Commercial Investment Real Estate March/April 2013 - Page 37

T e article “Not Easy Leasing Green” (CIRE, September/October 2012, p.36) told an unpopular truth. It tallied a long list of hur- dles confronting tenants and landlords who pursue Leadership in Energy and Environ- mental Design certif cation. T is situation helps explain why California municipalities, New York City, and Canadian jurisdictions have enacted laws mandating environmen- tally responsible leases. In fact, outside of large institutional land- lords and mandated jurisdictions, green leases are rare — and for good reason. Com- plex leasing provisions of en require ongo- ing monitoring, reporting, consulting, and benchmarking responsibilities that typically involve engineering and computer systems specialists, facilities and asset managers, LEED-certified examiners, cost auditors, accounting specialists — and, of course, specialized lawyers. Because environmentally responsible leas- ing is costly, time-consuming, and unfamil- iar, many landlords and their leasing agents of en dismiss it without even investigating the possibility. Fear of the complexity and cost means the environment suf ers, since heating, cooling, and lighting commercial buildings generates a large portion of green- house gases. But in truth, many of the heating, ventila- tion, air conditioning, and lighting ef cien- cies that have the most impact per dollar invested can be attained with very simple paperwork and within the typical landlord- tenant relationship. Small, non-institutional landlords can take advantage of many prof- itable environmental leasing opportunities that are easy to access. Keep It Simple As owners of industrial, of ce, retail, and multifamily properties for more than 38 years, we have found that many environ- mentally responsible changes can be made with a few simple steps that will not delay or complicate the leasing process, nor signif - cantly increase expenses. T e key is to write leases empowering the landlord to make energy-saving equipment purchase decisions unilaterally — without having to involve the tenant and third-party environmental professionals in the pro- cess. A lease clause permitting the landlord to decide when and how to make building system upgrades and committing tenants to cooperate gives unilateral power to the landlord. For example, this simple lease provision states that operating charges include: the cost, amortized over its useful life, of the purchase and installation of any device including the maintenance and repair of such device, to improve the operating ef ciency of any system in the building or reduce the cost of insurance and thereby reduce operating expenses. Under this clause, the tenant pays the amortized cost without the need for an engi- neering study supporting a tenant savings in excess of the amortized cost. However, in the interest of good tenant relations, our practice has been to exclude interest and do a simple payback period calculation. For big-ticket items we recommend get- ting an engineer’s opinion letter stating that the savings to the tenants exceed the amortized cost. Tenants are protected by having an engineer benchmark the exist- ing consumption with the proviso that the total operating costs paid by tenant will not increase when the cost of the improvement is charged to the tenant. Another reimbursement method is New York City’s Energy Aligned Clause that states: (1) tenant shall reimburse landlord 80 per- cent of the yearly amortized cost of the upgrade; and (2) the reimbursement period shall be lengthened to 125 percent of the actual years used in the amortization calcu- lation, enabling landlord to recoup 100 percent of its outlay (80 percent of yearly amount mulitplied by 1.25, the length of the payback period); (3) no interest is added in amortizing as a means of approximating the addi- tional benefit to landlord of having newer equipment without having had to pay all of the replacement costs due to eventual failure of the existing equipment. If the landlord wishes to be more aggres- sive it can seek a quicker payback period and a higher annual recovery rate than 80 percent of the projected cost savings. T e EAC may be more ef ective than a simple payback at 100 percent amortization for capital investments that may produce savings that are dif cult for the engineer to quantify. Although the EAC lengthens the reimbursement time by 25 percent (the tenant pays back at the rate of 80 percent of the yearly amount due), this clause is more evenhanded when there is any signif cant uncertainty about the utility savings. [See “Resources” for more information.] How Does It Work? T e following examples illustrate how land- lords can make environmentally responsible upgrades to their buildings under dif erent lease types. Triple Net Leases. In some NNN leases, energy ef cient upgrades present disincen- tives to building owners because the tenant benef ts and the landlord pays. For example, why should a landlord replace eight func- tioning, circa 1975 natural gas-f red boilers that are 65 percent ef cient with newer boil- ers that are 94 percent ef cient when the ten- ant’s gas bill will be reduced but the landlord will pay all of the capital cost? But if the landlord looks at the larger pic- ture, the 94 percent boilers, plus the associ- ated engineering costs of $200,000, have an operational life of 25 years, and an amortiz- able life under asset depreciation standards of 10 years. T ey produce a savings in reduced natural gas consumption and maintenance of $30,000 per year. So over the long term there is an incentive to replace the boilers. Using the EAC method, the tenant saves $30,000 in yearly fuel and operating costs and pays the landlord amortization of $16,000 per year — a net gain of $14,000 per March | April | 2013 35