by Katherine Noonan — Originally published in the May/June 2018 issue of BOMA Magazine. — BOMA International has published a model lease guide for more than 30 years. In 2005, BOMA revised the model lease form to address sustainability issues and the allocation of rights and obligations of parties regarding the same. As technological advances and approaches to sustainability issues have changed over time, BOMA International has updated the guide in 2008, 2011 and once again this past April in its latest version, Green Lease Guide: A Guide for Landlords and Tenants to Collaborate on Energy Efficiency and Sustainable Practices. Below are just a few of the key changes that appear in the new form.
Green certifications take many forms, all of which have their own requirements. Because developments in the green building industry are always changing, largely due to new technology, the requirements of green certifications are constantly being updated. This lease cites a number of LEED 3.0 standards, as these continue to be applicable even though LEED 4.0 is now available for certification purposes. Similarly, modifications to the ENERGY STAR® program have introduced options for benchmarking green standards for leased premises through the Tenant Spaces program. The language of this lease is not specific to any particular green certification program, but addresses green issues across the board and refers to specific green certification programs where applicable or helpful to illustrate a given issue.
Updated Financial Accounting Standards Board (FASB) Rules
The revised lease notes that new FASB accounting rules now require tenants to show most leases as capital expenses on their financial statements, rather than accounting for leases as off-balance sheet operating expenses. These FASB requirements started taking effect for public companies at the end of 2017 and will be required for most private companies by 2020. Among other things, these rules require tenants to include renewal options as capital obligations if it is determined that the exercise of the renewal option is more likely than not. This also has implications for how tenant pass-through obligations are categorized. If categorized as rent, then these must be shown as capital costs; but, if they are categorized as taxes or operating expenses, then they need not be capitalized. Though overall numbers might not vary, these rules could lead tenants to prefer net leases—with lower rent amounts and higher expenses—over gross or full-service leases, which have higher rent amounts because the rent is calculated to include tax and expenses.
Green Capital Improvements
The form lease addresses green building capital improvements, both required by law and those that a landlord may elect to undertake. Lease negotiations often focus on capital improvement pass-throughs, and important issues include whether the improvement is required by law, how a landlord documents an intended cost savings and how the cost will be amortized.
The form lease raises the possibility for on-site electrical generation and discusses some of the questions that would need to be answered before such an agreement between landlord and tenant could be finalized.
The form lease includes a clause prohibiting smoking in and within a limited distance of the building. This is consistent with the no-smoking requirement of most green certification programs. The language now appears in the body of the lease and discusses possible exceptions if a landlord does not control the entire prohibited area.
This version of the form lease addresses a wide variety of parking issues, including electric vehicle charging stations, carpooling, transportation management programs and bike racks.
Many green certification programs and some local laws require that entities gather and report certain information regarding sustainability metrics and efforts. The form lease provides that landlord and tenant will share information about the base building or the premises in order to allow the parties to comply with the requirements of a green building certification program. The provisions prohibit the parties from using such information against the providing party.
Green building standards and practices are constantly changing, and BOMA International’s revised form lease addresses a number of key advances while maintaining flexibility. The revised lease is a useful guide for both landlords and tenants for whom sustainability is a priority.
About the Author
Katherine Noonan is a member of the Real Estate Development and Complex Transactions Group at Ballard Spahr LLP in Washington, D.C. She also updated and wrote the BOMA International Green Lease Guide: A Guide for Landlords and Tenants to Collaborate on Energy Efficiency and Sustainable Practices, available now at store.boma.org.