Green leases: Creating a better incentive structure for the use of renewable energies

One of the principal hurdles that the green movement has been unable to clear to date is how to make large-scale modifications in the way that energy is produced given the current market climate and incentives. An example of the current incentives being contrary to the development of renewable energy is in the leasing of commercial buildings. One widely used type of lease in the commercial context is the net lease. A net lease requires the tenant to pay the costs of operation of the building on top of the monetary rent that has been negotiated with the landlord. Net leases are popular with landlords because they shift the risk of increasing operational costs to the tenant. The result of a net lease is that the landlord has little, if any, incentive to minimize energy costs to the tenants of their building, because these costs are being borne by the tenant. But the tenants, who might see a benefit from reducing energy usage, are not in a position to make the sometimes significant and necessary changes to a building to reduce their energy usage. To the extent that a tenant is motivated enough, and a landlord is willing to allow the tenant to undertake such changes, many renewable energy sources, such as solar power, wind energy or geothermal heating, require significant capital investments at the outset. Because the renewable energy equipment would become part of the building, instead of the property of the tenant, it is very unlikely that a tenant would recover his/her initial capital outlay. In order to provide greater incentives for the use of renewable energies, a lease can simply switch the burden for operating costs back to the landlord. This lease, called a gross lease, requires the landlord to pay the utilities associated with a tenant's occupancy of a space. In doing so, the landlord will now see the savings of any increase in efficiency in the building and see gains to the bottom line. As in the case of the tenant, the landlord will also face the initial capital investment associated with the installation of efficiency gaining equipment and materials, but because the landlord will retain this equipment as an asset, these costs can be recouped during the course of the entire useful life of the equipment. The landlord may also see the use of gross leases as a marketing tool. To the extent that green tenant space can charge a premium, prospective tenants would be in a better position to judge the costs that they face when examining a gross lease as opposed to a net lease. A gross lease may also be tailored by the landlord to maintain incentives for the tenants to preserve energy where they can. For example, a lease could include provisions that require the tenant to pay costs associated with power usage outside of the normal working day. This would result in the tenants having an incentive to purchase energy efficient appliances, insure that their employees turn off their computers and eliminate other unnecessary power use after hours. Green leases may also be used to address environmental factors such as indoor air quality and renewable materials used in a "green tenant space." The United States Green Building Counsel has recognized that the improvement of indoor air quality and the restriction of materials containing VOCs have a positive effect on employee happiness and retention, and tenants may may wish to negotiate additional lease provisions dictating the materials used as part of any renovations to insure that certain specifications are met. By incorporating some of these provisions into leases, landlords and tenants can create a mutually beneficial arrangement that will result in lower rent for the tenants, increased value of commercial spaces to the landlord, and lower energy usage overall. Kevin Walsh is an associate in the environmental practice group at Certilman Balin Adler & Hyman, LLP, Hauppauge, N.Y.