Alan Whitson

Tenants seeking to negotiate a green lease should follow the adage “buyer beware.”

While an increasing number of landlords are building out space to meet the U.S. Green Building Council’s Leadership in Energy and Environmental (LEED) standards, the marketplace is still sorting out what constitutes a green lease [see “BOMA ‘greens’ lease guidelines,” SI "2008 Green Real Estate Guide"].

Under current market conditions, tenants and building owners must address several issues when drafting a green lease:

• Rent structure and operating expenses
• Energy use by tenant
• Operational performance
• Hazardous materials
• Green cleaning
• Recycling
• Build out of tenant spaces

Virtually every commercial lease executed in the last 30 years contains a rent escalation clause. The intent is to protect the landlord’s investment from the ravages of inflation. The trend led landlords to draft leases where the tenant pays rent plus reimbursement for operating costs, such as energy, water, janitorial, insurance and taxes.

Real estate professionals call this a “net lease.” In effect, it transfers operating risks from the landlord to the tenant. Doing so reduces the landlord’s incentive to apply efficient management or sustainable principles to cut operating costs, since these costs are now excluded from calculating a building’s net operating income (NOI); this is the basis for calculating a building’s economic value.

For tenants, especially in multi-tenant buildings, there is a downside to using the net lease. For years, the operating expense and tax clause, or common area maintenance (CAM) clause, that requires tenants pay for any increase in the building’s operating expenses, has been a secret profit-center for landlords.