Page 302 - The Green Building Bottom Line The Real Cost of Sustainable Building

280 CHAPTER 9

ances, taxes, janitorial services, building operating hours, supply of utilities and the
measurement of tenant’s consumption of the same, recycling programs, smoking
policies, and controls over subsequent repairs and alterations.

LEASE ECONOMICS

As an initial matter, the economic structure of the green lease must be examined, as
this structure has a direct impact on the incentives created to build and operate high-
performance buildings, as well as the return received by one party or the other from
energy cost reductions. The typical economic structures for a commercial office build-
ing with multiple tenants fall into one of three categories: a so-called “gross lease,” a
“modified gross lease,” or a “net lease.”
Under the gross lease structure, the tenant pays a single rent to the landlord, which
is inclusive of the tenant’s share of the costs to operate and manage the building. This
structure allocates the fiscal responsibility to the landlord to manage the costs of oper-
ating the building, as the amount of rent received by the landlord is fixed. In this case,
the benefits of a green building, such as lower energy costs, would benefit the land-
lord. As a result, there is arguably little incentive for the tenant to participate in any
program to reduce or control energy costs, as there is no change in the total costs
incurred by the tenant to occupy the leased space if energy costs go up or down.
The modified gross lease structure represents the transference of some of the risk of
controlling the operating costs of the building to the tenant. Here, the tenant’s initial rent
includes operating expenses for a specified year (typically the first year of the lease),
called a “base year,” or up to a particular dollar figure, called an “expense stop.”
Following the initial base year, in addition to the base rent, the tenant also pays the land-
lord for its share of operating costs in excess of the base year or expense stop amounts.
In this case, the total amount of rent paid by the tenant increases as the cost of operating
the building increases, including increases based on higher energy costs.
The so-called “net lease” is a different lease structure that leverages all of the costs
of operating the building to the tenants. Under this structure, the tenants pay the land-
lord a base rent, plus an additional charge for costs of operating, maintaining, insur-
ing, and managing the building. Here the tenants bear all of the risks that the building
operating costs will increase; however, the entire benefit of any reduction in building
operating costs accrues to the tenants, not the landlord. Historically, the net lease
structure has been utilized predominantly in single-tenant and retail lease settings.
While the net lease may provide some incentive for tenants to minimize operating
costs, it does not directly reward a landlord for designing, constructing, and main-
taining the most environmentally conscious and energy-efficient building.
Under either the gross lease or modified gross lease rent structures, the landlord has
an incentive to control the costs of operating the building in order to maximize the
rents received from the tenants, which in turn maximizes the value of the building. As
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such, this creates a financial incentive for landlords. This incentive must be supported
by the terms of the lease agreement.