Sustainable Development – Goodwin Procter
L.A.’s Long-Awaited Expo Line Opens on 4/28
It used to be an accepted truth that to travel anywhere in Los Angeles it would take you “20 minutes.” But as the City’s population has grown and streets have become increasingly congested, a 20-minute trip seems like a pipe dream. However, LA’s infamous traffic is expected to finally receive some relief with the opening of Phase 1 of the much anticipated Expo Line this weekend.
The new 8.6 mile line is the first light rail, mass transit line to serve West Los Angeles since the 1950s. The Expo line is expected to eventually shuffle 64,000 commuters a day between Downtown LA and Culver City, making it one of the most heavily-used lines in the country. That number could grow even larger when Phase 2 comes “online” in 2016. Phase 2 will expand the line 6.6 miles further west into Santa Monica.
Phase 1 features of the Metro Expo Line include:
- 8.6 miles long
- Directly connects to the existing 70-station Metro Rail system
- Estimated ride time between Downtown LA and Culver City: less than 30 minutes
- Ten new stations, three of which are aerial
- New public artworks at stations (Metro Expo Line Art Guide)
- 5.9 miles of new bike lanes
- Start of construction: 2006
- Grand opening: April 28, 2012
- Powered electrically with overhead catenary wires
Funding for the Expo Line was made possible by the Measure R, 1/2-cent sales tax for transit projects, passed by voters in 2008.
Visit www.Metro.net for more information on riding the new Expo Line.
Metro Expo Line features include:
- 8.6 miles long
- Directly connects to the existing 70 station Metro Rail system
- Estimated ride time between Downtown LA and Culver City: less than 30 minutes
- Ten new stations, three of which are aerial *
- New public artworks at stations
- 5.9 miles of new bike lanes
- Start of construction: 2006
- Grand opening: April 28, 2012
- Powered electrically with overhead catenary wires
Federal Government Gets Behind Adaptive Reuse
Old Post Office - Trump organization has acquired redevelopment rights for the historic federal structure.
Despite recommending sharp decreases in government spending across the board, President Obama’s budget for 2013 provides for a near-level $93.3 million for the EPA’s Brownfields Program, which provides funding for clean up and reinvestment in brownfield sites.
In addition, in a showing of bipartisan cooperation, the U.S. House of Representatives recently passed the Civilian Property Realignment Act. Intended to be a cost saving measure that would increase the government’s treasury by selling property and reducing building operating costs, the Act also encourages the adaptive reuse of government property. As government buildings, such as former post offices, are put on the market, savvy investors will be able to re-purpose the buildings for hotels, apartments and office structures. When the basic building frame already exists, developers don’t have to construct a project from the ground up, which provides opportunity for significant savings.
The development industry welcomes federal support for adaptive reuse. But enterprising developers can find state and local government incentives as well – incentives aimed at revitalizing urban cores. Watch for future posts detailing some of these programs and opportunities.
Adaptive Reuse Week
Prompted by a trip to @umamiburger’s UMAMIcatessen in downtown Los Angeles, we thought we would focus on Adaptive Reuse.
This week we will highlight creative adaptive reuse projects, provide an update on New Market Tax Credit programs, and discuss Rehabilitation Tax Credit Programs that may help turning old warehouse space into a popular restaurant with a cool crowd and a 45 minute wait for a table.
Green Leases and the Split Incentive Problem
Image via plaNYC Energy-Aligned Lease Language: Solving the Split-Incentive Problem Presentation
As mentioned earlier this week in our “Ask the Expert” interview with leasing expert Katie Murphy, one of the obstacles confronting green leases is the “split incentive problem.” In typical modified gross leases, the landlord must pay for major capital expenses such as energy retrofits, but most of the savings from reduced energy usage are realized by the tenant. Even when a lease permits the landlord to pass some of the improvement costs to the tenant as an operating expense, the landlord may be limited to amortizing those costs based on the useful life of the improvement. In addition, actual energy savings are difficult to measure, and tenants are often suspicious of a landlord’s savings estimates, making the recovery of such costs even more difficult.
