Avoid Red Ink with Green Leases

By Airst, Randall; Airst, Susan | Journal of Property Management, September/October 2010 | Go to article overview

Avoid Red Ink with Green Leases


Airst, Randall, Airst, Susan, Journal of Property Management


Moving to a Green Gross Lease Can Benefit Landlords and Tenants

THE MOVEMENT TOWARD SUSTAINABLE OR GREEN BUILDINGS IS WELL PAST ITS INFANCY, AND CONTINUES TO GAIN MOMENTUM. Green leases need to keep pace, and reflect the environmental and economic goals of both tenants and landlords.

A variety of issues must be addressed in a green lease. However, one preliminary, yet crucial determination of sustainability is whether the lease is net or gross.

Today, many first-class properties are governed by net leases, whereby tenants are responsible for the property's operating expenses, such as maintenance and utilities. Landlords shift the risk of high operating costs, passing through any costs that exceed the annual estimate to the tenant.

Additionally, because landlords with net leases are not responsible for operating expenses, they have little incentive to reduce them. To the contrary, many net leases impose administrative fees of around 15 percent and management fees of around 4 percent. Consequently, the higher the operating costs, the higher the administrative and management fees imposed by landlords and their managers.

As a result, a building's sustainability can become an afterthought to tenants, who have little control over operating costs, and to landlords, who pass the buck on some of the very operations that allow them to market their buildings as green.

A return to gross leases, however, can benefit both landlords and tenants, as well as foster a building's sustainability. Landlords and tenants could agree on a minimum or base rent, coupled with an allowance for operating costs. The minimum rent and allowance would be totaled, and together with operating costs such as common area utilities, real estate taxes and insurance premiums, would represent the gross rental payment owed by the tenant. …

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