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Surety Industry Continues to Critique Performance Bond Requirements of D.C. Green Building Act

I have often used Washington, D.C.’s 2006 Green Building Act as a paradigm for green building legislation that is enacted quickly, fails to define key terms, or fails to address other important legal ramifications that were not contemplated by the drafters. (As a quick aside, surety law expert Bryan Seifert provides a comprehensive overview of the D.C. Act and its implications for the surety industry in the Understanding the Business of Green focus issue from the Counselors of Real Estate that I recently uploaded into GRELJ).  A little over a year ago over at gbNYC, we linked to a letter that Mark McCallum, general counsel for the National Association of Surety Bond Producers, had written to the D.C. City Council expressing his concerns over certain provisions of the Act. I had been wondering where the NASB’s efforts stood because certain provisions of the Act are scheduled to take effect beginning in January. Accordingly, I was interested to see an article in the Washington Business Journal earlier this week noting that the D.C. Department of the Environment has created a working group in cooperation with the Department of Consumer and Regulatory Affairs to address Mr. McCallum’s concerns.

The surety industry’s specific objection to the legislation as drafted is its requirement that projects post what is defined as a “performance bond” equal to 4 percent of the project’s total cost in advance of construction. If the project fails to meet certain levels of LEED certification, the bond is forfeited into a green building fund (which is administered by the same organization that evaluates compliance with the Act- also problematic as an obvious conflict of interest). This bond is, of course, not the traditional sort of construction performance bond but rather essentially a penal sum that is assessed in the event that a project fails to meet the requisite LEED rating.

Mr. McCallum makes the quite salient point that, as drafted, the performance bond requirement “does nothing to put the building in compliance. It simply serves as a funding mechanism for the bureaucracy.” More significantly, the owner or developer of the building, who will likely be responsible for posting the bond, is not necessarily the party that is ultimately responsible for achieving the LEED certification. Accordingly, the surety industry is extremely wary of insuring a risk that it cannot assess with sufficient accuracy. It follows that, if owners and developers cannot obtain the bond as required, they would likely need to post a letter of credit or find some other way of satisfying their obligations under the Act. The more likely scenario is that such owners will simply choose not to build in the District until there is more clarity with respect to these bonding requirements and which parties- if any- will be required to procure and post the bond.

Still, it is a positive development that the City Council is listening to the surety industry and attempting to address its concerns, though it is curious that we are still exactly where we were a year ago with respect to resolving these issues; given that the legislation is set to take effect in a couple of weeks, the City Council could certainly have moved a bit more quickly in terms of addressing Mr. McCallum’s original letter from over a year ago. As the Journal notes, “[t]he surety industry’s opposition is limited to the performance bonds issue. The march toward green building standards does not pose a problem.”

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