The New York Mayor’s Office of Long Term Planning and Sustainability (OLTPS) recently assembled a group of real estate professionals to discuss this problem. The group examined industry experience and found that actual commercial energy savings for retrofits usually fall within +/-20% of the predicted savings. The group concluded that a landlord’s cost recovery for energy retrofits should be based on predicted energy savings, but that tenants should also be protected from under performance.
The OLTPS has developed model lease language to align the interests of tenants and landlords hoping to mutually realize the benefits of energy retrofits. To see the OLTPS’s presentation, including model lease language and financial models, click here.
Questions about green leases? Send them our way at sustainabledevelopment@goodwinprocter.com.
Expert Q+A: Green Leases – Part Two with Katie Murphy
Following is the second part of our two-part “Ask the Expert” series on Green Leases with Senior Attorney Katie Murphy.
Q: Between Landlord and Tenant, which party is entitled to the benefit of any rebates, credits or other incentives that accrue because of new sustainability efforts?
A: Tenants clearly reap the benefit of the savings to the operating expenses that result from energy efficient and other sustainability improvements to the property. There is more debate, however, as to whether the tenant should be entitled to the benefit of tax rebates or credits that the landlord secures from federal, state and local governments to perform these improvements.
Ultimately, the resolution should depend on whether the cost to perform the improvement was passed on to the tenant or not in its operating expenses. If it was, then the tax credit should be netted from the costs passed through or otherwise recognized in the taxes passed through to the tenant. However, if the landlord funded the costs of the improvement without passing through to the tenant, then the tenant should not get the benefit of the tax credit or other incentive which the landlord received for that improvement.
A gray area, however, exists for new leases where the tax credit or rebate is in effect only for the first few years of the term. Should the base year taxes for that tenant reflect the tax credit? Certainly, landlords would want it to as it will result in a lower tax base going forward. This will be a point of negotiation between the parties.
Q: What lease clause would a landlord need to be worried about that could turn a green effort into a bad lease?
A: The operating expense definition will be an important lease provision if the landlord’s goal is to include the costs in tenant operating expenses. If that is not a factor, then the lease clauses that may be at issue will depend upon the impact the new green practices will have on the tenants. Will access to the tenant’s premises be required? Will there be material new obligations on the tenants? Many leases restrict the landlord from changing the rules or imposing new rules if they will have an adverse effect on the tenant’s use of the premises.
Instituting recycling programs may not cause much trouble, but installing electric submeters for all tenant spaces and changing the way electricity is paid for by the tenants may be something that can not be done without the tenant’s permission or without some manipulation of operating expenses. Generally, leases don’t permit the landlord to back out electricity expenses from the expenses in the base year or other operating years, which is something the landlord would need to do if converting to tenant submetered or checkmetered electricity charges.
Q: How much cooperation is required from a tenant to implement green/LEED strategies?
A: Installations of energy saving equipment may require tenant cooperation only if access to the tenant space is required. Ongoing procedures such as recycling programs, energy reporting, or requiring green cleaning products will require more tenant cooperation unless the Lease clearly gives the landlord the power to implement these procedures or the law otherwise requires it. To avoid the need to plead with existing tenants, new leases and lease amendments should be drafted in such a way that anticipates these changes and gives flexibility to the landlords to implement and modify these procedures during the term as new materials and procedures evolve and LEED standards change.
Q: Any recommended strategies if you are trying to get your building LEED certified, but you are dealing with a tenant under an existing lease?
