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Green Leasing: The Sustainable Future of Landlord and Tenant Relationships under LL97

 

Buildings covered under Local Law 97 make up nearly 60% of the city's building area. As many building owners expect to face fines in 2024 and even more in 2030, it's evident that business as usual will not work. To avoid fines and comply with LL97, landlords and tenants must collaborate on reducing carbon emissions for whole buildings.

However, costs structured in most conventional leases, such as net leases, discourage landlords and tenants from investing in a more efficient building. On the other hand, green leasing- energy-aligned or high-performance leasing addresses this problem and can be pivotal in transforming landlord and tenant relationships under LL97. 

Conventional leases establish responsibility for capital expenses on the landlord while responsibility for utilities and other operating costs are set to the tenant. So when landlords pay for the capital costs of improvements, the financial savings of lower operating costs accrue to the tenant. Hence, problems arise when one party (agent) makes decisions on behalf of another party (principal), but the agent neglects to act with the principal's best interest in mind- known as the principle-agent problem. So, by the structure of conventional leases, there is a lack of information symmetry and incentives between landlords and tenants to invest in energy efficiency improvements. 

The conversion of conventional leases to green leases will play an exigent role in prioritizing energy efficiency while apportioning costs between landlord and tenant. So now, let's look at green leases more closely. 


 What is green leasing? 

"Green leasing is the practice of realigning the financial incentives of sustainability or energy measures in lease documents" (IMT, 2015). Green leases include specific clauses that address and prioritize sustainable solutions while ensuring both building owners and tenants save money, conserve resources, and promote efficient operation of buildings. 


Based on principles from the Green Lease Leaders, the following key elements of green leases, policies, or corporate rules for tenants are outlined:

1. Track tenant space energy and water use 
2. Request whole-building ENERGY STAR score from landlord annually 
3. Ensure transaction management team receives energy training 
4. Implement tenant energy management best practices 
5. Purchase on-site renewables if offered by landlord and competitively priced 
6. Accept cost recovery for efficiency upgrades benefiting tenant 
7. Commit to actively contributing to a whole building performance reduction goal in carbon or Energy Use Intensity
8. Establish social impact goals for health, resiliency, diversity, and climate

As a tenant, you can use Green Lease Leaders’ Tenant leasing Audit Tool to quickly see if you meet their key requirements for receiving the Green Lease Leaders recognition. 

Green lease clauses provide a landlord more security knowing that tenants must comply with their financial contribution to the commissioning process. Landlords can choose to commission, retrocommission or recommission their buildings. A green lease can make sure that a proper commissioning occurs. A Green Lease can address tenant liaison, utility billing, and commissioning processes.

Based on principles from the Green Lease Leaders, the following key elements of green leases, policies, or corporate rules for landlords are outlined:

1. Track common area energy and water use and request record of tenant energy use annually 
2. Disclose whole-building ENERGY STAR score to tenant annually 
3. Ensure brokers or leasing agent(s) have energy training 
4. Implement landlord energy management best practices
5. Require tenants to purchase on-site renewables if offered by landlord and competitively priced 
6. Install submetering equipment and meter tenant spaces for electricity use
7. Establish a tenant energy efficiency engagement and training
8. Establish a whole building performance reduction target in Carbon or Energy Use Intensity (EUI) units

You may use the Landlord Leasing Audit Tool as a landlord to determine what measures you can take to establish Green Leasing practices for your property.

 

High-efficiency buildings offer indisputable financial and environmental advantages. However, under new pressures of Local Law 97, property professionals need a dependable and concise strategy to implement sustainable building practices with the collaboration of their tenants.

The constraints of conventional leases in reducing carbon emissions consolidate the exigence of green leases. So by incorporating green operations into lease agreements, green leasing has the potential to transform what buildings can do for inhabitants, communities, and the environment.

 

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