Triple Net Lease and a Green Lease
Hopefully by now you at least understand some of the basics of triple net lease investing. If not – BUY THE COURSE.
Lately there has been a lot of discussion on green leases. Essentially these are leases where the tenant is incentives in some form to operate the facility in a more environmental friendly way. The structures vary but this could be in the form of using less water, less lights, etc.
Here is a more detailed example of how a green lease could add value to your triple net lease property:
Suppose an owner’s operating costs for his office building are $9.50 per square foot and assume energy costs are $2.00 of that, or about 20%. If the owner makes the building more energy efficient, reducing his operating costs by 40%, he will be saving .80 cents per square foot (.80 cents = 40% of $2.00). In a Net Lease arrangement (where the tenant pays for all electric/energy charges) the owner does not have an economic incentive to make these investments because the savings go to the tenant, as opposed to his bottom line. However, by shifting from a Net Lease structure to a modified “green Gross Lease” approach, where the tenant pays a rent that has certain expense items, such as water and electric, built in, the duty of responsibility for managing these costs can be shifted away from the tenant and back to the landlord, who reaps the benefits of his capital improvements and the efficiencies/savings they produce.
Indeed, from an owner’s perspective, by having the right type of green lease in place, the resulting efficiencies will produce value in both the short and long term. By capitalizing (or “capping”) the .80 cents of energy savings at a 11% cap rate (or expected return) you’ve created about $7.27 in additional value per square foot for your building. Do this with a 100,000 square foot building and that small improvement has added $727,000 of value to your property.
There are ways to integrate a green lease with a triple net lease that we will discuss in another blog post.
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