A: The best strategy is to have a well drafted lease document (or amendment) that reserves to the landlord the right to make all kinds of changes to the building and to institute these programs. In addition, you should spend the time to fully understand the project and how it will likely impact the tenants on a day to day basis while it is ongoing and when it is finished and try to incorporate items that will mitigate any objectionable impact on the tenants. You should also understand the benefits that LEED improvements have been proven to have on tenants and their businesses, including increased productivity and better working environments. You may want to visit other buildings that have done similar LEED improvements. Finally, you need to determine what costs, if any, you are planning to pass through to tenants and based on what language in the leases.
When you have all this necessary information, put on your salesperson hat and meet with each of the tenants to explain what you are planning, how it may affect them and how they will be better off when this is finished.
A special thank you to Katie Murphy for taking part in this interview. If you have questions about green leases, please feel free to contact us. We may include responses to the questions received in a follow-up post.
Have an idea for a future “Ask the Expert” post? Share it with us at sustainabledevelopment@goodwinprocter.com.
Expert Q+A: Green Leases – Part One with Katie Murphy
To kick-off our “Ask the Expert” series, Goodwin Procter’s Sustainable Development Editor Doug Praw sat down with Senior Attorney Katie Murphy to talk about how to implement sustainability in commercial leasing transactions. Check out part one of this two-part interview below.
Q: How can you allocate or cost share certain “green” expenses between Landlord and Tenant?
A: It really depends on the type of expense and the language in the operating costs provision of the lease. As different tenants in the buildings may have different operating cost provisions, it may be that a landlord can pass costs through to some tenants but not others.
Generally, if the costs are not major capital expenditures, but relate to day-to-day maintenance or building operations, they could be included in operating expenses. Costs of recycling, for example, would likely qualify.
Major capital expenses, however, are often excluded from the definition of operating expenses, except for the annual amortization of certain specified exceptions such as (i) costs which are reasonably intended to reduce operating expenses or create an operating efficiency, (ii) costs to comply with laws amended or newly enacted after the lease commenced, and, sometimes, (iii) costs to replace building and other equipment necessary to the day-to-day operation of the building.
A landlord would need to assess the type of improvements or alterations that are required to meet the LEED standard and whether they will fit into any of the foregoing categories. Even if they do arguably qualify, the landlord will likely be limited to passing through the annual amortization to tenants with varying remaining lease terms and so the recovery may not be much at all. However, with a LEED building, landlords may realize higher rental rates as leases roll and thereby recoup more of this investment in the higher rental stream.
There are costs associated with LEED, such as increased design and engineering fees and certification costs, that tenants may successfully challenge as being discretionary expenses and not really necessary to the day-to-day operation of the building or for the installation of a qualifying capital expenditure.
Q: How can the Landlord implement new operational procedures on the Tenant mid-lease term?
A: Again, it will depend upon the language in the lease and how onerous the burden on the tenant of these new procedures. If they are relatively benign, such as participating in a recycling program, then arguably the landlord could use the authority in the lease to promulgate rules and regulations to institute this program.
Some states have imposed legal requirements to measure and report electrical usage (which would be a LEED point) and so a tenant’s obligation to comply with laws may assist a landlord in mandating such requirements.
Landlords, when negotiating lease amendments with existing tenants, should use these opportunities to work in green lease provisions that will require the tenant to cooperate with landlord’s efforts to obtain LEED certification and to participate in landlord’s LEED or other sustainability programs. This is not limited to LEED and can be modified to permit the landlord to pursue other programs such as Energy Star.
Q: Should a lease treat sustainability defaults and remedies any different than traditional lease defaults and remedies?
A: This is a contentious issue on both sides. Tenants requiring a landlord to obtain or build to LEED (or other standard) or to maintain a building in accordance with LEED are met with landlords who do not want to be in default and risk the loss of a lease if the certification is not obtained or is not maintained, particularly since these certifications are subject to the discretion of a third party.
Similarly, tenants do not want such dire consequences if they somehow do something that impacts the landlord’s LEED certification either initially or during the term. As of yet, I have not seen any leases where the failure was an actual default, although some first drafts have included such provisions or others such as granting the tenant a right to reduce its rent or exercise self-help. I have not seen any survive to actual lease execution.
