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Green Leases – All You Need To Know

images (4)The mention of something called a green lease may conjure up something by a sea-sick lawyer or scribbled on elephant dung paper. But it is far more practical than it may sound to some who still have the idea of green being about separating the garbage or wearing daisies in strategic places. Green leases are here to stay and it’s likely if you have a foot in commercial property in South Africa that you’re going to need to know what one is.

Crudely a green lease would include obligations on the landlord and tenant to achieve targets for energy consumption and sustainability, among others.

At a residential level green leases would encourage landlords and tenants to agree to work together to make a home greener. The property owner typically commits to manage the rental in a sustainable way while the tenant pledges to reduce energy consumption, to recycle whenever possible and to follow other green lease terms.

green-leaseIn the world of big buildings and commercial interests such discussions can leave one quite discombobulated. As serious as these matters are, in order to understand the necessity of green leases we need to extricate ourselves from some of the genuine earnestness and angst with which the subject is typically approached.

No better place to do so than the good old land of Oz. No worries mate! Well it’s true, despite the rumblings for things to go green in the construction world in the US and Europe for many years, it was the practical Aussies who have played such a pioneering role in the world of green building and thence the accompanying lease framework.

The essential motive for the bringing about green leases in Australia was its federal government’s resolution not to inhabit structures that did not make a 4.5 star NABERS (not the soap opera) rating. NABERS is the operational rating system for carbon emissions in Australia. South Africa is in the process of developing a similar system. More recent legislation relating to mandatory disclosure has further strengthened the Australian regulatory framework and has had a positive impact on green leasing. The carbon emissions legislation in the UK has played a similar role in framing green leases.

Since the Australians have been down this road before, let’s consider what has typically been present in their green leases. According to Commercial Property firm Cousins Business Lawyers, experts in green leases, indicate the following ingredients in Australian green leases:

  • A commitment on the part of the landlord to maintain the central services of the building to such standards to ensure the Australian Building Greenhouse Rating is retained.
  • An obligation on both parties to consider “in a reasonable and co-operative manner” whether an improved rating can be achieved during the term of the lease and, if they agree, to take whatever steps lie within their control to achieve that rating.
  • Both parties to commit to an energy management plan to operate the building in accordance with prevailing government policy on energy conservation.

green-lease1Over in the UK there are increasingly stringent building regulations requiring developers to build more energy efficient buildings and Green Leases may be being used as a device to attract “Green Tenants”.  It is anticipated that in the EU and UK in the future, property owners will be under pressure to improve the energy performance of their buildings as a result of the introduction of Energy Performance Certificates (EPCs) for commercial premises and Green Leases may have a key role in enabling the implementation of the recommendations that will form part of EPCs. The commercial property industry is trying to anticipate legislative pressure that may manifest itself in the same way as it has done in Australia.

Here in South Africa, just last year, The Green Building Council and SAPOA (South African Property Owners Association) put their heads together and rather helpfully released a “Green Lease Toolkit” similar to the UK version and those used in some US cities. The Toolkit aims to facilitate a smoother path than some of the pioneers in this field have experienced thus far. In the Toolkit are some contemplative thoughts like:

“Green buildings present a textbook example of economic game theory. Each party stands to gain if the other acts, but loses if they act and the other doesn’t. The challenge is in negotiating an agreement where both parties act for green buildings to achieve an optimal equilibrium – a ‘win-win’. An informed tenant may be willing to pay a higher base rental if the costs and efficiencies of occupation are improved, so that the joint gain needed to stimulate investment into green development, can be achieved.” PG17 Green Lease Toolkit.

images (1)The Green Building Council and SAPOA’s document make the point that mutual understanding is what underpins any green lease.  They believe the primary purpose of the lease is to a) improve the operational performance of green buildings and b) deliver to landlords and tenants an “equitable share of the incremental value provided by green buildings.”

Finally the toolkit, which has a wealth of information and opinion from South Africa’s leaders in the field, States that a Green Lease seeks to achieve its goals through the governing of:

  • The base building and fit-out quality in buildings
  • The contractual requirements of facilities managers
  • The behaviour of tenants from an environmental perspective
  • Regulation of governing bodies (through continuing education)

Clearly conceptualising of the practical elements as well as articulating the more abstract notions has come together in a very sober yet encouraging document that behooves potential tenants and landlords to seriously consider the work of those who have gone before, as well as follow the advice of men and women who have laid a foundation on which others may build.

