GREEN LEASING

1. GREEN LEASING A LEGAL PERSPECTIVE

2. Overview • Green Building & Evolution of Green Lease • What is “Green Building”? • Who Determines if a Building is “Green”? • What is LEED? • What is a Green Lease, and Why Do We Need It? • Green Lease Drafting Issues • Barriers to Green Leases • Salient Green Leasing Issues • Regulating Behavior • Cost Recovery & Benefit Allocation • Compliance, Risk Allocation, Remedies & Dispute Resolution • Green Leasing in LEED – EB Context • Summary & Conclusions

3. Green Building & Evolution of Green Lease • What is “Green Building” • “The practice of increasing the efficiency with which buildings use resources – energy, water and materials – while reducing building impacts on human health and the environment during the building’s lifestyle, through better siting, design, construction, operation, maintenance and removal.” – EPA • “Design and construction that uses building techniques that minimize environmental impacts and reduce the energy consumption of buildings while contributing to the health and productivity of the occupants.” – USGBC

4. Green Building & Evolution of Green Lease • Who Determines if a Building is “Green”? • Currently, no federally-legislated definition • Voluntary rating organizations: • USGBC – LEED • Green Globes • Energy Star • Local ordinances (often by reference to rating organization standards)

5. Green Building & Evolution of Green Lease • What is LEED? • Voluntary, consensus-based national standard for developing and operating high performance sustainable buildings • 9 rating programs (including pilots) • Most relevant: NC; CS; EB; CI • Inter-Relationships of Rating Systems • Leading third party certification program in U.S. (standard for many current and proposed governmental ordinances)

6. Green Building & Evolution of Green Lease • Green Lease – What is it? • Lease which has additional provisions set out within it, whereby the Landlord and Tenant undertake specific responsibilities and obligations with respect to the sustainable operation of a building (e.g., energy efficiency measures, waste reduction/management and water efficiency).

7. Green Building & Evolution of Green Lease • Green Lease – Why do we need it? • New level of necessary behavioral regulations & control, as each party’s actions or inactions impact performance of building and the ability to achieve/maintain LEED certification • New cost & benefit allocation issues • Risk Allocation • Compliance, Default, Remedies & Dispute Resolution

8. Green Building & Evolution of Green Lease • Green Lease – Drafting • Must define “Green”, and properly allocate responsibility for achieving and maintaining sustainable objectives. Which LEED? • Deal and building specific by nature, so doesn’t lend itself to a “form” lease, although some are starting to appear (e.g., BOMA) • Approaches: • Paternalistic: Obligations for reduced consumption of energy or resources, and environmentally responsible behavior, are mandated by Landlord or Tenant. • Cooperative: Mutual objectives are set out in Lease for both parties to achieve, leading to responsibilities and liabilities for both parties.

9. Green Building & Evolution of Green Lease • Barriers to Green Leases • Landlord Barriers • Long pay-back periods for certain improvements • Lack of skill or knowledge; risk aversion • Indifferent tenants; lease restrictions (lighting; materials; building improvements) • Inability to pass-through “green” costs

10. Green Building & Evolution of Green Lease • Tenant Barriers • Lack of skill or knowledge • Fear of unfair rent increase based on “green cost” pass-throughs • Inability to produce, or procure from Landlord, premises – specific water & energy consumption data (submeter) • Energy & water costs assessed on p.s.f. basis, rather than direct consumption, so no savings incentive • Lease restrictions (alterations; inability to compel recycling or energy management programs; inability to compel record-keeping)

11. Salient Green Leasing Issues • Regulating Behavior • Importance • Critical to achieving/maintaining LEED certification • Direct impact on building performance (operating costs; building value) • Ancillary impacts (tenants; financing; tax abatements or other incentives; reputation)

12. Salient Green Leasing Issues • Tenant Behavioral Controls • Build-Out; Future Alterations, Improvements & Repairs • Enhanced need to restrict and control Tenant’s build-out, and future alterations and repairs, to ensure compliance with green standards of building • Construction waste management • Adherence to green features (low-VOC paints; energy efficient appliances; water efficient fixtures; HVAC & lighting controls; energy management program)

13. Salient Green Leasing Issues • Ensuring Compliance • Approval over Tenant’s plans & specifications • Approval over Tenant’s design & construction team/contracts (LEED expertise/experience) • Must use Landlord’s contractor (liability issue?) • General compliance with certain LEED rating system • Specify green standards & requirements in lease or in attached work letter • Approval over all Tenant alterations, improvements and repairs (caution: carveouts for deminimus work) • If casualty, Tenant must rebuild to certain LEED standard

