Foley & Lardner LLP: Letters of Intent for Green Leases for Office and Retail

By Emerson M. Lotzia

When a landlord or tenant desires a green or sustainable lease pursuant to (i) internal policies or corporate branding or (ii) requires such a lease because of financing or monetary incentives, addressing the key green or sustainable lease issues in the letter of intent or lease proposal (collectively, the LOI) can save much time and expense in finalizing the lease. This article will discuss the key elements of a green or sustainable lease that should be addressed in any LOI.

1.  Sustainability Standards.

As referenced above, either the landlord or the tenant may require certain sustainability standards. Those standards might be as follows and should be stated in the LOI:

• The U.S. Green Building Councils LEED Green Building Rating System that has the following subcategories:
  • LEED 2009 New Construction and Major Renovations
  • LEED 2009 for Core and Shell Development (LEED Core and Shell)
  • LEED 2009 for Existing Buildings Operations and Maintenance (LEED EBOM)
  • LEED 2009 for Commercial Interiors (LEED CI)
  • LEED 2009 Retail for New Construction and Major Renovations and Commercial Interiors
• Certification with standards applicable to U.S. Environmental Protection Agency's Energy Start Rating
• The Green Building Initiatives Green Globes for Continual Improvement of Existing Buildings
• The Building Owners and Managers Association (BOMA) Internationals 360 Performance Program
• Any comparable rating, certification, or performance program now or hereafter in existence

For multitenant office and retail buildings, the dominant third-party sustainable standard for landlords will be LEED Core and Shell for newly constructed buildings and LEED EBOM for existing buildings. The dominant sustainable standard for tenants will be LEED CI. The recommendations in this article will focus on the LEED Core and Shell, LEED EBOM, and LEED CI.

2.  Capex/Opex

For retail leases using a pass through of common area and maintenance expenses and office leases using a base-year concept with the tenant paying increases in expenses over the base year amount, there is always much discussion between the landlord and tenant on capital expenditures (Capex) and operating expenses (Opex). Typically, the tenant resists any capital expenditures being included as part of the operating expenses but the general alternatives for green or sustainable Capex are as follows:

• Pass through of pro rata share of green/sustainable Capex
• Pro rate the pro rata green/sustainable Capex share over the useful life of the green/sustainable Capex item
• Allow green/sustainable Capex only to the extent green/sustainable Capex saves Opex
• Allow any green/sustainable Capex that is intended to save Opex
• Limit the green/sustainable Capex pass through to the actual amount of savings
• Allow green/sustainable Capex pro rated over the useful life only for Capex required by law¹

3.  Construction Obligations and Operations and Maintenance

The tenant improvements would either be constructed by the landlord or tenant but the tenant improvements (and any alterations) will be subject to a published lease exhibit or stand-alone publication containing tenant design and construction guidelines and certain additional, mandatory construction rules and regulations. The "must-haves" and optional guidelines will be dictated by the desired LEED certification of the landlord (e.g., LEED Core and Shell or LEED EBOM) or tenant (e.g., LEED CI) and might be as follows:

• Sustainable site requirements such as:
  • Alternative transportation infrastructure, such as bicycle racks, changing rooms, and preferred parking for carpool
  • Interior and exterior lighting controls to reduce off-site lighting and night-sky pollution
• Water efficiency requirements such as:
  • Low-flow toilets, urinals, lavatory faucets, and commercial pre-rinse spray valves (for food service applications) together with automatic control valves
• Energy and atmosphere requirements, such as:
  • Use of energy-efficient lighting
  • Installation of Energy Star Equipment
  • Enhanced commissioning to verify the tenant space is operating as intended
  • Use of sub-meters for utilities
• Materials and resources requirements, such as:
  • Adherence to solid waste and recycle management plans
  • Reuse of construction materials and furniture and use of recycled, regional, and rapidly renewable materials and certified wood
• Indoor environmental quality requirements, such as:
  • Use of sustainable green cleaning products
  • Adherence to construction and before-occupancy indoor air quality plans
  • Use of low volatile organic compound emitting adhesives, sealants, coatings, floor coverings, and composite wood products and furniture
  • Required controllability for lighting and thermal controls
  • Preservation of daylighting and views

4.  Sharing Information

Both the tenant and the landlord should agree to share information on the consumption of utilities, the consumption of utilities-per-square-foot and the consumption of utilities-per-occupant of electricity, gas, and other fuels and water and the total gross waste (by ton) generated or diverted from landfills or incineration.

5.  Special Remedies

If there are damages for failure to comply with the sustainability standards, such as the loss of a low-interest credit facility for failure to obtain a certain LEED certification or the failure to obtain incentives due to the failure to obtain a certain LEED certification, the damage/default sections should specifically address these special damages.

6.  Conclusion

Regardless of which sustainability standard is chosen by the landlord or the tenant, before the LOI is finished, that chosen standard should be reviewed and all major items in that sustainability standard should be addressed in the LOI.

¹Taking the LEED on Green Leasing: What You and Your Clients Need to Know. The American Bar Association, Section of Real Property, Trust and Estate Law and the ABA Center for Continuing Legal Education, March 5, 2009, Event Code: CET9TTL

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or:

Emerson M. Lotzia
Jacksonville, Florida
904.359.8722
elotzia@foley.com

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