Green lease

With real estate growth continuing and a near Asean integration, green building features will join the centerpiece of building tenancy negotiations.

There are three or four times more tenant building occupants than owners in most cities. And business is getting more conscious of the environmental impact of buildings, a record 35 percent of total carbon emissions. So for corporate social responsibility and for good public relations and corporate branding, the commercial building tenancy market is coming up with real estate sustainability initiatives.

Responsible property management in advanced countries is now developing profitable “best practices” benchmarks for professionally managed buildings. There is also money in it.

Singapore has years ago targeted their total building stock to be green in a specific number of years, and today they have “greened” a good fifth of their building stock. Landlords and tenants are enjoying higher rents, and water and energy savings, and higher employee productivity due to good indoor quality.

Energy consumption of a building is determined not only by its design and method of construction, but also by the behavior and culture of the tenant or occupant.

What are the benefits for the building owners and tenants of commercial buildings for adoption of environment sustainability clauses in their lease contracts?

Green leases are now gaining more and more popularity due to their ability to further improve the environment over the life cycle of a building at the same time benefiting both the landlords and the tenants who occupy them.

What is a green lease?

A green lease between the landlord and the tenant includes environmentally sustainable development provisions to ensure that the use and operation of a building lessens the impact on the environment, and assures good indoor air quality. Green lease allows landlords and tenants to set targets for energy, water, indoor air quality and recycling.  It also allows landlords to implement green retrofits to existing buildings.

There are two major types of leases. One is net lease where tenants pay for rent, property taxes, insurance and building operation expenses.

The other type is called gross lease where the landlord assumes responsibility for building operation and other costs.

The problem is that in a net lease, there is no incentive for the landlord for making any energy-efficient improvements since they do not pay for the high operating costs that could be reduced if the building adopts green-building measures.

On the other hand, in a gross lease, tenants do not get incentives to practice energy and water conservation in their units if the savings are not directly reflected in their monthly utility bills. They are billed usually on per square meter floor area basis for their utility use.

This predicament is termed split incentive. This is addressed by utilizing the energy efficiency pass-through clause by allowing capital cost to be passed on from building-efficiency investments to the tenants.

Pass-through is the process of offsetting increased costs of improvements by raising rental prices only to the extent of the savings.

The government could give real-estate tax breaks and legislate for well-regulated green loans to property owners. The government could also set a target date for old and existing buildings to meet sustainable standards for the sake of the building rental market.

The Philippine Green Building Initiative (PGBI) helps building owners assess the environmental sustainability features of their building. Among the areas are mainly energy use, water consumption and materials used in construction. PGBI is joined by nine building professional organizations.

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