Green lease is recently becoming more popular among real estate investors and landlords. So, if you are a landlord or a tenant looking for new trends in real estate investing and searching for ways to increase your return on investment, then continue reading this blog and learn all about green leasing and how it can benefit you and your real estate investment!
Related: 6 Real Estate Market Trends of 2017
Why is it important to improve the environmental performance of buildings?
An increasing emphasis on carbon footprint reduction and sustainable green building is leading real estate investors to “green-up” their real estate investments. Studies show that 30% of energy consumption is attributed to the real estate sector, a high percentage that is contributing more and more to climate change, a major global issue of our time.
The emerging of new trends in real estate investing is helping real estate investors and landlords to achieve sustainable long-term investments that are resource-efficient and have lower carbon footprint on the environment. In other words, a sustainable future of the real estate sector is only guaranteed by lowering the environmental impact and improving the performance of buildings.
What is green lease and how does it work?
Green lease is a rental contract between landlords and tenants that offers substantial benefits to both, by giving them the framework under which they can achieve energy efficiency and other environmentally sustainable goals throughout the lease term. The green lease is negotiated between involved parties that could include a tenant and a landlord or a combination of tenants and a landlord. The final result is a rental agreement that includes provisions to be implemented through a careful process to assure maximum effectiveness of the green lease.
Green leasing is the method used to rent out a green building, a type of property that is designed, built, operated, and maintained using environmentally responsible and resource efficient processes. The green lease is needed to address how the operating costs of the investment property should be addressed and what the duties and obligations of tenants and landlords are. Furthermore, a green lease can provide the tools for a better management and operation of buildings such as management plans and future sustainability targets.
Information included in the green lease:
- What are the environmental measures to be taken to achieve and maintain energy efficiency and sustainability goals? For example, indoor temperature regulation, water use, and materials used to maintain the property.
- How will the tenants and landlords cooperate to achieve these measures?
- Which party is responsible for monitoring the compliance with these measures?
- What will happen if in case of failure to meet the targets?
- How are the costs and benefits allocated between the landlord and the tenants?
What are the common issues of green leasing?
A common issue of a green lease is the split incentive problem. It can arise where the costs and benefits of implementing sustainability measures are not aligned together. For example, in the case of net lease, where rent and building operation expenses are charged to the tenant, the landlord has lower incentives to invest in new equipment and technologies that may improve the performance of the building, since the tenant is already paying for the operating costs of the building. A solution to the split incentive problem is to use a gross lease in which the operating costs are already included into the lease so that owners would have an incentive to lower the operating costs of their investment property since it would increase the net operating income. In addition to the split incentive problem, green leases can be more complicated to negotiate compared to traditional leases as more experts are needed to find a common ground between landlords and tenants, but they also offer several advantages!
What are the benefits of green lease for landlords
1- Reduce energy consumption and cut operating costs: Being a landlord is very challenging, especially when faced with high operating costs that lower the net operating income of the investment properties. Adopting green building solutions and using green leasing as the only method to rent out your rental properties can lower energy costs by about 25%. Green leases can also increase the net operating income of a real estate investment by making buildings eligible to financial incentives in the form of tax deductible charges.
2- Happier and long-term tenants: From a tenant perspective, adopting a green lease can lead to a significant reduction in operating costs and a better work environment. In addition, in case of commercial real estate, companies can enhance their reputation for better corporate social responsibility (CSR) in the sense of giving more to the environment, their employees, and the community in general. Environmentally efficient rental properties are more attractive to tenants and therefore produce higher return on investment for landlords. In other words, benefits to tenants can be also considered as benefits to landlords, since they encourage a higher occupancy rate and thus higher returns for landlords. Green leases can be an opportunity for landlords aiming to “green up” their rental properties, therefore, achieving a higher level of satisfaction and limiting disputes that may arise with landlords.
3- Competitive marketing advantage: Implementing environmentally friendly measures such as recycling waste and using energy efficient appliances to achieve a certain sustainability rating can place your rental property high in the market. Studies show that buildings that are certified under LEED rating system (Leadership in Energy and Environmental Design) can achieve higher rents and greater occupancy rate than non-certified buildings. Therefore, a sustainable work environment fostered by a green lease can attract more high value tenants.
Related: 8 Steps to Becoming a Landlord
Green leasing can be a great opportunity for real estate investors, especially with the increasing awareness towards environmental sustainability and the rise of new trends in real estate investing that aim to lower the environmental impact of the real estate sector.
Use Mashvisor to find real estate properties that offer green leasing options!