Tenant Leasing Illustrated – October 2019 – Environmental Comedy And Your Lease

Climate change or not, something is going on, whether it is super intense hurricanes such as Dorian or the rainstorm that wiped out my driveway last month.

Yet, there are still those who do not see the urgency which can be frustrating to many and particularly so to scientists.

An article from The Atlantic talked about scientists using satire to make their scientific case.

Certain French scientists posted the following in a scientific journal: “We do not care about planet Earth. If humans are exhausting the planet’s resources, it’s Earth that needs to adapt – not us.”

The authors then warned: “Should planet Earth stick with its hardline ideological stance… we will seek a second planet.”

That ought to show Mother Nature.

Professional comedians have also taken up the topic, such as Stephen Colbert who tweeted: “Global warming isn’t real because I was cold today! Also great news: World hunger is over because I just ate.”

Not much to do but laugh or cry, but does it really help the problem?

According to The Atlantic, there is a whole field of research showing that joking about serious subjects can capture people’s attention, make complex topics accessible and even sway people’s beliefs.

Maybe an (occasionally) humorous newsletter could explain the complexities of commercial leasing. Nah, commercial leasing is a subject much too sacrosanct to joke about!

In the climate change humor department, there is a fine line between comedy and tragedy.

To quote that well-known commercial leasing attorney, Mel Brooks: “Tragedy is when I cut my finger. Comedy is when you fall into an open sewer and die”.

So funny things are things that happen to others, but what happens when we are all facing an open sewer?

Tragedy is when a tenant does not pay its legal bills. Comedy is when they hire a leasing attorney in the first place.

Maybe that did not come out quite the way I intended.

Climate change will also have an effect on commercial leasing.

The New York City Council passed its own Green New Deal this year with a number of environmental requirements, including one creating carbon emissions limits for most buildings over 25,000 square feet codified as Local Law 97 of 2019.

Local Law 97 sets a goal of reducing building emissions by 40% by 2030 with requirements for two different compliance periods (2024-2029 and 2030-2034) to meet annual whole-building carbon intensity limits and requires the submission of emissions intensity reports or the payment of substantial fines.

Robert Meier, P.E., Business Development Manager at SourceOne, a leading energy advisory company [RMeier@s1inc.com] tells us that carbon emissions can be reduced through efficiencies in base building and supplemental HVAC, common area and tenant lighting and sensors and controls.

As Mr. Meier points out, the rules for this law are not yet finalized but changes cannot occur overnight so owners will need to start the process and, while such efficiencies can be expensive, over the long term they typically produce an excellent return on investment.

Why does this matter to tenants?

Well, to a building owner tragedy is having a new legal requirement to comply with and comedy is passing on as much of its costs onto its tenants as possible.

Costs to meet carbon intensity limits through improvements to the building and common areas, including capital costs, are likely to be passed on to tenants as building operating expenses.

Other costs may be imposed directly on tenants with respect to their individual spaces since tenants generally represent over fifty percent of a building’s energy use.

And with increased attempts to address climate change, Local Law 97 will no doubt soon be accompanied by similar legislation in New York City and elsewhere.

To avoid potential tragedy with environmentally focused initiatives, follow these six suggestions:

    • Avoid limitations on your capacity. Make sure that increased efficiencies to limit carbon emissions do not affect your ability to run your business, such as by reducing the effectiveness of your HVAC system, your premises’ electrical capacity or available lighting.

    • Calibrate building-wide expenses. These costs will undoubtedly be passed on as operating expenses.
        • Address base year. Make sure these items charged back to you on a building-wide basis are covered in your base year or, if not, that your base year can be modified.
        • Try to exclude capital items. The largest environmental initiatives may involve costs required by GAAP to be capitalized. Your initial argument should be that these costs should remain with your landlord as owner of the building.
        • Place limitations if capital items are unavoidable. As with any operating expense escalation, it may not be possible to exclude all capital items, so these larger costs should be appropriately limited:
            • Only allow the inclusion of capital items required to comply with laws enacted after the date of your lease. Your landlord may want to include compliance with laws enacted prior to the date of your lease but with respect to which the obligation to comply first arises after the date of your lease.
            • Require that the work be intended to reduce the building’s carbon intensity and actually do so (or at a minimum such intention should be supported by third-party reputable and industry standard analysis and subject to your review).
            • Such capital costs should be amortized on a level payment basis commencing when the item in question is put into service and continuing over such item’s useful life in accordance with GAAP.
    • Require bidding. Provide that any costs which exceed some agreed upon amount be bid out to at least three or four independent contractors.
    • Allow for audits. As with any operating expense escalation, provide for the right to audit Landlord’s books with an independent dispute resolution mechanism.
    • Focus on costs limited to your space. Since tenants generate much of a building’s energy use, landlords may require tenants to make their own spaces more energy efficient either as part of the initial construction or perhaps a mid-lease upgrade. If you are sharing in the building-wide costs, then your landlord should share in the costs for your individual space, perhaps with a tenant improvement allowance or additional rent abatements.
    • Share savings and incentives. To the extent you share the cost of energy upgrade projects you should also expect to share in the monthly utility cost savings, whether as a pass through or directly metered. In addition, request to share in any available incentives or utility rebates; a “win-win” as both parties have an incentive to cut carbon emissions.
    • Cap your annual costs. You may want to limit your annual increase in costs (e.g., 105% of the prior year’s costs), whether billed as building-wide operating expenses or individually to you, so that any large costs can be spread out over time.
    • Remember ancillary benefits. Meeting carbon efficiencies can help in achieving LEED status, Energy Star Ratings and other environmentally friendly ratings that have benefits for attracting young talent and general positive publicity.

Tragedy is this newsletter showing up in your mailbox every month. Comedy is knowing I practice commercial leasing law so you do not have to. Follow the six suggestions above and your building’s environmentally focused initiatives will not end in a tragedy.