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Whilst the aims of green leases are admirable enough, the provisions that impose obligations on the parties may have some unforeseen consequences:

•      For tenants, the cost implications of the green provisions may only become apparent some way into the lease.

  • For landlords, the level of rent on review may be lower if the green provisions are deemed to be onerous on the tenant.
  • As these provisions are largely unknown and untested in this South Africa, the uncertainty surrounding them may make green leases more difficult to sell on.

Regardless of one’s opinion of matters green it’s clear that green is the future and green has benefits. One thing is certain; if you’re going to get a green lease drawn up make sure you use someone with green fingers, that is someone who knows all about the new strides in green leases.

Cape Town Office Vacancies- Today and Tomorrow

Some would say that we build for tomorrow not for today. For some time now Cape Town CBD has seen few new construction projects and given the latest office vacancy, figures that may be just as well.

Looking at the latest SA Property Owners Association (SAPOA) office vacancy survey for 2011 Capet Town’s six out of seven nodes face a trend of growing vacancies for the previous quarter. The survey shows the amount of vacant space is also rising in most decentralised office markets.

For combined Premier A and B grade offices:
Cape Town CBD is at 10.5% up from 9.7%.
In the Southern Suburbs: Claremont is at 13.7%; Rondebosch & Newlands 7.3%.
In Tygerberg, the Bellville vacancy average is 9.4% whereas a year ago it was 6%.
Office vacancy around the broader V&A Waterfront precinct is at 6.9 per cent.
Pinelands is at around 3.4%. Century City however has dropped over the previous year to 8.8% from 10.5%.
Here development activity has increased dramatically, with works on the Estuaries 2, Park Lane and the Bridgeways Precinct currently in progress.

There is some evidence that tenants have attempted to reduce their rental bill by securing cheaper space. This may have played a role in underpinning the demand for affordable CBD space.

Looking at smaller business owners, it may be that many people have gone back home to set up office in the garage – back to cottage-work environments away from the big city.

The point that vacancy rates are growing in Cape Town should not come as a shock. While weakening economic circumstances reduce the demand for space and increase vacancy rates, it is equally important to consider the effect that lagging development activity has on the market. Vacancy rates rise and fall because development activity is often poorly co-ordinated with demand.

Of course an obvious down side for property owners is that a rise in vacancy rates also has the potential to increase operating costs. In an environment of rising vacancy rates, property owners have little choice but to absorb operating costs that would normally be passed on to tenants. This issue has become particularly pertinent to South African property owners in general who have experienced a significant rise in electricity costs which would normally be passed on to tenants.

But the are some people that are looking ahead at the future of space in Cape Town with a steady confidence in the long term office market. In the Clock Tower precinct for example, Allan Gray is making its presence felt with a confidence inspiring project.

The new Allan Gray building is a R1 billion mixed use complex and claims to be one of Cape Town’s first Green buildings. The development is the biggest at the V&A Waterfront since the state-owned Public Investment Corporation (PIC) and Growthpoint Properties bought the iconic landmark for R9.7bn earlier in 2011.

Another office development worth mentioning is the new Portside building which will be the provincial headquarters of FirstRand’s three principle divisions: FNB, Wesbank and RMB. There will also be  an additional 25 000m² of prime space up for grabs for leasing to corporate and retail tenants. The project on the corner of Buitengracht Street and Hans Strijdom Avenue is a partnership between First Rand and Old Mutual, it should see completion by 2014. This bodes well for the precinct buoying up confidence in the area.

Other projects in Cape Town in the near future would include the new 20 storey building on Bree Street that will host legal offices and present more office space to fill. Currently underway is the 18 storey The Mirage hotel and mixed use development that should be complete by 2013.  Cape Town International Convention Centre, which includes new convention space, office space, apartments, as well as a hospital is also on the cards. By the time these projects mature the hope is that the world will be a friendlier place for landlords.

Worth noting is that there are also some up sides to the economic downturn effects. The vacancy trend has created some opportunities for tenants. Some companies have felt the confidence to shelve elaborate expansion plans and others who were facing relocation now have negotiating space. Landlords are far more willing to exercise a little creativity, offering concessions and making opportunities available that would not otherwise have been available in a low vacancy market.

So as long as Cape Town keeps its head down building for tomorrow’s prospective tenants and looking after the one’s it currently has, it should be able to weather this storm.