Whether building owners and occupants in the District of Columbia are seeking to improve their building performance to meet pending Building Energy Performance Standards (BEPS), make progress toward internal environmental, social, or governance goals, or simply provide a more competitive, high-quality building to occupants, there is a common tool already at their disposal that can be tuned up to drive significant progress: their lease agreement.
“Our green lease lays the foundation for a mutually beneficial tenant-landlord partnership on sustainability. Green leasing is the best tool to build efficient, healthy, productive, and appealing leased spaces and we are committed to this practice across our entire portfolio.Jeffrey Abramson, Partner, The Tower Companies
What is “Green Leasing”?
Green leases—also called energy-efficient leases, high-performance leases, or landlord-tenant aligned leases—refers to language in a landlord-tenant lease agreement that helps to ensure sustainable and healthy workplaces through smart design, construction, and operational standards.
Green leasing can be used as a mutually beneficial tool that operates beyond areas that are typically controlled by the landlord. Supporting both building owners and occupants, green leasing helps to reduce costs and improve operations, comply with the District of Columbia’s environmental regulations, use resources more efficiently, and enhance indoor environmental quality. In doing so, green lease standards can also support building owners, property managers, and tenants to achieve higher levels of productivity and meet their sustainability and environmental, social, and governance (ESG) goals.
What is the District’s BEPS?
The District is aiming to become the healthiest, greenest, and most livable city in the United States. With this in mind, its leadership has committed to reducing greenhouse gas emissions 50% by 2032. To reach this goal, the District requires that building owners report energy and water consumption annually through a benchmarking program and will require large buildings to meet energy consumption thresholds as part of the Building Energy Performance Standards (BEPS). Since tenants can control to up to 80% of energy usage in a building, green lease language is more critical than ever to help building owners meet and exceed defined performance thresholds. Landlords who own or manage buildings in Washington, DC may also consider modifying existing lease language to allow for BEPS non-compliance fees to be shared with tenants, since energy performance is a shared responsibility.
Why buildings are critical for climate action
What is included in green leasing?
Green leasing is an industry best practice that started as a way to address energy consumption in a building. Over time, green leasing has evolved to also address a broader set of sustainability challenges such as water consumption, waste management, and indoor air quality. Green leases establish landlord and tenant responsibilities regarding the design and construction of an office space, and set expectations for other sustainability commitments for the entire duration of a lease.
Green leases go beyond local or national building codes, and often share similarities with well-known industry certifications such as ENERGY STAR, LEED, Fitwel, and WELL. They are most often requirements that either tenants or landlords agree to implement and are not considered recommendations. However, some green leases will also include statements that “strongly encourage” sustainable behavior that benefits everyone. Both requirements and recommendations help to start a conversation between all stakeholders, to learn about shared values, and to form an on-going partnership that goes beyond business as usual. While green leases vary by company, Green Lease Leaders, created and managed by the Institute for Market Transformation (IMT) and the U.S. Department of Energy’s (DOE) Better Buildings Alliance, sets national standards for what constitutes a green lease and recognizes landlords and tenants for creating and implementing compliant leases.
How is green leasing incorporated into a standard lease agreement?
Green leases can be driven by a building owner, by a tenant, or both through a collaborative and negotiated effort. Relevant language is typically included in a landlord-tenant lease agreement as either 1) a separate exhibit that is attached to the standard lease, or 2) clauses incorporated throughout the various sections of a standard lease. There are advantages and disadvantages to both options and each organization must decide what works best for their company. The Green Lease Leaders program favors an integrated approach that includes green lease clauses embedded throughout various sections in the standard lease. This may cause less concern to unfamiliar stakeholders and it also normalizes green leasing as part of standard business operations. However, some organizations prefer a separate green lease exhibit which centralizes green leasing clauses and allows for expansion on how the tenant will work with the landlord to achieve efficiency goals, e.g. build-out requirements, green cleaning, or operating procedures.
Green Lease Leader Program
Learn how to implement green leases for your building(s) and apply to become a Green Lease Leader.
Why implement green leasing guidelines?
