Characterizing a Lease As Green Implies That It Incorporates at Least Some Sort of Sustainable

9-8-09

Green Leasing:
Start by Defining a Green Building andMix with a Lease
ACREL Annual Meeting
October 2009
Vicki R. Harding

Characterizing a lease as “green” implies that it incorporates at least some sort of sustainable building practices. Beyond that, “green lease” means what the landlord and tenant want it to mean.

The details will turn on the objectives of the landlord and tenant in entering into the lease. Common reasons for considering a green lease include:

• government requirements (such as ordinances mandating that buildings be LEED certified) and incentives (such as expedited permit review, tax incentives or bonus zoning height or density for LEED certified buildings);
• marketing (for example, a landlord may seek LEED certification based on the perception that tenants will find the building more desirable, so that the building leases more quickly and commands higher rents);
• corporate policy (for example, a company-wide mandate that steps be taken to reduce the company’s carbon footprint, which translates into leasing space in buildings that meet specified energy efficiency and other criteria).

The approach taken in the lease is also influenced by whether it is the landlord or the tenant that is the driving force. A landlord is coming to the negotiations from the perspective of a building owner. As a result, the landlord generally starts with its vision of a green building, and then uses the lease to assure that the tenant will cooperate as necessary to achieve the status of a green building or allow operation as a green building. A tenant, on the other hand, has no control over the building and must use the lease as the tool to achieve the green measures that it desires.

In both cases, acritical threshold question is what the parties mean by a green building: Is the focus on construction or operation of the building? What criteria is a party using to define the desired results? To what extent is it necessary or helpful to incorporate items into the lease?

The U.S. Green Building Council’s LEED Green Building Rating Systems have dominated the market for commercial and institutional buildings. So, by default, many landlords and tenants use LEED as their standard, although alternatives are available, as discussed below.

A.LEED Green Building Rating Systems

1.“Leadership in Energy and Environmental Design”

The U.S. Green Building Council (“USGBC”) was formed in 1993. One of its early priorities was development of a system to define and measure “green buildings.” This led to development of the LEED Green Building Rating Systems. LEED stands for “Leadership In Energy and Environmental Design.” As suggested by its name, LEED is designed to push the envelope in green building practices in order to transform the built environment, as opposed to defining minimum standards.

LEED Version 1.0 was launched as a pilot project in 1998, and then released as LEED Version 2.0 in 2000. This rating system eventually became LEED for New Construction (“LEED-NC”), which is designed for rating commercial and institutional buildings with a focus on office buildings, although it can be applied to other buildings, including high rise residential.

Each LEED system has prerequisites and credits designed to measure performance in areas of sustainable development. There are different levels of certification depending on the number of credits earned (in addition to the prerequisites): Certified, Silver, Gold and Platinum. A building is certified based on a third-party review of documentation.

Although project certification was originally handled by the USGBC, it is now administered by the Green Building Certification Institute (“GBCI”). Separating development of the rating systems by the USGBC from the certification process is part of an effort to qualify for American National Standards Institute’s (“ANSI”) accreditation.

2.Evolution of Multiple Rating Systems

Over time, additional rating systems have been added to LEED-NC, including:

• LEED for Core & Shell (“LEED-CS”) and LEED for Commercial Interiors (“LEED-CI”): These rating systems were designed to recognize the division of control and responsibility between an owner (LEED-CS) and a tenant (LEED-CI). They apply to new construction and major renovations.
• LEED for Existing Buildings, which became Existing Buildings: Operations & Maintenance (“LEED-EB/OM”): This rating system addresses ongoing operations of existing commercial or institutional buildings (or high rise residential). A building must be fully occupied for at least 12 months (i.e. < 25% vacancy) in order to pursue LEED-EB/OM. Evaluation for certification includes the entire building even if the owner does not control the entire space (for example, tenant space in a leased building), although up to 10% under separate management control may be exempted.
• Other LEED rating systems tailored for particular circumstances that have either been adopted or are in pilot stage include LEED for Schools, LEED for Healthcare, LEED for Homes, LEED for Retail (both new construction and commercial interiors), and LEED for Neighborhood Development.

3.Rating System Criteria

The LEED rating systems consist of prerequisites and credits designed to measure performance in the areas of sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality (although there is some variation in the areas assessed for specialized rating systems, such as LEED for Neighborhood Development).

A rating system defines credits and prerequisites by setting forth the intent, requirements and potential technologies and strategies. Many of the requirements include detailed technical specifications. In addition, more detailed guidance is provided in a related reference guide. Project-specific questions regarding credits may be raised in a request for a ruling. The rulings (referred to as “Credit Interpretations Ruling” or “CIR”) are available for review, and project teams are encouraged to consult the CIRs for answers before contacting the USGBC with questions.

