February Program: Putting The “Ease” In Green Leases

By Michele Krause, Ginsberg Jacobs LLC

A timely discussion of how landlords and tenants are incorporating “green” issues into their lease negotiations and lease agreements took place on February 24, 2010 at CREW Chicago’s monthly luncheon. Ann Volz of VOA Associates Incorporated served as the moderator of a panel that included Marilyn Lissner of Cushman & Wakefield of Illinois, Inc., Victoria Noonan of Tishman Speyer and Kristen Boike of Jenner & Block LLP. After Kristen outlined the issues currently being incorporated into lease agreements in order to address green issues, Victoria and Marilyn then shared the concerns of landlords and tenants, respectively, in addressing green issues. Kristen started her presentation by providing the audience with a background on topics such as what a green building is (one with a reduction in environmental impact, a comfortable and healthy indoor environment and a location that allows access via public transportation) and what a developer’s motivation for green development is.

Motivating factors for green development include a sense of environmental responsibility, lower operating costs, increased worker productivity, attraction and retention of talent, increased building value and decreased risk of sick building syndrome. Yes, sick building syndrome is a real problem, and a recent study has shown approximately $30 billion in indirect costs related to sick building syndrome. Kristen then moved on to discuss the more common green concepts that are being incorporated into lease agreements. These provisions include operating expenses/costs, carbon taxes and rebates, sustainability goals, insurance and casualty, rules and regulations, build out and materials, maintenance and repairs/alterations, assignment and subletting, defaults and remedies, as well as relocation provisions and continuing compliance and operation provisions.
Victoria then provided the landlord’s point of view. After acknowledging that there are increased costs associated with obtaining LEED certifications, she suggested that one does not need LEED certified status to do the right thing environmentally. In fact, there are four areas landlords can look at in order to immediately reduce costs and environmental impact. Those areas are energy, water, recycling and cleaning (i.e., green cleaning supplies). For example, by implementing various water efficiency initiatives, Tishman Speyer has been able to conserve over 30 million gallons of water annually. Additionally, implementing recycling programs at their properties within their portfolio has allowed them to recycle nearly 6 million annual pounds of cardboard, paper, glass, plastic and aluminum. Victoria pointed out that, despite a common misperception, landlords are not incentivized to run up operating costs and pass those costs along to tenants, especially since buildings are not 100% occupied which means landlords bear a portion of those costs too. She also added that three years ago, they used to have to beg tenants to recycle, but they no longer need to because people generally want to do the right thing now.
Offering the tenant’s perspective, Marilyn stated that what is most important is being able to lease the best building for the lowest cost. So, landlords will lose marketability by not having lower costs. If given the choice between a green and a non-green building, with all other things being equal, a tenant will always choose to lease space in a green building. However, when questioned about want is more important, price or green, Marilyn responded that tenants are always first concerned about price (with some rare exceptions). Tenants do not want the additional costs of green buildings passed along to them without also getting the benefits of the green buildings, so the discussion of operating expenses becomes of primary importance.

One thing that became clear from this discussion is that the vast majority of us have jumped on the green bandwagon and want to do the right thing. Both landlords and tenants are now looking at properties in a new light. The discussion of green building issues is being introduced earlier in the process of lease negotiations, and lease agreements are now being drafted with an eye towards green issues to ensure the needs of both parties are addressed.