Green leasing can reduce operating costs and help building owners comply with the District’s Building Energy Performance Standard. Green leases help building owners improve operations, save money, and stay competitive in today’s challenging marketplace. In Washington, DC, commercial office buildings consume 60% of total energy usage and green leasing can reduce energy-related operating costs by up to 22%. Green leasing language aims to help building owners and property managers be more confident of the return on investment for building performance and efficiency improvements. This also establishes a shared responsibility to comply with Building Energy Performance Standards.
Sustainable and healthy buildings attract and retain tenants in a competitive market.
Delivering sustainable and healthy buildings is no longer voluntary for building owners; it is an expectation from tenant companies and employees. Building owners who invest in high-performance buildings have a differentiator that will attract and retain tenants. Tenants may even come to the table with a checklist of green building requirements early in the process, so it’s important for building owners to be proactive if they want to stand out and be competitive with the building next door. Green lease language can also lead to high-performance buildings that realize higher rent premiums and/or higher occupancy rates by meeting tenant demands and scoring high on their sustainability checklists. There are also studies that show improved property values when building owners invest in buildings with a goal to make them more sustainable.
Building owners and tenants can show leadership and earn recognition.
In addition to improving operations and reducing building operating costs, building owners and property managers are also motivated by industry recognition, which is a powerful way to demonstrate leadership and a desire to push the industry forward. Green lease adoption results in high-performance buildings, which can increase ENERGY STAR and LEED scores, as well as assist with achieving other certifications such as BOMA 360, Fitwel or WELL. Receiving industry recognition also helps a company to retain and attract like-minded employees, tenants, investors, and other partners.
Green leasing supports improved health and productivity.
People spend 90% of their lives indoors. According to the 3-30-300 rule, people are a business’s most expensive asset—costing 100x more than office utilities and 10x more than office space rent. Yet, too many buildings have inadequate ventilation and other health hazards that can result in “sick building syndrome” and lead to worker illness and absences. Therefore, when people are healthy and productive, it results in a strong bottom line for business too. In fact, green-certified buildings can actually improve the cognitive performance of the occupants. It is a win-win for everyone. Green leases establish an enforceable accountability measure that can be leveraged for a variety of healthy building improvements as well as energy efficiency.
Buildings contribute 73% of total greenhouse gas emissions in the District.
Climate risk is one of the top challenges confronting the commercial real estate industry today. It has and will continue to have an impact on development, operations, and property values due to more frequent flooding, record-breaking temperatures, and other extreme weather events. These climate risks may yield an increase in operational costs and capital as well as asset devaluation. Company executives and investors are asking questions like: Are we complying with the local laws? Are our buildings energy-efficient, healthy, and resilient? How do we achieve a net-zero portfolio? Green lease guidelines align values, set expectations, drive energy efficiency, reduce climate impact, and demand that all tenants in a building act on a level playing field. After all, tenants can control up to 80% of energy usage in a commercial office building and green leasing is an actionable tool that holds everyone accountable. Green leasing also helps both landlords and tenants meet their climate goals and share progress through voluntary and mandatory reporting. Building and operating buildings with climate risk and resilience in mind is critical to staying competitive and staying in business.
How do you motivate key stakeholders?
To enact a green leasing program or an individual lease, all stakeholders must come to see the advantages of green leases. The first step is to identify each of the key players and to determine what drives their decision-making process. This will help develop a strategy for approaching the conversation with each stakeholder, learning how to adjust accordingly, and getting constructive feedback. Listening to stakeholder interests, educating them, and knowing how to answer, “What’s in it for me?” is key to having a successful green leasing program and engaged players.
- Building Owners. Building owners (landlords) have an opportunity to lead the charge and manage collaboration across internal and external roles such as asset managers, property managers, building engineers, sustainability professionals, accountants, attorneys, architects, construction managers, and brokers. Green leasing can benefit building owners by reducing operating costs, complying with local regulations, and achieving company goals for internal and external reporting. In some cases, a landlord may incorporate language that will allow for capital investments to be recuperated from tenants. It’s important to note that having a leadership team who is committed to sustainability and green leasing as a best practice is absolutely crucial because without it, the landlord team may not buy-into the process and give it the attention it deserves. This is one of the biggest challenges and addressed further in the section below on Sustainability Commitment from Leadership.