14. Salient Green Leasing Issues • Operations • Landlord must ensure tenant participation in any green measures applicable to the building • Recycling/Energy Management Programs • Energy conservation measures • Utilities • Landlord right to purchase green or renewable energy • Ability to measure consumption, charge for overconsumption, regulate consumption

15. Salient Green Leasing Issues • Record-Keeping/Reporting • Tenants must be required to provide the necessary energy/IAQ/water use data to Landlord for purposes of Landlord’s reporting requirements • Rules & Regulations • Landlord must have the ability to ensure tenant compliance with the “green” rules and regulations for the building

16. Salient Green Leasing Issues • Landlord Behavioral Controls • Benchmarks & Targets • Tenant must ensure “green” benchmarks and targets are clearly defined in lease. • Performance Standards • Specifications & procedures for measuring environmental performance should be set forth in lease. • Caution in using of old standards to define Landlord obligations – e.g. “first class operations” or “reasonable landlord” standards • Operation & Maintenance Obligations • Landlord’s ongoing operation & maintenance obligations with respect to green features should be specified.

17. Salient Green Leasing Issues • Green Programs • Any tenant-required green programs for the building should be set forth in lease.

18. Salient Green Leasing Issues • Cost Recovery & Benefit Allocation • Cost Recovery • Breadth of Operating Expenses • Green features (e.g., vegetated roof, water collection system) • Amortized costs of green equipment/systems and operational enhancements • Costs related to LEED certification • Lease Economics • Net Lease vs. Gross Lease • Allocation of benefit/risk of reduced operating costs • Base year issues

19. Salient Green Leasing Issues • Benefit Allocation • White Tags & Carbon Offset Credits • Energy Savings • Tax Rebates • Reduced Insurance and Financing Costs

20. Salient Green Leasing Issues • Compliance, Risk Allocation, Remedies & Dispute Resolution • Compliance • Specific obligation to obtain/maintain targeted LEED certification • Definition/measurement of success • Time period for performance • Obligation of each party to perform

21. Salient Green Leasing Issues • Risk Allocation • Failure to achieve targeted LEED certification • Performance and durability of new technologies • Insurance • Coverage for green features • Coverage for recommissioning & recertification fees • Endorsement for upgrading conventional to “green” • Available products: • Fireman’s Fund – “GreenGuard” Insurance Program (Green upgrade coverage; Green certified building coverage; Building commissioning coverage) • AON – “Green Building Property Program” (Green replacement and upgrade coverage; Covers costs to hire LEED-AP design professionals; Covers LEED certification costs)

22. Salient Green Leasing Issues • Remedies • Termination of lease • Self-Help • Rent Reduction or Abatement • Alternative Dispute Resolution • Expedites resolution of disputes over why a particular target or objective is not being met (lack of compliance with policies & regulations; excessive energy use; failure of green features or technologies)

23. Green Leasing in LEED – EB Context • 9 Prerequisites; Minimum 34 Points Required for Certification • Applies to Whole Building, Including Tenant Space • Building Must Be At Least 75% Occupied for 12 Months

24. Green Leasing in LEED – EB Context • Credit Categories: • Materials In • Materials Out • Building Administration • Green Cleaning • Site Management • Occupant Health & Safety • Energy Metrics • Operational Effectiveness

25. Green Leasing in LEED – EB Context • Must File for Recertification At Least Every 5 Years • Must be able to demonstrate adherence to environmental policies & procedures • Must track occupants purchasing and waste streams to verify performance goals • Must maintain minimum required occupancy, and track occupant satisfaction

26. Green Leasing in LEED – EB Context • At Least 28 Points (Maybe More) Require Some Level of Tenant Participation (Excluding Cost Allocation Issues): • Alternative transportation • Light pollution reduction • Water efficiency • Sustainable purchasing • Solid waste management & reduction • Occupant comfort • Tenant construction IAQ and waste • Daylighting & views • Green cleaning

27. Summary & Conclusions • Growing Need for Green Leases • Rising costs of energy, water, materials and insurance, as well as increased governmental environmental and air quality regulation, will drive green buildings • Tenants seeking to reduce carbon footprints and meet corporate sustainability reporting requirements • Tenants and Landlords seeking to manage energy consumption costs • Tenants need assurance that Landlords will provide what they need to meet green objectives, and vice-versa

28. Summary & Conclusions • Green Lease is a Double-Edged Sword • Increased regulation & expense pass-throughs = share in cost savings and additional remedies (cooperative approach) • Should achieving higher levels of certification = higher rents? • Landlord and Tenant held to higher standards with respect to features and performance of building • Green Leases are Property and Transaction Specific; No Single Form Works for Every Deal

29. Robert E. Stanley, Esq. 1170 Peachtree Street, Suite 750 Atlanta, GA 30309 (404) 835 - 6201 rstanley@seblaw.com www.seblaw.com