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Valuing sustainable Leases: understanding Green Lease structure is essential as appraisers learn to value high-performance buildings.

When it comes to the valuation of "green" commercial buildings, appraisers face new challenges. Finding comparables remains difficult. The cost method does not adequately reflect long-term benefits from upfront costs for smart capital improvements. The income approach seeks energy efficiency as a way to demonstrate reduced costs and a boost to net operating income over time but that also has limitations.


New technologies and sustainable management techniques can provide greater conservation, efficiency and control over energy, water and material resource costs that lead to greater values. Unfortunately, our traditional lease structures fail to align the benefits with the burdens of those objectives. The "Green Lease" is a tool that will break those barriers and create a means to achieve higher valuations for prospective owners, investors and lenders as well as to the tenants and local municipalities they serve.

As both a contract and a conveyance of a real property interest, a lease comes with segregated components of value fractured from obligations to the building as a whole. Enhanced values can be derived with an integration of more communal objectives and fair allocation of shared benefits as well as costs. A Green Lease is a form of lease transaction that seeks to adopt sustainable business objectives and give greater recognition to mutual advantages for both landlords and tenants. Commercial buildings consume enormous amounts of energy and water as well as material resources that require increasingly efficient and effective ways to use those resources and limit the impact of carbon emissions traced to a building as a source. A Green Lease structure requires the parties to give meaningful consideration to those direct and indirect connections to a broader local and global environment.

Larger corporate concerns already face mandates for corporate responsibility from their shareholders and boards of directors to pursue integrated design and sustainable management practices. Third-party certifications such as a LEED certification from the United States Green Building Council or the achievement of a good score from the Environmental Protection Agency's Energy Star Portfolio Manager program verify leadership and direction. Moving beyond that requires collective commitments from landlords, tenants and their agents to keep building operations on track with proper maintenance, repairs and replacements to attain these goals throughout a building's life cycle.

Green Leases define the levels of commitments and obligations to ensure a maximization of indoor air quality and a minimization of energy, water and material resource consumption. This means mutual responsibility to measure and verify the usage of electricity and water with energy efficient equipment such as light sensors, smart meters and water regulators in tenant premises. It involves fair allocation of costs for retrofitting machinery, equipment and lighting for common areas and accommodation to community storm water management and public transportation access policies. It requires mutual support for recycling programs, office supply procurement practices and contractor regulation to maximize use of recycled or locally sourced materials for tenant improvements. It ensures monitoring and certifying cleaning services with low VOC levels and minimized supply use. It requires vigilance for an effective energy and environmental management plan to encourage a greater mutual accountability and transparency with audits beyond operating costs normally passed through to the tenant for its percentage share.

Smart growth is being mandated with increasing fiscal and tax incentives as well as regulatory compliance mechanisms to address environmental, energy and climate change concerns. Success in meeting those social mandates will mean higher property valuations. New objective valuation methodologies must be established that can capture and report successful added direct as well as indirect or intangible values that high-performance buildings with effective sustainable building practices will create. Their unique advantages will be sought out by investors, lenders and tenants as well as governmental authorities. This will result in a move of capital into superior sustainable product to avoid obsolescence issues that are already beginning to surface. As appraisers search for a new objective approach to value this new developing asset class, a thorough understanding of a Green Lease structure will become more essential.

FREDRIC B. PROHOV has been an attorney for 30 years in Chicago. His primary areas of practices are in real estate, finance and secured lending. He can be reached for comments at

by Fredric B. Prohov, J.D., LEED AP
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Title Annotation:feature
Author:Prohov, Fredric B.
Publication:Valuation Insights & Perspectives
Date:Mar 22, 2009
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