Nothing but (Triple) Net: Why Green Buildings Earn More Green
Derek Warnick | June 24, 2011 at 9:52 am
“Compared to their conventional counterparts, green buildings are more profitable, less risky, preferred by investors, pull higher rents, and have higher occupancy….” Thus begins an interesting article by Erica Gies in Forbes on findings by the Capital Markets Partnership that demonstrate green buildings really do present a better business case for their owners than their “brown” counterparts.
While I didn’t have the $1,000 to verify CMP’s claims directly (alas, their report cost money), the point is pretty clear: green can lead to you making more green. A bit older, but free, is a report by CoStar from 2008 that shows “…green buildings outperform their non-green peer assets in key areas such as occupancy, sale price and rental rates.”
High level, I think the reasons for this revolve around the style in which many, if not most, leases for newer commercial property are written today. In a word, “triple-net.” The triple-net lease is one where the tenant is reasonable for utilities and basically every other expense the building incurs. This means that if the building is more energy efficient it will lower the tenant’s costs, because their utility pass through charges will be less. Green buildings, and LEED buildings in particular, tend to be newer, and many of the measures that make them energy efficient also make them more comfortable and less prone to maintenance needs. This means that if you rent a building with a new energy efficient roof, not only should your utility bills be lower, but the risk of you having to foot a piece of the bill for roof repairs would likewise be reduced.
The flip side is the gross lease, where the tenant pays a fixed, if often escalating, rent and doesn’t care about energy costs or maintenance. It is interesting to note the specific problem here: if a landlord becomes green ahead of time, he or she can charge higher rents because of it. But if a landlord wants to upgrade an existing building that has a net lease, he or she is left with the prospect of lowering tenants’ energy bills with no way to recover the investment. So, put simply, there is plenty of incentive for new builds to be green, but unless you rent your properties on a gross lease, it can be tough to create the economic case for retrofits without significant tenant support, regardless of how much money and energy can be saved. If my rent is already low and fixed, agreeing to pay a higher fixed rate for a hypothetically lower variable energy cost can be a tough sell indeed.
As the commercial building stock rolls over, we should see green and LEED become the new norm, and inefficient buildings being shunned like asbestos or lead paint.
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