Real Estate Forum

NEWS FRONT
Helping Tenants and Landlords Go Green

CHICAGO—Many brokers are noticing that an increasing number of landlords and tenants want it known that they support energy sustainability. Jones Lang LaSalle has begun bringing many of them together to sign “green leases,” agreements that set out in detail how each will reduce energy use.

“We’ve been working on energy sustainability programs for five or six years now as an offering to clients,” says Michael Jordan, JLL’s EVP for sustainability. He believes “green leases truly are the future of commercial real estate.” Landlords who want to cut energy use naturally begin by examining their operating systems, but without an understanding with their tenants, any adjustments will have limited impact, he adds.

“I’ll never say that green concerns are the
drivers of location strategy,” but the increas-
ing popularity of things like recycling, alter-
native energy and the desire to slice energy
costs means “green concerns are working
themselves into the leasing process.”
“Green concerns do add a new level of
complexity to lease negotiations,” says Mark
W. Collins, regional director for JLL, since
green leases need to have built-in flexibility.
“Ten years from now, what we consider the
best practices in energy sustainability might
have changed.” Collins and Robert J. Roe
from JLL represented KeyCorp in its recent
negotiations with Columbia Property Trust
for a green lease at Key Tower, its Cleveland
headquarters. The companies announced
the 15-year lease extension for 487,000
square feet last month. The trust was repre-
sented by Jacobs Real Estate Services. The
terms were not disclosed, adds Collins, but
“Columbia was a willing partner and that’s
the best way for two parties to agree on an
overall sustainability plan.”
Jordan helps companies and brokers
incorporate sustainability plans into leases. A
successful green lease needs three main
components, he says. First, owners and ten-
ants must negotiate the details of the energy
efficiency programs they want in place. For
example, if tenants’ employees want recy-
cling programs, detailed negotiations can
“make sure there is recycling infrastructure
that can support the employees’ behavior.”
Second, a suitable lease will align energy
programs with agreed financial incentives.
“If you’re pushing your employees to turn
off monitors and lights but you don’t have
the right lease conditions, you might be sav-
ing energy but not costs.” And perhaps most
important, each side should agree to the
transparent collection and periodic evalua-
tion of energy-saving programs’ impact.

The Art of Crafting a Strong Net Lease

Net-lease investors would be well served to focus on more than a deal’s economic factors when drafting a new net lease. Experienced outside counsel and expertise at this key moment can ensure long-term protection of an asset’s value.

The art of creating a fundamentally sound net lease, after a tentative agreement is reached between a landlord and tenant, is a frequently overlooked skill among the real estate investment community. Too often, new leases include potential pitfalls, which while seemingly insignificant when the lease is executed, could have disastrous long-term consequences for landlords. The impact of lease deficiencies can range from severely compromising the sale value of a property to making refinancing impossible, or allowing a tenant to reduce his rent arbitrarily or even terminate a lease early.

When drafting a new lease, landlords often overlook the fact that long-term goals and strategies for a property may change during the term of the lease. Initially landlords may intend to hold a property indefinitely, but circumstances may change, necessitating sale or refinancing. If landlords do not plan for potential changes in strategy, lease deficiencies may leave them unprepared for a new course of action. It’s critical for landlords to draft leases that provide for any contingency they may experience during their ownership of a property.

Some of the most commonly overlooked lease provisions that could lead to challenging scenarios include: assignment language, financial reporting provisions, landlord expense obligations and co-tenancy provisions. While it’s impossible to address each potential issue individually, the following example illustrates one possible pitfall.

In 2008, a Midwestern shopping center landlord agreed to a ground lease with a major national bank for an out-parcel of one of its grocery-anchored centers. Satisfied that they were long-term holders of the center, and that the bank would invest more than $2 million in improvements and pay a good rent, the landlord did not spend a great deal time negotiating various smaller provisions of the lease. One of those provisions was an assignment clause that allowed the tenant to assign the lease to another tenant as long as the assignee had a net worth in excess of $100 million.

During the tumultuous financial crisis, the landlord decided to pursue a sale of the ground lease to free up capital. However, investors were concerned the assignment provision could lead to a significant downgrade of the credit behind the lease. To insulate themselves from the perceived risk, investors priced the asset’s capitalization rate 100 basis points higher than similar assets in the market. Ultimately, the lease deficiency cost the landlord more than $500,000 in total sale value. The landlord could have easily avoided the lease issue when the lease was drafted.

For landlords, potential pitfalls posed by various lease provisions may be difficult to catch and correct. Often the experience of third party advisors, such as experienced real estate attorneys, investment sales brokers and mortgage specialists, can be invaluable in these matters. These professionals have extensive experience and knowledge of net lease provisions and potential hazards they could contain.

(This column originally appeared in slightly different form on GlobeSt.com.)

By Brad Feller

Brad Feller is an associate director in the Chicago office of Stan Johnson Co. He may be contacted at bfeller@stanjohnsonco.com. The views expressed in this column are the author’s own.