The questions that need to be asked and should drive the resolution are: Does the punishment fit the crime? Will the other party suffer real damage if the certification is not obtained and/or maintained? If so, is loss of the lease the appropriate remedy? Are money damages appropriate? In the end, most landlords and tenants don’t want to be exposed to these remedies and so for now we have not seen any real teeth in the green lease provisions that do survive to execution.
Stay tuned for part two of this interview tomorrow.
Green Leases: A Primer
Before posting our first “Ask the Expert” interview on the nuances and intricacies of implementing LEED in commercial leasing transactions it first helps to answer: What is a green lease? At its most basic, a green lease is a traditional commercial real estate lease that uses various leasing provisions to promote environmentally friendly practices. These provisions govern everything from rent structure and operating expenses to the build out of tenant improvements and environmental management plans. Currently, the most prominent green leasing standards are offered by the United States Green Building Council (the promulgators of LEED certification) and the Building Owners and Managers Association International.
While green leasing undoubtedly has many environmental benefits, its growth in popularity amongst building owner, managers and tenants can also be attributed to a green lease’s effect on a business’ bottom line. Common green lease features such as longer lease terms, a reduction in energy and water consumption, and the use of alternative on-site energy sources (e.g., solar panels) all drastically reduce building operating costs.
Yet, despite these potential financial boons, implementing sustainable practices often comes with a challenge. Raising environmental performance levels can present obstacles for both a landlord and a tenant in deciding which green initiatives to pursue and who will ultimately bear the cost. Our interview with Goodwin Procter Senior Attorney Katie Murphy will attempt to address some of these issues by exploring green leases in the context of the landlord tenant relationship.
Weekly Quick Hits – Green Lease Week
This week marks the first in a series of special “Ask the Expert” interview features. With the goal of providing news, research and valuable education to our followers, we will begin interviewing in-house experts on topics related to sustainable development. Katherine Murphy, a senior attorney in Goodwin Procter’s Real Estate, REITs & Real Estate Capital Markets Group, specializes in the representation of landlords and tenants in commercial lease transactions. On Wednesday and Thursday, we will post an interview we conducted with her about implementing LEED in commercial leasing transactions. Thereafter, we plan on posting an interview with Bruce Tribush that focuses on construction documentation in a LEED world. A third interview with Steven Comen will follow. Mr. Comen will be discussing infrastructure procurement and strategies. We hope you enjoy the series.
Now back to our regularly scheduled Weekly Quick Hits:
Stockton, CA eyes Chapter 9 – With about $702 million of long-term bond debt, the City of Stockton, California is deciding whether to file a Chapter 9 bankruptcy. (San Francisco Chronicle)
County Follows City on Energy Efficiency – Santa Fe County staffers are revising their building code to be more energy efficient. (Santa Fe New Mexican)
Support for Transit – Op-Ed piece regarding the House Transportation Bill. (Newsday)
Pritzker Prize Awarded to Wang Shu – Chinese architect Wang Shu wins Pritzker Prize for his juxtaposition of modern form with salvaged/recycled materials. (The New York Times)
@BarackObama’s Corporate Tax Reform Plan
Yesterday, President Obama asked Congress to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent. The President’s proposal can be found here, with commentary from the NY Times here.
Who Made USGBC’s Top 10 List for LEED Buildings?
Image via the Official Blog of the USGBC
The U.S. Green Building Council (USGBC) has announced the top 10 states for LEED-certified buildings per capita in 2011. The District of Columbia leads with 31.5 square feet of green building space per person. The top state is Colorado, with 2.74 square feet per person. Other leading green building states include Illinois, Virginia and Washington.
Over 44,000 commercial projects participate in the LEED certification program, encompassing 8 billion square feet of green space in all 50 states and in 120 countries. To see if your state made the top 10 list in 2011, click here.
