Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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Regardless of the pros and cons, landlords and tenants may have no choice but to embrace green building and other sustain- ability practices. California was the fi rst state to adopt a mandatory green building code, and other states have implemented similar requirements. In addition, several cities such as Los Angeles, Phoenix, Hono- lulu, Las Vegas, and New York have adopted mandatory green building ordinances. T ere is some overlap and some distinction among federal and state code requirements, city ordinances, and various prerequisites and credits that can be earned under the U.S. Green Building Council's Leadership in Energy and Environmental Design rat- ing system, should the landlord or tenant seek LEED certifi cation. But all of these pro- grams will impact the leasing relationship between landlord and tenant in some way. Therefore, whether dealing with green tenant improvements in a single- or mul- titenant building or the construction of a new green building for one or more tenants, the landlord and tenant should come to an agreement on each party's expectations and responsibilities. Because mandatory green building requirements vary among states and cities, this article will focus specifi cally on how the LEED rating system aff ects the following lease provisions. 1. Delivery of Premises; Commencement Date; Rent Commencement Date The delivery, term commencement, and rent commencement dates are typically determined by the party — landlord or tenant — that is constructing the tenant improvements. T ese dates could be further impacted if either party expresses an inter- est in obtaining LEED certifi cation. If the tenant is seeking LEED certifi ca- tion, the landlord may not want it to aff ect the dates noted above. For example, certain CCIM.com LEED credits, such as enhanced commis- sioning, are not awarded until eight months to 10 months aſt er substantial completion. Other credits, such as thermal comfort veri- fi cation, are not awarded until six months to 18 months aſt er tenant occupancy. 2. Operating Expenses If the landlord seeks LEED certification for a multitenant building, it may want to reconsider whether to enter into gross or net leases as there will be costs associated with obtaining and maintaining LEED certification, commissioning, and green building capital expenditures, repairs, and replacements. If it chooses to use net leases, the landlord will want to expressly list these costs. Otherwise a tenant could argue they are not standard pass-through operating expenses. As a trade-off , a tenant may want to negotiate for a share of tax credits and/or other incentives in exchange for paying for such additional operating expenses. 3. Use of Premises; Alterations, Additions, and Improvements A typical use clause restricts the tenant to a specifi c use of the premises, but sometimes allows all other lawful uses. Regardless, the use must comply with applicable law, including state or local green building codes and/or ordinances. In addition, if the landlord or the tenant seeks LEED certifi cation for the property, the tenant should expressly agree its use of the premises will comply with LEED pre- requisites and credits. The tenant should be required to comply with whichever is the most stringent — state codes, local ordinances, or the applicable LEED prereq- uisites and credits. Any alterations, addi- tions, or improvements that jeopardize LEED certifi cation should be prohibited. By example, LEED for Green Interior Design and Construction MR Credit 1.2 requires maintenance of 40 percent to 60 percent of non-shell, nonstructural components of the premises. 4. Maintenance and Repair; Surrender of Premises T e tenant and landlord should agree on who should be required to maintain what portion of the premises or building, as applicable, in its LEED-certifi ed condition so that it does not run the risk of losing its LEED certifi cation. If LEED certifi cation is not concurrent with delivery of the premises to the tenant, the parties should expressly clarify the condition (pre- or post-LEED certification) under which the premises must be surrendered at the expiration or termination of the lease. 5. Parking Parking is a source of revenue for landlords. However, certain LEED credits, state codes, and local ordinances require bicycle park- ing, changing rooms, and that parking not exceed the minimum per zoning. T e LEED credits calculate parking based on full-time and part-time staff and peak transients but don't seem to take into consideration that the number of tenant employees may change over time. The lease needs flexibility to allow for changes to parking corresponding with the changes in the number of tenant employees. 6. Assignment and Subletting; Relocation; Early Termination T e landlord should determine whether a prospective assignee/subtenant's proposed use of the premises will comply or con- fl ict with applicable LEED requirements. In addition, both the landlord and ten- ant should be cognizant of the impact of seeking to obtain LEED for Green Interior Design and Construction MR Credit 1.1, which requires that the tenant enter into September | October | 2012 37 javarman/veer; Ocean Photography/Veer