For example, LEED-NCIEQ (Indoor Environmental Quality)Credit 4.2 requires use of low-emitting materials for paints and coatings. The intent is to reduce the quantity of indoor air contaminants, and the requirement is that paints and coatings used on the interior of the building meet specified standards: (1) volatile organic compound (“VOC”) content limits established in Green Seal Standard GS-11, Paints, 1st Edition, May 20, 1993 for architectural paints and coatings, (2) VOC content limit of 250 g/L established in Green Seal Standard GC-03, Anti-Corrosive Paints, 2nd Edition, January 7, 1997 for anti-corrosive and anti-rust paints, and (3) VOC content limits established in South Coast Air Quality Management District (SCAQMD) Rule 1113, Architectural Coatings, rules in effect on January 1, 2004 for clear wood finishes, floor coatings, stains, primer, and shellacs.

The reference guide includes a summary of the referenced standards and discussion of implementation of the requirements, the pointat which the requirements need to be addressed in the timeline of a construction project, calculation methodology, and guidance on documentation of the credit.

As an example of a CIR ruling, a project team requested guidance on whether aerosol “spray” paints were subject to this credit, and the ruling was that spray paints could be excluded because the referenced standards did not address aerosol paints.

As illustrated by this example, the certification process tends to be very objective and technical. If the technical requirements are met, the credit will be awarded. If the technical requirements are not met, the credit will not be awarded (except in very limited cases where a project obtains a favorable CIR ruling for an alternative), and the intent will not be used to extend the requirements by analogy.

4.Revisions to Major Systems in 2009

The existing LEED rating systems continue to evolve and new systems continue to be added. In 2009, LEED-NC, LEED-C&S, LEED-EB/OM, LEED-CI and LEED for Schoolswere updated to new versions identified as LEED 2009 (part of LEED v3). In addition to incorporating developments since each systemwas last revised, the changes were intended to:

• align similar credits between systems,
• reallocate credits based on an analysis that takes into account the impact of the credit and the importance of the area impacted (with greenhouse gas emissions as a top priority), and
• introduce the concept of regional variations by adding regional-specific bonus credits.

Historically, the LEED systems were developed independently over time, with the result that in some cases two rating systems that included the exact same credit referenced different versions of the same standard (for example, ASHRAE 60.1 (2004) and ASHRAE 60.1 (2007)). Similarly, newer systems reflected developments that occurred subsequent to the original systems (for example, adding additional certification sources to qualify materials). The goal in aligning credits was to establish consistent requirements so that the same criteria apply when the same credit is used in different rating systems.

The reallocation of credits based on an assessment of building impacts was a major effort designed to encourage strategies that would have a more significant effect in achieving desired environmental results by giving them more credits. Impact categories given a high priority include greenhouse gas emissions, which means that more points are given for strategies that have a positive impact on areas such as energy efficiency and CO2 reductions.

The LEED 2009 revisionsalso began to introduce the concept of variations by region. Traditionally the LEED rating systems are uniformly applied nationwide. However, for LEED 2009, USGBC regions were asked to identify credits relating to issues of particular local importance. For example, water efficiency is more important in areas where water availability is a concern, suchas southwest United States. Based on the regional input, each of the LEED 2009 systems has regional-specific bonus credits that may be earned in addition to the standard credits.

Projects that register under LEED 2009 rating systems are also subject to “Minimum Program Requirements” (“MPRs”) that define minimum characteristics that a project must have in order to be eligible for certification. The MPRs may evolve over time, and include requirements such as compliance with all applicable environmental laws, and minimum occupancy and floor area criteria.

5.LEED Rating Systems and Leases

The primary subject matter of a lease is the ongoing occupancy and operation of the premises. However, almost all of the LEED rating systems focus on new construction and major renovations, which from a lease perspective is relevant primarily to the initial build-out and any subsequent major renovations of the leased premises. Only LEED for Existing Buildings: Operations & Maintenance focuses on matters relevant to the ongoing use of the building and premises. Unfortunately, LEED-EB/OM applies to the entire building and does not recognize the division of control and responsibility between the landlord and the tenants.

As a result, if the primary concern of a landlord or tenant is the ongoing use of the premises and building, it will not be sufficient to simply reference portions of a LEED rating system. Further work will be required for implementation in the lease. The parties will need either to supplement the criteria of a LEED rating system that focuses on new construction or to define the relative responsibilities of the landlord and tenant in applying LEED-EB/OM.

