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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a minimum 10-year lease. T is may hin- der the ability to assign the lease, sublet the premises, relocate the tenant, or terminate the lease, especially if the consequence is revocation of the LEED certifi cation. 7. Damage and Destruction; Insurance If the LEED-certifi ed premises is damaged or destroyed, the parties should clarify whether replacement includes LEED certi- fi cation and, if so, whether to the same level (LEED Platinum, Gold, Silver or certifi ed) and/or the same credits obtained. Archi- tects, engineers, and contractors should consider obtaining green errors and omis- sions insurance, which covers liability if, for example, a contract to design and build a LEED Gold building is entered into but the building is only awarded LEED Silver. In addition, the tenant should be required to maintain green property insurance, which covers LEED re-certifi cation costs. T e party engaging the contractor may consider hold- ing back funds until LEED certifi cation is obtained; however, this can create problems between the general contractor and its sub- contractors, even if the general contractor is not in default. Some credits can take six months to 18 months to be awarded aſt er substantial completion. 8. Expansion Option; Right of First Refusal/Offer T e parties should consider the impact an expansion has on the original premises that has already achieved LEED certifi ca- tion. If maintenance of LEED certifica- tion is important, the expansion premises should similarly comply. In addition, if the tenant has a right of fi rst refusal/off er to lease additional, non-adjacent space, the parties need to consider whether to use two diff erent leases, especially if the new space is not required to be LEED certifi ed, as the LEED-related tenant lease obligations will not apply to the non-LEED-certifi ed space. 9. Extension Option — Fair Market Rental Value It is common for the landlord and tenant to provide that if the term of the lease is extended, the rent during the extension term will be based on a fair market rental value formula. Issues may arise using this formula, especially if the property is LEED certifi ed, because there may not be any LEED-certifi ed comparables. T e parties will also want to make sure the appraisers have signifi cant experience on LEED projects. 10. Default; Remedies The parties should clarify whether there should be a default and corresponding rem- edy if LEED certifi cation, a specifi c LEED level, or a specifi c LEED credit is not obtained due to tenant or landlord action. In addi- tion, the parties should clarify the appropri- ate remedy if the tenant is not in monetary default but its actions cause the property to have its LEED certifi cation revoked. T e landlord will want the right to monitor the tenant's performance of LEED-related cov- enants, and the tenant will want to require that the person monitoring have signifi cant skill and experience related to LEED projects. 11. Work Letter A work letter is usually an exhibit to the lease that provides tenant improvement guidelines. T e landlord and tenant may agree that they will each perform certain portions of the work. T e landlord usually wants control over any changes to the build- ing systems; however, doing so might result in the landlord unintentionally taking on certain LEED certifi cation responsibilities. Regardless of who performs the work, the contractor and architect who are engaged should be LEED-APs with the requisite experience. Since the architect and the con- tractor are involved in the LEED certifi cation process, architect and construction contracts should be modifi ed to address LEED expecta- tions, responsibilities, and remedies for failure to comply. T e landlord or tenant may off er varying incentives to the design team based on the level of LEED certifi cation obtained. T e design team will likely want to obtain its own errors and omissions green insurance to provide some coverage in the event it fails to deliver a LEED-certifi ed project or the level of LEED certifi cation requested. In addition, the contractor will likely want the landlord to be required to provide train- ing to its building maintenance staff so that building equipment and systems are oper- ated and utilized properly in accordance with LEED requirements. This shifts the burden from the contractor to the landlord in the event LEED certifi cation is revoked for improper maintenance. Similarly, the land- lord may want to pass this obligation on to the tenant, to the extent feasible. 12. Letter of Intent Since the aforementioned LEED-specifi c lease provision modifi cations are not cus- tomary, they should be addressed in the letter of intent. At the letter of intent stage, the landlord and tenant should agree upon the expectations of the level of LEED certi- fi cation and credits to be pursued, how the responsibilities in connection with obtain- ing and maintaining LEED certification should be allocated, and what the remedies should be if either party fails to comply with those responsibilities. Eric A. Altoon, JD, LEED-AP, is a partner with Gordon Kemper LLP in Los Angeles. Contact him at eric.altoon@gordonkemper.com. 38 September | October | 2012 Commercial Investment Real Estate