Envisioning the 2020 Lease
As time marches on, the inevitability of change is a constant reality for all of us in the real estate industry. In past blog posts, including our recent July 2015 Game Changers issue, we've highlighted how the built environment is evolving in response to changing demographics, technology, sustainability and a whole host of other factors.
For every asset type, from residential to industrial, value is inextricably linked to staying relevant. We believe that the lease — which governs how tenant-occupied, income-producing property is used, operated, maintained and renovated — significantly influences the rate at which the underlying property can evolve and stay relevant, or not.
Envisioning the 2020 Lease
As a result, we envision that the ideal lease of 2020 is one that anticipates, encourages and facilitates changes over the lease term that will optimize the value of the subject property in ways that traditional lease structures do not.
Getting to this ideal lease will be tricky. Most efforts to step away from traditional lease structures are met with great resistance and those traditional structures often incorporate a delicate and hard-fought balance between control and certainty on one hand, and flexibility and innovation on the other.
Energy Aligned Green Lease
However, there is a precedent for advancing into new leasehold territory in order to facilitate innovation and value creation that I believe holds the key to developing the ideal 2020 lease. It is often referred to as an Energy Aligned Green Lease.
The Energy Aligned Green Lease emerged from the realization that traditional lease structures disincentivize landlords from making energy efficiency improvements to their properties. To correct this, a New York City task force of real estate professionals was convened by Mayor Bloomberg as part of New York City’s PlaNYC. The fruit of their efforts, a provision that requires the tenant to contribute to the costs of future qualifying energy efficiency improvements at a rate that makes it financially palatable for the landlord to make these improvements, is the crux of an Energy Aligned Green Lease.
The details governing this requirement on the tenant's part coalesce into a significant departure from a traditional lease, whether it be a triple net, gross or modified gross lease; and in the details, lie the differences that make the difference between inaction on the landlord's part and taking action to improve the property and thus add value.
Future-Proof Your Leases Now
For sure, challenges still abound, including the challenge of getting landlords, tenants and their attorneys to incorporate this and other "new" structures into their leases.
As the pace of change accelerates, the need for building greater flexibility into leases will increase. I believe the Energy Aligned Green Lease is a potent example of a 2020 approach to leasing that incorporates the flexibility necessary to facilitate asset value optimization.
Now we just have to use it.