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The Greening of Commercial Real Estate

This article originally appeared in a Real Estate Special Supplement to the San Fernando Valley Business Journal, September 15, 2008

By David Adelman and Bryan Lewitt

For the longest time, “green” was just a color.  Then along came the golfers, the vegetarians and the politicians, each of whom started to use “green” for their own selfish purposes.  Today, “green” has morphed into a way of doing business which cuts across industry lines, as those of us who work actively in the commercial real estate market are starting to see.  As more new buildings are constructed and older buildings are renovated, terms such as “LEED Certification” and “green building” are starting to creep into our vocabularies.  This primer is designed to introduce you to the “greening” of the commercial real estate world.

In 1998, the U.S. Green Building Council (USGBC) introduced a rating system for environmentally sustainable construction known as LEED, an acronym for Leadership in Energy and Environmental Design (www.usgbc.org).  Now internationally-recognized, this system is designed to promote certain design and construction practices aimed at reducing negative environmental impacts and improving occupant health and well-being while at the same time increasing profitability.  Generally speaking, these practices focus on choosing environmentally sustainable sites, reducing energy use, using renewable energy, incorporating water sensitive designs, using recycled or recyclable building materials, integrating waste management principles and creating healthy interior environments.

“Green development” has definitely taken hold.  According to the USGBC, over 3.6 billion square feet of commercial building space has been or is in the process of being “LEED Certified” and by 2010 approximately 10% of all new commercial construction projects will be “green”.  If you’re interested, drive by or go online and check out the 4-story, 240,000 square foot Legacy Corporate Pointe in Culver City.  It’s one of the newest “green buildings” in Southern California, having achieved the highest level “LEED Certification” – a “gold” rating (www.legacypartners.com).

However, in today’s dollars, a “green building” is generally more expensive to develop than a conventional building, but not as much as one might think.  One study estimates the average development costs associated with a “LEED Certified” building to be 2% more than those associated with its conventional counterpart.  Not generally known for their altruism, “green” landlords will more often than not try to pass on these increased development costs to their tenants in the form of above market rents.  However, on the flip side, “green” landlords will have to walk a fine line so as not to price themselves out of the market.

Facing the prospect of above market rents, why would any tenant be anxious to commit to a 3, 5 or even 10 year lease in a “green building”?  There are at least a couple of compelling reasons.  First, while base rents may be above market, tenants should be able to take advantage of lower operating cost pass-throughs which will result from utility and insurance cost savings and, possibly in the near future, reduced property taxes.  Second, tenants will be in a better position to attract and retain employees by being able to offer them a healthy and user-friendly workplace, which should result in greater employee job satisfaction and increased employee productivity.

As you might imagine, the advent of the “green building” has given rise to the “green lease”.  A “green lease” distinguishes itself from a conventional lease by incorporating environmentally sustainable development principles aimed at minimizing environmental impacts, improving the quality of the work experience for all occupants and creating a variety of economic incentives and disincentives for both landlord and tenant in support of these principles.  To assist those of us who work in the arena of commercial leasing, the renown Building Owners and Managers Association (BOMA) International recently released its “Guide to Writing a Commercial Real Estate Lease Including Green Lease Language” (www.boma.org).

In a “green lease”, certain conventional provisions would take on a slightly different flavor.  For example, tenants might be required to employ certain waste disposal and recycling practices, operate within certain energy and water consumption limitations, incorporate recycled or recyclable building materials into their tenant improvements or participate in transportation plans designed to encourage car pooling and the use of public transportation.  Similarly, landlords might be required to provide bicycle storage, changing rooms and showers, use native and drought tolerant plants in common landscaped areas, ensure that all building systems are installed and operated to maximum efficiency or provide independent consultants to help tenants comply with energy and water consumption restrictions.  There are many other possible variations, often dependent upon the form of lease being used – gross, modified gross or triple net.

Kermit the Frog sings “It’s Not Easy Being Green”.  Whether or not it’s easy is no longer at issue.  “Green” is here to stay in the world of commercial real estate, so we’d all better get used to that frog suit and understand exactly what we’re dealing with and how it can be used to our best advantage, whether landlord or tenant.

© 2008 The San Fernando Valley Business Journal. All Rights Reserved.