AVOID RED INk wITH GREEN LEASES Moving
to a Green Gross lease can Benefit landlords and tenants
the MOveMent tOward sustain- aBle Or Green BuildinGs is well Past its infancy, and cOntinues tO Gain MOMentuM. Green leases need to keep pace, and reflect the environmental and economic goals of both tenants and landlords. A variety of issues must be addressed in a
green lease. However, one preliminary, yet crucial determination of sustainability is whether
the lease is net or gross.
Today, many first-class properties are governed
by net leases, whereby tenants are responsible for
the property’s operating expenses, such as maintenance and utilities. Landlords shift the risk of
high operating costs, passing through any costs
that exceed the annual estimate to the tenant.
Additionally, because landlords with net leases are not responsible for operating expenses,
they have little incentive to reduce them. To the
contrary, many net leases impose administrative
fees of around 15 percent and management fees
of around 4 percent. Consequently, the higher
the operating costs, the higher the administrative and management fees imposed by landlords
and their managers.
As a result, a building’s sustainability can
become an afterthought to tenants, who have
little control over operating costs, and to landlords, who pass the buck on some of the very
operations that allow them to market their
buildings as green.
A return to gross leases, however, can benefit
both landlords and tenants, as well as foster
a building’s sustainability. Landlords and tenants could agree on a minimum or base rent,
coupled with an allowance for operating costs.
The minimum rent and allowance would be
totaled, and together with operating costs such
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as common area utilities, real estate taxes and
insurance premiums, would represent the gross
rental payment owed by the tenant.
If the landlord or property manager was able
to reduce costs and come in under the gross
rental figure, the incremental savings would
represent additional profit to the landlord. Such
incremental savings would positively impact
return on investment (ROI) and therefore the
Tenants would benefit because the savings
would be divided between landlord and tenant,
providing each with an incentive to cooperate
on commercially reasonable steps to hold costs
Gross leases also make it easier for tenants to
compare rental rates throughout the term of the
lease. Operating costs are often more difficult to
compare over the life of the lease. With a gross
green lease, tenants will be able to compare the
total occupancy costs of one building against
another, not just the minimum rent.
Landlords who successfully hold costs down,
will not only increase their per square foot
income, but will be able to market their lower
costs, using such savings to secure quicker
absorption and higher occupancy.
Increasingly, property management professionals will be called upon to negotiate, administer and manage green leases. Further, familiarity with green leasing issues will be required to
effectively manage green properties. Changing
to a gross lease format, though, is the first step.
To determine other important items that
should appear in a green lease, IREM Members
may receive a complimentary Green lease
action Plan checklist, by sending an e-mail
request to email@example.com. n