Celeste Hammond, Greening Commercial Leases

Report
GREENING Commercial Leases:
A Business Response to Climate
Change & Environmental Goals
Professor Celeste Hammond
John Marshall Law School
ABA RPTE Professor’s Corner
Commercial Leases
May 8, 2013
Old Buildings or New Construction
• I. Terminology
• II. Greening is a serious real estate
development
• III. Implications for landlords & tenants in
commercial buildings & their LEASES
I. What does “GREEN” Mean?
“The practice of (1) increasing the efficiency
with which buildings and their sites use energy,
water and materials and
(2) reducing building impacts on human health
and the environment, through better siting,
design, construction, operation, maintenance
and removal- the complete building life cycle”
GREEN LEASE?
• Any strategy that uses a lease to formalize the
responsibilities between Tenants and
Landlords with respect to a building’s green
practices.
• Such leases ‘align’ the financial and energy
incentives of GREEN buildings to that both
Tenants and Landlords can work together. *
• * U.S. Department of Energy
Terminology
• Reflects both Sustainability Concerns and
Environmental goals
• LEED = Leadership in Energy & Environmental Design
– (from United States Green Building Council –USGBC)
• Green Globes
• National Association of Home Builders (NAHB)
• Energy Star Initiative
• Who decides what is “GREEN”? Private groups?
Government?
• What is GREEN Washing?
II. GREENING is Serious
• CLIMATE Change  local, state, federal
regulation and standards
• ENERGY Concerns
– Political – where will we get increasingly needed
energy?
– Economic - Who will pay for new energy
infrastructure & research?
• CARBON FOOTPRINT
II. GREENING is serious
• Conserve NATURAL RESOURCES
– Commercial real estate uses 40% of all energy!
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72% electricity
39% of energy use
38% carbon dioxide emissions
30% waste output (136 million tons annually)
14% potable water consumption
• Most OFFICE space is leased
• GREEN Professionals NOW includes Attorneys!
– LEED: GREEN ASSOCIATES (GA)
– Commercial Brokers Asso: Certified Green Brokers
Examples of Green
Water, waste
• Diversion of construction,
demolition, and land-clearing
waste from land fill
• Facilitate alternate site
selection transportation near
building, e.g., bike racks &
subways
• Limit flow rates in toilets and
sinks & max. flush rate
• Meter electricity separately for
each premises
• Longer leases (10 years)
Reduce energy usage
• Heating, Ventilation and air
conditioning (HVAC) limited
to normal business
hours/days ONLY
• Limit electricity to normal
business hours/days to .025
kWh per rentable square
foot.
• Daylighting measures to
avoid lighting interior
spaces
LEED
United States Green Building Council
• Non profit TRADE organization
• Founded 1993
• Develops Leadership in Energy &
Environmental Design = LEED (2000) Green
Building Rating system 2009 LEED 3.0
– Certification of buildings
– Accreditation of professionals
• USGBC chapters locally
LEED Assessment CRITERIA
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Sustainable site
Water efficiency
Energy & Atmosphere
Materials & Resources
Indoor air quality
Innovation
Levels of LEED
certification
DISCLOSURE
PROCESS:
Registration
Design Review
Construction review
Certification
[APPEAL?]
LEED LEVELS:
• PLATINUM 52-69 points
• GOLD 39-51
• SILVER 33-38
• CERTIFIED 26-32
• New Construction (NC)
LEED
CLASSIFICATION:
• Existing Buildings &
Operations (EB:O& M)
• Interior Design &
Construction (ID & C)
Other Rating Systems
• Green Globes – owned by Jones Lang LaSalle
• Energy Star – developed by Federal
Department of Energy and EPA
• HAHB – Home Builders Green program
(competes with LEED for leases)
• Earthcraft example of regional system
(Atlanta residential)
Benefits of Certification
• Verification
• Marketing
• Regulation
• Incentives
III. Implications for Landlords, Tenants
and their Attorneys
• Standards set by TRADE groups/sometimes adopted by
government:
Federal Government requirements for all it leases above certain size
States eg. CALGREEN
Local eg NYC
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Advantages
Costs
Drafting Objectives in Commercial Leases
Legal Issues Looming
Standards of Trade Groups (sometimes
adopted by Government
• ICC commercial building code
• ASHRAE “Advancing HVAC & R to serve
human and promote a sustainable world”
• CalGreen Code – first statewide code in
country.