- Tenants. Tenants share common goals with landlords such as low operating costs, healthy and productive workers and, often, sustainability goals. However, many tenants are not knowledgeable about the benefits of green buildings and are unfamiliar with green leasing. It is important to communicate the benefits of green leasing in advance of a new lease or renewal by framing it in terms that are meaningful to the tenant. Depending on the building and the lease, this might include lower utility costs, indoor health and safety measures, worker productivity and, when relevant, ESG goal advancement. Identifying “sustainability champions” helps overcome barriers to creating a green lease and supports long-term tenant behavior change.
- Brokers. Brokers are key players in realizing a successful green leasing program which can support their financial and business interests. To remain competitive, they will also want to be up to date on both the District’s BEPS requirements and it may impact landlord and tenant concerns during real estate transactions. Since brokers are involved from the very beginning, it is important to secure their buy-in for green leasing early and often. They can be trusted advisors that find shared interests between tenants and landlords and can help communicate the benefits of green leases to both parties. Brokers also benefit from understanding green leasing because it is part of the market trends they must watch, and because green leases increase the value of the buildings in their portfolio.
- Design and construction teams. Design and construction teams that work for the landlord and for the tenant are critical to the implementation of energy efficiency and health projects. Unfortunately, these key players are not always brought into the conversation early enough or not identified until after the lease has been signed. Therefore, it’s important to communicate early when a building will have a green lease and what the implications will be for them. Leases that enable cutting-edge sustainability efforts may help these teams perform standout work that differentiates them from their competition.
- Property managers and building engineers. Property managers and building engineers either work as in-house employees for the building owner or are hired as a third-party partner, and this aspect will change their perspective on operations. In all cases, these teams are the ‘boots on the ground’ and critical to the end goals—a high-performance building with satisfied tenants. Property managers and building engineers are motivated by tenant satisfaction, recognition from colleagues and industry peers and their company’s internal performance review program. Green leases may be intimidating because they require consultation with legal experts and a change in the normal business process, adding more work as well as uncertainty. However, significantly lower operating expenses and clear arrangements with building occupants may make their jobs easier in the long term.
Overcoming common obstacles to green leasing
Challenge: A successful green leasing program starts with a strong and unwavering commitment by leadership, typically from the building owner’s organization, but it could also be driven by a tenant or a third-party property management company. If sustainability is not a core part of organizational goals and the company has not dedicated resources to it, green leasing may be viewed by team members as an additional hurdle to getting their specific job done or a deal executed. A landlord’s core business is to lease space in buildings, and if the importance of sustainability is not driven from the top and enforced then it will come across as optional and not be a priority by managers and other employees. Creating green lease language is not difficult—but if there is not strong support and enthusiasm communicated from leadership, it will be a short-lived practice.
Solution: The leadership team at an organization can be engaged either by employees, peers, investors, government, or non-profit organizations to provide education on the benefits of green leasing. There is healthy competition in the Washington, DC commercial real estate market and companies are motivated and influenced by what peer organizations are doing. Understanding success through real-life examples can unlock great potential in a company that has not traditionally focused on sustainability or health initiatives in the past. To drive home the commitment by leadership to implement green leasing clauses, sustainability goals should be part of every employee’s performance review process, which determines annual raises, bonuses, and other benefits.
Challenge: Due to fear of the unknown and lack of experience, there is a narrative that green leasing best practices will cost too much money and turn off tenants or landlords when negotiating a deal. Neither concern needs to prohibit green leasing. The reality is that yes, there may be a few low-cost measures needed, like conducting air quality testing or installing submeters, but leases lock in a clear short- and long-term benefit. Also, many green lease clauses do not have a cost associated because they are already part of industry best practices such as requiring equipment and electronics that carry an ENERGY STAR label or allowing for a day cleaning program to save energy. As for the second concern, green leases can be an asset in attracting tenants because they often lower tenant utility bills and position them to achieve their own ESG goals. These benefits generally outweigh the costs of having an attorney briefly review new lease language.
