of global energy-related carbon emissions, including 28% from operational emissions (that is, energy to heat, cool and power buildings) and 11% due to materials and construction.

Leases designed to reduce these figures offer advantages to landlords and tenants alike. For example, the Institute for Market Transformation (IMT), a nonprofit that aims to decarbonize buildings, estimates that green leases can help reduce utility bills by as much as 50 cents per square foot in U.S. office buildings. Landlords also have discovered that tenants increasingly desire — and may pay more for — space in buildings with LEED, ENERGY STAR or similar certifications.

Businesses that lease space have found that a commitment to sustainability can provide several perks. For instance, many investors and customers prioritize such commitments and do the research before they loosen their purse strings. Sustainable business practices are also playing an important role in luring new employees. This is an especially high priority among Millennials and Generation Z, who together now make up the largest subset of the U.S. workforce.

The COVID-19 pandemic has boosted interest in so-called "healthy buildings," which are closely related to green buildings, too. Healthy buildings offer better lighting, heat and ventilation. When the pandemic hit, green buildings were better prepared because they generally already had HVAC systems that draw in fresh air, as opposed to simply circulating indoor air.

Research from Harvard University has found that working in an office with higher air quality and better ventilation also can raise employees' cognitive functioning. In addition, their decision-making performance improved when they were exposed to higher ventilation rates, lower chemical levels and lower carbon dioxide levels.

The Nitty-Gritty

You can find standardized green leases. But you may want to consider negotiating specific environmentally friendly practices and/or goals with the landlord. Areas to explore include:

Certification. Green building standards usually require periodic recertification. (See "Understanding the Standards," at right.) To ensure renewal, landlords may require tenants to use sustainable design components, construction materials and even office equipment, such as computers, servers and appliances.

Improvements. Landlords also don't want to jeopardize their buildings' certifications with noncompliant tenant improvements. You must ensure that any improvement project satisfies the relevant lease terms. In the event that tenants want to install energy-saving improvements that will benefit both parties, the lease should provide for how costs will be shared.

Renewable energy. The lease should address how a conversion to renewable energy sources, such as installing solar panels, will be handled. For example, which party will be responsible for installation and maintenance? Who will receive any revenue from selling excess output to local utilities (where allowed)?

Green leases also may contain provisions related to:

• HVAC,
• Water usage,
• Energy management and monitoring,
• Irrigation and landscaping,
• Air quality,
• Lighting,
• Waste management and recycling, and
• Maintenance, including the cleaning products used.

A lease can even include transportation components, such as requiring a tenant to provide bike racks or public transportation passes for employees.

Understanding the Standards

You've probably heard of LEED certification, which stands for Leadership in Energy and Environmental Design. LEED, which historically has been the most widely used green building standard, rates buildings based on the following factors:

• Carbon,
• Energy,
• Water,
• Waste,
• Transportation,
• Materials,
• Health, and
• Indoor environmental quality.

LEED ratings range from "certified" (40-49 points earned) to "platinum" (80 or more points). But the traditional LEED system focuses more on construction than operations and, therefore, doesn't necessarily translate to lower emissions.

Newer certifications take operations into account when calculating their ratings, including the NABERS Climate Active Carbon Neutral Certification. LEED Zero certifies the achievement of net-zero goals in existing buildings, including for carbon, energy, water and waste. The WELL Building Standard and Fitwel Certification verify building features that support the health and wellness of employees and visitors.

Here to Stay

The incentives for sustainable practices — from environmental impacts to market growth and employee recruitment and retention — will likely only grow in future years. Negotiating a green lease now can help you stay ahead of the game.

Back to News