If the parties are primarily concerned about construction of a green building or if the objective is to obtain LEED certification, the LEED-C&S and LEED-CI (including the LEED for Retail variations) should be a good fit. In negotiating the lease, the parties need to be aware that each of these rating systems contemplates that certain measures will be implemented through the lease. For example, a tenant that occupies less than 75% of a building can earn three points under LEED-CI by submetering energy use in the tenant space and providing in the lease that energy costs are paid by the tenant and not included in the base rent (EA Credit 3: Measurement and Verification). Similarly, a tenant can earn a point by entering into a lease with a minimum term of ten years (MR Credit 1.1: Tenant Space – Long-Term Commitment).

6.Climate Change and Energy Performance

USGBC’s alignment with climate change issues is likely to maintain or enhance acceptance of LEED as a preferred rating system.

The climate action agenda items adopted by the USGBC in November 2006 included:

• increased energy reduction as a prerequisite for certification (which was initially implemented by requiring commercial projects registered after June 26, 2007 to achieve a minimum number of energy efficiency credits),
• goal of requiring new commercial LEED projects to reduce CO2 emissions by 50%,
• seeking to implement a carbon dioxide offset program.

USGBC continues to work on these agenda items, including development of a carbon dioxide offset program based on verified performance for LEED certified buildings.

A March4, 2008 report prepared by the New Buildings Institute for the USGBC on “Energy Performance of LEED for New Construction Buildings” concluded that on average LEED buildings are delivering anticipated energy savings. However, there was a wide variation for individual projects, and the report further concluded that additional study was required to narrow the range of variability in order to come up with a statistically credible precise quantification of LEED energy savings (which is necessary in order to support an argument that carbon dioxide reductions automatically follow from LEED certification).

More recent efforts in this area include the March2009 Memorandum of Understanding among the USGBC, the Green Building Council of Australia, and the UK Green Building Council regarding CO2 metrics for rating systems. The stated objective is to “map and develop common metrics to measure emissions of CO2 equivalents from new homes and buildings.”

In a related development, the Minimum Program Requirements applicable to LEED 2009 projects noted above include the following requirement (from version approved in April 2009):

6. MUST COMMIT TO SHARING WHOLE-BUILDING ENERGY AND WATER USAGE DATA

All certified projects must commit to sharing with USGBC and/or GBCI all available actual whole-project energy and water usage data for a period of at least 5 years. This period starts on the date that the LEED project begins typical physical occupancy if certifying under New Construction, Core & Shell, Schools, or Commercial Interiors, or the date that the building is awarded certification if certifying under Existing Buildings: Operations & Maintenance. Sharing this data includes supplying information on a regular basis in a free, accessible, and secure online tool or, if necessary, taking any action to authorize the collection of information directly from service or utility providers. This commitment must carry forward if the building or space changes ownership or lessee.

This data should be helpful in supporting development of the link between LEED certification and energy savings. However, the ongoing obligation to provide data, including after a change in ownership or tenant, is particularly troubling given that certification may be revoked for non-compliance with any applicable MPRs.

B.Standard 189.1

The USGBC is also involved in developing a non-LEED standard for new commercial buildings and major renovation projects.

Draft Standard 189.1, Standard for the Design of High-Performance Green Buildings Except Low-Rise Residential Buildings, is being developed by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (“ASHRAE”) in conjunction with the Illuminating Engineering Society of North America (“IESNA”) and the USGBC to provide minimum criteria for green building practices in a form that can be incorporated into building codes.

The project was initiated in early 2007. There were two public comment periods on drafts developed by the initial standards committee. Then the committee was reconstituted in late 2008 to expand membership and broaden the expertise on the committee. In issuing a revised draft for a third public comment period, a statement was made that publication of the final standard is expected by early 2010.

Although it seems that a standard designed to provide minimum criteria for green building practices would be preferable for local ordinance purposes to the LEED rating systems (which are designed to push the market leaders), it may be difficult to persuade people to change to a new unknown system, and the longer it takes to issue Standard 189.1, the more difficult it will be to overcome the established position of LEED rating systems.

C.Green Globes

Green Globes is a green building assessment program that is developed for use in the United States by the Green Building Initiative (“GBI”).

BREEAM (Building Research Establishment's Environmental Assessment Method), a green rating system developed in the United Kingdom, was used as the basis for a Canadian assessment protocol named Green Globes, which in turn was licensed to GBI for use in the United States. (Initially GBI concentrated on the residential market. Licensing Green Globes allowed GBI to expand into the nonresidential building market.)

Green Globes as implemented in the United States includes rating systems for both “New Construction” and “Continual Improvement of Existing Buildings,” similar to LEED-NC and LEED-EB/OM. To date, Green Globes does not include any assessment program that recognizes the division of control between a landlord and a tenant (i.e. there is no equivalent to LEED-C&S and LEED-CI).