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  • Writer's pictureRealFacts Editorial Team

Green Leases: Changing the Retrofit Calculus

Windmills and solar panels

In a concerted effort toward sustainability, participants in the National Building Performance Standard Coalition committed to publishing a Building Performance Standard (BPS) by Earth Day 2024. This initiative involves over 40 cities, states, and counties working towards implementing laws that set emissions limits or energy efficiency requirements for buildings by Earth Day 2026.

As BPS proliferates, building owners are seeking cost-effective ways to transition their properties, while lenders and investors aim to underwrite fines or retrofit costs. One strategy gaining momentum is the adoption of green leases, which establish agreements between landlords and tenants to identify the benefits of retrofit or other sustainability-related activities and allocate costs accordingly, addressing the split incentive challenge.

The Institute for Market Transformation (IMT), tracking the green lease space for a decade, awards annual "green lease leaders." Ten companies were recognized in the program ten years ago, compared to 65 this year, illustrating the expansion of green leasing over the past decade. Notably, approximately half of the recognized companies this year are new, indicating a broader adoption beyond just leading-edge companies. Initially concentrated in the office space, green lease leaders now span various property types, including both landlords and tenants.

Examining effective green leases for different property types and tenant-landlord relationships provides examples of replicable strategies. Additionally, it gives underwriters more consideration for properties exposed to BPS, beyond underwriting retrofit costs or fines for noncompliance.

For instance, Jamestown and ESRT shared their experiences leveraging green leases in an IMT case study. Implementing green leases well before BPS came into effect, they found these lease structures eased their compliance burden. Key elements of their green leases include clauses covering utility data sharing, cost recovery for upgrades benefiting tenants, and design/construction guidelines that also facilitate BPS compliance.

Both firms noted that their sustainability credentials and openness to green leases attract tenants striving to fulfill corporate climate commitments. However, financial considerations remain paramount. By aligning the lease length with the payback period of energy efficiency improvements, tenants often benefit from substantial savings from retrofits, even when they contribute to the costs.

Examining sample language and other green leases helps owners and tenants prioritize their goals with green leasing. They can start by focusing on clauses most important to their priorities, such as easing BPS compliance or meeting corporate climate targets.

In conclusion, the rise of BPS necessitates innovative solutions like green leases to navigate the evolving landscape of building energy policies. With sustainability becoming a cornerstone of modern real estate, green leases offer a practical and collaborative approach for landlords and tenants to drive meaningful change while reaping mutual benefits.

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