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The Greenest Lease Around: NEEA and Unico Collaborate on a Win-Win
In October, the Northwest Energy Efficiency Alliance (NEEA) completed the move into our new offices in downtown Portland’s Commonwealth Building, securing a cost-effective, energy-efficient space with an environmental footprint well below the market norm. Earlier in this series, you read about the carbon factor (how the carbon footprint of our employees’ commutes factored into our choice of locations) and the human factor (how a cross-functional team collaborated to identify and create an office that meets our needs). Now, learn how we introduced innovative green concepts in another traditionally tricky area – the commercial lease.
Wins All Around
Because all parties ultimately felt the lease package made financial sense, it would be a misnomer to say that some items were “wins” for the tenant and others for the landlord. So, here are some of the green provisions that ultimately made it into the lease, which really were wins all around.
|DESIGN & CONSTRUCTION|
|Tenant Improvement (TI) Practices||The lease specifies that NEEA agrees to perform all TI work in accordance with sustainability practices, engage a third-party sustainability consultant to assist with our TI, and pursue and maintain LEED for Commercial Interiors certification for our space. The landlord, Unico Properties, is obligated to cooperate with these efforts, including such specific activities as modifying their construction waste processes. (We didn’t let ourselves off the hook there: we’re required to recycle or reuse construction waste and report this activity to the landlord.)||NEEA and Unico both proactively committed to these activities, a rare sight in today’s market. Because of this and other sustainability commitments, our brokers are confident we have the greenest lease in the city. Though these provisions might impose additional costs on NEEA and Unico, our executives supported them with the understanding that they’re part of our mission and core values, and Unico was confident that the built-out space would be more re-leasable in the future if it were built green now.|
|Tenant improvement costs||Unico agreed to a “turnkey” TI, where they essentially incur all the costs of building out the space and oversee the process, then hand us the key to the space. If the project exceeded the agreed-upon budget, those extra costs would be assumed by Unico.||NEEA’s TI posed some challenges for the process. For example, the construction budget assumed building-standard lighting, but NEEA’s selected lighting package was more costly; the indoor bicycle storage area is an unusual allowance, but one we felt was critical to our corporate culture. These items required us to negotiate and redefine what exactly “turnkey” means – what specifications and standards should be used to price the project, what is considered an “additional” cost beyond the building standard, and who should pay for it?|
|Benchmarking||Unico is required to benchmark energy and water use in ENERGY STAR’s national benchmarking tool, Portfolio Manager, and disclose performance data to NEEA quarterly.||Though benchmarking is a common practice among environmentally-conscious real estate owners like Unico, the lease kicked their efforts into high gear. Benchmarking creates transparency into the building’s utility consumption and costs.|
|the ENERGY STAR label||The lease requires Unico to strive to attain an ENERGY STAR label for the building (applicable to buildings earning a 75 or higher in the 1-100 energy performance rating system within Portfolio Manager).||The lease holds Unico accountable for making every effort to meet a well-defined, accepted industry standard for energy performance – removing some of the ambiguity about what constitutes “energy efficiency.”|
|Separate metering||NEEA’s electricity consumption must be separately metered. This makes it possible to structure our lease as a net lease, in which our utility costs are our own responsibility – and are under our control.||In theory, a net lease with separate metering ensures that a tenant is financially motivated to operate their space efficiently and invest in energy-efficient technologies. On a practical level, the accounting is tricky unless all other tenants in the building are sub-metered as well. Other tenants at the Commonwealth Building have expressed an interest in separate metering in pursuit of LEED-CI certification; the property management team is currently assessing the best way to implement this, while determining how to track and allocate energy costs in the meantime when only some tenants are directly metered.|
|Ongoing green initiatives at the building||The lease stipulates that Unico will form a Tenant Sustainability Committee to act as a voice for all tenants in decisions about building operations. NEEA is obligated to comply with the Sustainability Committee’s current and/or future programs intended to promote sustainability at the building (including recycling, energy and water conservation efforts, and indoor air quality), and we’re prohibited from operating our space in a manner that would negatively impact our ENERGY STAR rating or LEED certification.||Some landlords might feel that they’d lose some control over building operations by having a committee provide input on decisions, but Unico was open to the idea. The committee will give other tenants the chance to easily join NEEA in sustainable practices and procedures – whether or not they previously considered them. Future leases at the Commonwealth Building will incorporate similar provisions for tenant compliance with building sustainability initiatives. Certain building-wide services mandated in NEEA’s lease (such as green cleaning) will inevitably impact other tenants in one way or another, so why not involve them more directly?|
|Itemizing energy costs||In many leases, utility costs are charged as a total “utility” line item that includes multiple building services. However, Unico is required to disclose specific, itemized energy costs, separate from other utility items such as janitorial, water, and trash removal.||This gives NEEA insight into the true impact of efficiency measures on the total cost of occupancy. If utility costs were lumped together, changes in the costs of one service (such as janitorial) could be confused with changes in another (such as energy). In this example, decreasing janitorial costs could mask increasing energy costs, and the tenant may not realize that efficiency goals are not being met.|
|Hours of operation||The hours of operation specified in the lease are 7:00am to 6:00pm, Monday through Friday. For HVAC services to be provided on Saturdays, we’re required to give the landlord advance notice – in contrast with the many commercial buildings that regularly condition empty space on weekends.||Most landlords believe that if Saturdays are included in lease hours, the building must always be conditioned during that time – even if it’s sitting empty. In our lease, we reversed these customary assumptions about Saturday HVAC service, setting an example for other landlords and tenants looking for mutually-agreeable, financially-sound efficiency strategies.|
|Operating expenses||Most leases define the operating expenses that the landlord is allowed to pass through to the tenant. In NEEA’s lease, this definition is expanded to include the costs of energy-efficiency improvements – meaning Unico is incentivized to improve efficiency because they can recover these improvement investments fairly quickly.||The next challenge? Convincing the other 90% of the building tenants to agree to this model, so that it can be used effectively for common-area projects.|
|GENERAL LEASE PROVISIONS|
|Lease term||Because longer leases are inherently more sustainable (and earn a LEED credit), NEEA committed to a 10-year lease.||Some tenants don’t have the flexibility or stability to commit to a long lease, but all parties tend to benefit from them. The landlord gets a steady income, NEEA locks in our green lease terms and our rental rate, and fewer office moves mean less waste and natural resource consumption.|
|Educating the market||The lease gives NEEA the right to share some of its provisions with third parties in connection with its work...||…the reason that you’re able to read this article today!|
In our lease negotiations, we often aimed pretty high. One of our bolder ideas that didn’t make it into the lease: a financial penalty for the landlord if the building were to fall below a specified energy performance threshold. We also originally wanted the landlord to post the ENERGY STAR rating in the building’s lobby each month, but settled for the requirement that Unico must disclose this data directly to NEEA quarterly.
