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As Green Buildings Grow in Sacramento, Sacramento Landlords Should Revise Commercial Leases to Allocate Costs

The City of Sacramento was selected to receive an infusion of money from PACE Commercial Consortium to retrofit commercial buildings to green energy. Next week, the City of Sacramento will consider a contract giving the green light to the City’s participation in the PACE program.

solar panels.jpgUnder the PACE program, commercial property owners are loaned the money to complete upgrades recommended after an energy audit performed by Lockheed Martin. The loans are backed by long-term bonds that are sold to institutions like public pension funds. The loan payments will be paid over the course of 20 years and are attached to the building’s property taxes. The property owners will be reimbursed for the difference between the monetary savings due to the upgrades and the the payments on the loan.

As more and more buildings turn to green energy, landlords will need to revamp their lease agreements to deal with the allocation of costs. For instance, the cost to improve or build a green building is substantially higher than conventional building costs; while operating costs will be lower in green buildings. Landlords should determine how these costs and savings will be allocated. While a gross lease, which allows the landlord to offset capital expenditures for green building improvements by capturing the savings of the operating cost savings, may be preferable; a modified gross lease may best suit both landlords and tenants. In using a modified gross lease, the base rent will include base operating costs and will pass through any annual increase of the base operating costs. Landlords should also consider who benefits from tax credits from carbon off-sets,