In 2013, British-based retailer Marks & Spencer announced they were implementing “green building” clauses in their leases. The purpose was to help their retail portfolio achieve higher environmental standards. Marks & Spencer partnered with shopping center managers to facilitate the sharing of energy data, set energy targets and guide green retro-fit programs. This set the standard for future tenants as well.
The move signaled a new, collaborative approach between landlords and tenants in terms of sustainability and green buildings. Since then, many more companies have declared set sustainability targets for their real estate footprint. This includes many companies on Newsweek’s Green Rankings, for example.
The Changing Relationship Between Tenants and Landlords
Negotiating leases and operating terms was once a “zero-sum” game between landlords and tenants. It has since evolved as both sides realize the benefits of collaboration. This is pertinent, as increasing operating costs and ESG requirements impact both building managers and occupiers. A lower environmental impact overall is a win-win for both.
“Driven by the requirement to meet ever more stringent environmental legislation and reduce occupational costs, the two parties are increasingly working together to overcome the traditional ‘split incentive’ when it comes to allocating the costs and benefits of energy efficiency measures.” —TH Real Estate
Finding Tenants For Your Green Building
While the Marks & Spencer example highlights action taken on behalf of the tenant, not all property managers and investors are as lucky in sourcing progressive occupants. In most cases, managers need to develop their own best practices when finding a suitable tenant for a green building. Here are a few key things to look for:
A Collaborative Approach to Negotiations
As noted by TH Real Estate above, traditional landlord-tenant relationships take a “split incentive” approach to lease negations. Compromise, not collaboration is the end result. A converse strategy is to focus not only on direct occupancy costs, such as rent and term, but also on how mutual energy management practices can impact (and lower) net operating costs overall.
Established Corporate Social Responsibility Policies
As part of the review process, landlords should also note the potential tenant’s Corporate Social Responsibility (CSR) policies. How do they compare to their industry peer group? How detailed are their policies on energy conservation and sustainability? Do they have a working knowledge of real estate operating costs?
Though relatively simple, size is also a key factor for a green building tenant. The larger the tenant is, the more capital available for CSR programming. In addition, larger tenants will typically invest more in their spaces and take longer leases. Both bode well in the maintenance of a property-wide green building program.
Green leases are gaining popularity in the real estate industry. They are detailed contracts that set environmental standards and operating practices for the tenant. They can also help align the financial and energy priorities of tenants and building managers. Key items in a green lease include energy use, materials, tenant travel habits and waste reduction.
Building managers should also look for tenants that are technologically innovative and progressive. While many companies consider themselves green, firms that understand the benefits of data, software and mobile applications are more likely to adopt similar practices in their energy management and reporting. For example, Deloitte plays a highly technological role as the lead tenant for the environmentally progressive Edge building in Amsterdam.
Familiarity With Green Building Certifications
Potential tenants should be familiar with LEED, BOMA BEST and GRESB—all prominent green building standards and certification systems. They should know their policies and impacts. Tenants may consider themselves “green”, but there could be a mismatch in green practices between the landlord and tenant if the occupant doesn’t know these green building best practices.
Looking for more information about LEED and environmental best practices? Here are resources to help set up, or maintain, your green building program:
- How LEED Increases Real Estate Value
- How to Use Assessment Data to Build a Green Building Program
- Green Buildings: USGBC Economic Impact Findings
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