Colliers International - Houston “Pitfalls in Green Leases”

1. March 1, 2010 Michael K. Kuhn Vytas A. PetrulisJackson Walker L.L.P. Colliers International - Houston “Pitfalls in Green Leases”

2. OPERATING EXPENSEPASS-THROUGHS Operating Charges shall also include: (i) all costs of maintaining, managing, reporting, commissioning, and recommissioning the Building that was designed to conform with Energy Star® or LEED rating system, and (ii) all costs of applying, reporting and commissioning the Building to seek certification under Energy Star® or LEED; provided however, the cost of such applying, reporting and commissioning of the Building or any part thereof to seek certification shall be a cost capitalized and thereafter amortized as an Annual Operating Charge under GAAP. Source: BOMA Model Lease

3. PITFALLS FOR THE TENANT • What benefit is LEED certification to the Tenant? • Where are the controls to prevent Landlord from overspending? • What are “costs of maintaining” the LEED rating? • Could equipment purchases be included within this provision?

4. SOLUTIONS FOR THE TENANT • Determine whether the Tenant would benefit – if not, then seek to have the costs placed back on the Landlord. • Add a “cap” – either a dollar limit or percentage • Clarify that the costs are for services and application fees, not to purchase equipment

5. GENERAL SUSTAINABILITY REQUIREMENTS Tenant shall use proven energy and carbon reduction measures, including energy efficient bulbs in task lighting; use of lighting controls; daylighting measures to avoid overlighting interior spaces; closing shades on the south side of the building to avoid over heating the space; turning off lights and equipment at the end of the work day; and purchasing ENERGY STAR® qualified equipment, including but not limited to lighting, office equipment, commercial and residential quality kitchen equipment, vending and ice machines; purchasing products certified by the U.S. EPA’s Water Sense® program. Source: BOMA Model Lease

6. PITFALLS FOR THE TENANT • Who determines whether the Tenant’s measures are “proven”? • What is the penalty for the Tenant’s non-compliance? • What if ENERGY STAR® rated equipment is not available or is unsuitable?

7. SOLUTIONS FOR THE TENANT • Qualify the obligation to one of “use reasonable efforts to …” • Use ENERGY STAR® rated equipment only if available, cost-effective and suitable • Clarify that there is no penalty if the Tenant fails to comply

8. CONTRACTOR RULESAND REGULATIONS All construction and maintenance methods and procedures, material purchases, and disposal of waste must be in compliance with minimum green building standards and specifications as defined in these Contractor Rules and Regulations and the latest version of the U.S. Green Building Council’s Existing Buildings Reference Guide. Where there is a difference between the two, the more restrictive shall prevail. All projects shall be reviewed for potential impact to reduction targets and environmental programs. For any project over [$10,000], Contractor agrees to engage a third party LEED Accredited Professional or similarly qualified professional to oversee and validate that the project has met the standards for Landlord’s sustainability practices. [Numerous provisions regarding erosion control, indoor air quality, water use efficiency, energy management, purchasing, waste removal, etc.]

9. PITFALLS FOR THE TENANT • Green construction regulations can dramatically increase the cost of build-out • Hiring a LEED Accredited Professional will add to construction costs • Who is benefiting from these regulations? Is the Tenant seeking LEED certification for its build-out? • Construction regulations may not be part of the Lease; they may be furnished later • Landlord’s attorneys draft the construction regulations without an appreciation for the costs involved

10. SOLUTIONS FOR THE TENANT • Have a contractor thoroughly review the construction regulations • Identify wasteful, costly and redundant practices or requirements • Have the cost of the LEED AP covered by the Landlord unless the Tenant is seeking LEED CI certification

11. RECYCLING & WASTE MANAGEMENT Tenant covenants and agrees, at its sole cost and expense: (a) to comply with all present and future laws, orders and regulations of the Federal, State, county, municipal or other governing authorities, departments, commissions, agencies and boards regarding the collection, sorting, separation, and recycling of garbage, trash, rubbish and other refuse (collectively, “trash”); (b) to comply with Landlord’s recycling policy as part of Landlord’s sustainability practices where it may be more stringent than applicable law; (c) to sort and separate its trash and recycling into such categories as are provided by law or Landlord’s sustainability practices; (d) that each separately sorted category of trash and recycling shall be placed in separate receptacles as directed by Landlord; (e) that Landlord reserves the right to refuse to collect or accept from Tenant any waste that is not separated and sorted as required by law, and to require Tenant to arrange for such collection at Tenant’s sole cost and expense, utilizing a contractor satisfactory to Landlord; and (f) that Tenant shall pay all costs, expenses, fines, penalties or damages that may be imposed on Landlord or Tenant by reason of Tenant’s failure to comply with the provisions of this Section. Source: BOMA Model Lease

12. PITFALLS FOR THE TENANT • The Tenant’s exact obligations are not clear • “Landlord’s sustainability practices” could be anything the Landlord dreams up • The Landlord could claim that the Tenant’s non-compliance resulted in significant damages

13. SOLUTIONS FOR THE TENANT • Limit to requirements of law • Tie to a specific standard (e.g., LEED-EB: O&M) • Specify single stream recycling or that the Landlord will supply all labor and receptacles for collection and sorting

14. PURCHASE OF GREEN POWER Landlord reserves the right to change electricity providers at any time and to purchase green or renewable energy. Source: BOMA Model Lease

15. PITFALLS FOR THE TENANT • Green or renewable energy could be substantially more expensive • No benefit to the Tenant • Only helps the Landlord to attract new tenants (i.e., a marketing expense)

16. SOLUTIONS FOR THE TENANT • Apply limits to increases in costs • Tie to practices at comparable buildings • Tie to a specific LEED category (i.e., % of green/renewable energy used)

17. REPORTING OF ELECTRICITY USAGE Tenant shall be required to submit to Landlord electricity consumption data in a format deemed reasonably acceptable by Landlord. Source: BOMA Model Lease

18. PITFALLS FOR THE TENANT • What exactly being required is unclear • Cost of collecting data may be onerous • Landlord could try to charge the Tenant if high usage is shown

19. SOLUTIONS FOR THE TENANT • Limit to situation where the Tenant is paying the electricity provider directly • Specify exact information to be reported and have limits on the Tenant’s costs • State that it is being provided for informational purposes only

20. Michael K. Kuhn Jackson Walker L.L.P. 1401 McKinney Street, Suite 1900 Houston, Texas 77010 713-752-4309 mkuhn@jw.com THANKYOU! Vytas A. Petrulis Jackson Walker L.L.P. 1401 McKinney Street, Suite 1900 Houston, Texas 77010 713-752-4456 vpetrulis@jw.com