VALUE $$ of greening in Leasing
• Economic Benefits:
• LEED: $9.06 square foot rental difference
5% occupancy difference
• Energy Star: $4.73 square foot rental difference
2.5% occupancy difference
Reputational / branding ==> marketing
Higher employee productivity
Better tenant retention
Tax incentives
COSTS $$ OF Greening
• Increased construction costs: 2% - 8%
• Site Selection – important to certification point
system of LEED, but can be expensive
• Allocation between LL & T becomes critical
• Especially construction costs usually borne by LL
Drafting Objectives
• How will lawyers apply private standards of
LEED?
• How will lawyers respond to requirements of
building codes such as CAL Green Building
Code and International Construction Code
(IGCC)?
• How important is the “split incentive” issue to
parties to the Lease?
“Split Incentive” Issue
What it is:
Party doing capital improvement does NOT benefit
from savings of efficient energy in the building
Examples:
Net lease Tenants responsible for energy bills; little
incentive on part of Landlord to invest in energy
savings
Gross lease Tenants utilities usually included (and
paid by Landlord) Thus, Tenants little incentive to
save.
Drafting around “Split incentive” issue
• Brandywine Realty Trust:
– Clause in standard lease allowing it to pass through capital
costs of efficiency improvements
– Clause requires Tenants to submit monthly utility data OR
allow Landlord to install sub meters to measure utility
usage.
• New York City Form Lease: www.nyc.gov/eac
Guarantees LL will recover costs over projected
payback period
Aims to assure T that those improvements will
result in actual savings that even when split with LL
will result in net benefit.
DRAFTING GREEN
• FORM Leases for new construction and new
TENANTS:
– REALpac = Real Property Owners of Canada
– MODEL GREEN LEASE = Corporate Realty Design &
Management Institute
– BOMA = Building Owners and Mangagers
Association International Guide
• ADDENDA of modification to Existing Leases
Drafting GREEN
• What constitutes default?
• What is the standard of damages for default?
– To party (usually Tenant) harmed by non
compliance
• What are the remedies for default?
– Damages
– Restoration by harmed party and reimbursement?
Legal Issues Loom
• Insurance Coverage against potential “LEEDigation” for
LEED certified buildings
– Professional liability insurance does NOT insure for
warranties or guarantees made by eg architects
– Cover rebuilding to green standards?
• Defects – yet a building is NOT certified until after
completion.
• Breach of Contract: Contract should clearly allocate
GREEN Responsibility cf Shaw Development case where
Developer lost $600K in tax credits!
GREENwashing
• Investors, tenants, lenders and public officials
rely on if project is LEED, it will save energy,
etc. Is this promise achievable?
• Are the touted advantages of GREEN real?
• US Federal Trade Commission has begun
regulating GREEN marketing
• Puffing, false representation & fraud are risks
GREEN Lease websites
• http://www.greenbuildinglawblog.com
(Shari Shapiro, Cozen & O’Connor)
• http://www.greenleaselibrary.com
( U.S. Department of Energy)
http://www.nyc.gov/html/gbee/html/initiatives/
clauseshtml (PlaNYC Green Buildings & Energy
Efficiency)
More websites
http://www.usgbc.org (US Green Building CouncilLEED ratings certification)
http://www.greenglobes.com (Canadian Standards
Association ratings system)
http://www.energystar.gov (Federal EPA & DOE)
FORM leases:
http://www.realpac.ca/green-office (Canadian free)
http://www.squarefootage.net/TMGL.html ( $)
http://www.shop.boma.org ($)

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