“People are fixated on the lease itself, but there’s a whole package of documents that all link together. If you don’t have your ducks in a row, something might slip through the cracks in one of those other documents. It’s not a green lease, it’s a green lease document set.” –Jack Davis, NEEA's BetterBricks Initiative
Before diving into the leasing process, our brokers (Gordon King and Mike Holzgang of Colliers International) coached us on setting reasonable expectations as well as consistently and continually communicating our needs to the landlord so both parties always knew what was coming next. Our brokers also played the critical role of organizing all of NEEA’s diverse, dynamic requirements and understanding their implications for not only our lease, but also the various associated design documents: materials that stipulate ongoing operating conditions, the tenant improvement plan, and contractor rules and regulations. Some of the most substantive components of the “lease” actually appear in these other documents, including requirements that contractors use practices and products compliant with our LEED goals. It’s important to put leases in context: you’re not just negotiating a lease – you’re determining the plan for your occupancy of the building over the next ten years.
A Two-Way Street
From day one, our lease was intended to be a partnership with the landlord (including the Commonwealth Building’s General Manager, Brian Pearce). Our brokers only introduced us to landlords they deemed to be willing to enter into such a partnership. To make the cut, not only did the owner need to have space available in our target location priced within our budget, they also had to share our sustainability vision to some degree – and come to the process with an open mind. A number of buildings in Portland would have met most of our criteria for location, available space, and rent; and a number of landlords would have happily partnered with us on a groundbreaking green lease. At the Commonwealth Building, we found the intersection of both.
“If you decide sustainability practices are important to you, you should make your landlord commit to them. There are enough landlords out there who will.”
–Brian Pearce, Unico
Economics certainly flavored the discussions. It is a tenant’s market throughout most of the real estate industry, with landlords making concessions to attract or retain tenant companies. NEEA’s lease was also important to Unico and the Commonwealth Building for building-specific economic reasons. Though this backdrop may have tipped the scale in NEEA’s favor on some items, Unico was already pursuing sustainability initiatives and green leases in their portfolio, making them better-positioned to respond to our requirements than other landlords might have been.
So why push for these items to be included in the lease at all, if the landlord is also environmentally-conscious? Wouldn’t it be sufficient to have a separate policy document in which the tenant and owner put their mutual sustainability goals in writing? The advantage is that if the building sells, the next owner will be required to stick to their predecessor’s commitments if they are written into the lease.
Brian is confident that Unico will be able to continue to do business with NEEA and Colliers International on a long-term basis because of their willingness to partner and innovate in this lease. Unico is also embracing the Commonwealth Building’s new role as a hub for green businesses, hosting publicity and networking events and promoting tenants’ green leases in the local media. In the real estate industry, such relationships and reputations are critical to success.
“It’s a ‘win’ to get these elements in the actual lease documents. On the tenant’s behalf, this will hedge against future sales of the building: if the building sells, ‘I’ll try my best’ clauses don’t really cut it.” –Gordon King, Colliers International
Moving the Market
Embodying the emerging culture shift among some eco-minded owners, Unico accepted the costs of our green build-out and the burden of some of our green lease provisions, with the knowledge that this would put them at the forefront of a market transformation to redefine “normal” landlord costs and services. Unico is now expanding the use of its green lease addendum for new and extended leases, partly inspired by the NEEA transaction.
Our brokers from Colliers International are also recommending green leasing to their other clients, using the NEEA lease as a model. They’ve found that perhaps seven out of ten tenants have some level of interest in discussing the pros and cons of a green lease. If the green lease provisions are considered early and often, and all team members informed and educated about the process from the start, those that take action will find themselves with mutually-beneficial results that are good for the environment and the bottom line. In NEEA’s new home, we look forward to seeing how our green lease plays out in practice.
To learn more about NEEA’s move into new space, visit http://neeasuitesearch.wordpress.com/. Stay tuned for upcoming articles on the space planning process and our LEED CI certification.