Solution: Green leasing should be viewed as a long-term investment in the building and in the people who work inside it. There are mutual benefits and a clear return: to reduce operating costs, hold all tenants to the same standard so that everyone is receiving equal benefits, meet shared sustainable goals, enhance company reputation both internally and externally by prioritizing a sustainable workplace, and deliver a healthy space. The stakeholder driving the green lease guidelines in any negotiation should be ready to provide education about the green leasing program to all stakeholders involved as early as possible. As a proactive measure, the brokers and attorneys on the team promoting green leasing guidelines should receive educational training and be given the opportunity to provide feedback because they are the first “line of defense” when confronted with this challenge. (IMT and DOE offer on-demand broker education, such as this Better Buildings recording.) Design and construction teams are strong partners to demystify the perceived cost question too.
Challenge: The investment approach for energy efficiency projects varies depending on entity structure, lease structure, and tenant mix in a building (multi-tenant vs single tenant). Entity structures specific to landlords can be private, public, real estate investment trusts (REIT) and owner/investors that hire third-party management companies, or full-service building owners that have an internal property management staff. In addition, there are typically two different types of commercial office leases, referred to as triple net and gross (modified) leases. In gross leases, landlords assume responsibility for building operating expenses and in some cases, tenants may pay for a proportional share of utility expenses but not always. In a triple net lease, rent does not include operating costs and tenants pay for utility expenses as an estimated (square footage) or actual (submeter) calculation.
These standard lease types are driven by the local commercial real estate market. In Washington, DC, most multi-tenant leases are gross leases and single tenant buildings may utilize triple net leases. Depending on the entity type and lease structure, the landlord (and/or tenant) may not be incentivized to invest in energy efficiency and other sustainability measures that reduce operating costs because it is not perceived as a mutually beneficial project. In a gross modified lease, for example, an owner may pay the upfront cost for a rooftop solar PV array or large common area lighting retrofit, with no ability to recover any part of the investment from the tenant because they are responsible for the majority of operating costs. The life cycle analysis for these projects may still pencil out without the need for cost recovery and will reduce overall operating costs for the building, which is in the best interest of the building owner and the tenant.
Solution: Understand that the approach will vary depending on organization type, tenant mix, and lease structure but the important take-away is that green leasing and energy efficiency is always possible and all parties can benefit—it just may look different from building to building. It is important to understand the pros, cons, and challenges associated with each type of entity and lease structure—and then adjust accordingly to understand what is possible. It is also necessary to understand a company’s return threshold for projects, which may or may not align with their overall investment strategy. Identify quick wins like lighting projects and then tackle more cost-intensive projects like on-site renewable energy that have a significant impact, reasonable return, and a story to tell.
What are examples of green leasing clauses that should be considered?
Green lease requirements cover design, construction, and operations. Topic areas may include energy, water, waste, and indoor environmental quality. Guidelines may be considered requirements that are mandatory to implement, and other clauses may be considered voluntary but stated with strong encouragement.
Below are green lease language examples, with a focus on energy efficiency.
- Design (Lighting). Tenant must reduce connected lighting power density to be below the limits set in the 2017 DC Energy Conversation Code. All light bulbs and lighting fixtures must have either an ENERGY STAR certification or a Design Lights Consortium (DLC) certification, if available.
- Post-Construction (Air Quality). After construction is complete, the Leased Premise has been cleaned, and major punch list items that impact volatile organic compound levels have been finished, Tenant is required to install new MERV 13 filters on HVAC equipment serving the Leased Premise and conduct baseline IAQ testing in accordance with LEED® Reference Guide for Interior Design and Construction v4.1.
- Operations (Energy Benchmarking). Tenant must partner with Landlord to comply with all local jurisdiction reporting requirements. Data must be shared with Landlord, as requested, and includes but is not limited to: full-time and part-time occupants, server room sq. ft. and supplemental HVAC characteristics, total quantity of computers, and monthly utility consumption if paid by Tenant directly to the utility.
- Strong Guidance for Operations (Plug Load Usage). Tenant shall endeavor to implement and promote energy savings strategies to reduce plug load usage. Examples include utilizing power-savings settings for computer monitors and printers, reminding staff to turn off or unplug lights, electronics, and appliances when not in use, and installing advanced power strips.
For more green lease language examples, visit the Green Lease Leaders website.
“Landlords who are committed to sustainability and high-performing assets, through programs like green leasing, are creating a competitive advantage and more likely to see faster rates of capture in a healthy real estate market…Green leasing enables tenants and brokers to differentiate a product. I have experienced it first-handRandy Harrell, Vice Chairman at CBRE