I recently attended a webinar in which Jacob Bart of Stroock & Stroock & Lavan LLP spoke about how the costs of going “green” can conflict with the provisions in many existing leases. It is common for landlords to “pass through” operating expenses to their tenants, but those expenses are usually limited to non-capital expenditures. However, any changes to make a building more energy efficient or to reduce carbon emissions will likely be capital in nature. Therefore, it is difficult for a landlord to make those green changes because the landlord will not be reimbursed for the cost from the tenants. One way to address this is to allow the landlord to pass through capital expenses if they result in a savings of operating expenses.
But what if the new equipment is better for the environment, but won’t save much money? I recently had a chance to speak with Lee Johnson and Michael Noyes from the Greenwood Village office of the accounting firm Clifton Gunderson LLP about a tax deduction for energy saving improvements in commercial buildings under Section 179D of the Internal Revenue Code. This may provide an incentive for Landlord’s to make cost-saving capital improvements even if the landlord cannot pass them through to its tenants.
As tenants desire green buildings, not only for cost savings, but also for prestige and marketing purposes, it will be interesting to see if there are changes in the traditional allocation in leases of capital and operating costs between landlord and tenant.