Green building design, construction and operation practices have gained widespread popularity in the healthcare industry in recent years, even considering the current challenging economic climate. This trend is likely to continue because green building practices result in both decreased overall life cycle costs and healthier building occupants. This article will briefly examine the background of building green in the healthcare sector, discuss the unique needs of healthcare facilities in relation to green building practices, and finally examine the choices and challenges faced by healthcare facilities in determining whether to design, construct and/or operate a green building facility, with a specific emphasis on the legal issues therein.

Introduction

According to the United States Environmental Protection Agency (“EPA”), green building is the practice of creating healthier and more resource-efficient models of construction, renovation, operation, maintenance and demolition. The leading vehicles for green building implementation in the healthcare industry are the Green Guide for Healthcare (“GGHC”), a healthcare industry driven system that was created by the American Society for Healthcare Engineering in 2002 and the Leadership in Energy and Environmental Design (“LEED”) rating system administered by the U.S. Green Building Council (USGBC).

Adapting Green Building to the Unique Needs of Healthcare Facilities

There are a number of unique challenges in accomplishing standard green building practices in healthcare facilities, including, among others:

• The need for hospitals and other healthcare facilities to be open with all systems functioning 24/7;
• The high level of dangerous waste produced by healthcare facilities;
• Patients’ increased sensitivities to chemicals and pollutants (along with related air circulation issues);
• The need for healthcare facilities to meet stringent regulatory standards which are not applicable to typical commercial developments; and
• The fact that healthcare facilities have different transportation expectations than some other places of business (e.g. very few patients can be expected to ride bicycles to the hospital).

As a result of these differences, green building standards for the healthcare industry have taken longer to develop than other uses. Until recently, the healthcare industry generally relied on GGHC in designing, constructing and operating a green building. The GGHC is a voluntary self-certifying program that borrows from, but is not formally connected to the LEED rating system. In a manner similar to the LEED system, GGHC gives a certain number of “credits” for each environmentally-friendly and energy-efficient characteristic incorporated into a building. GGHC includes metrics for both construction and operations, which allows it to be used for existing facilities as well as new construction. Because GGHC is a self-certifying system, healthcare entities who wish to use it must vouch for their own compliance with the program.

The USGBC’s LEED system is the most established green building rating system. It is also a third-party certification system, so in contrast to GGHC, it more rigorously scrutinizes a project’s green building features. Some healthcare facilities have elected to invest the extra time, money, and effort required for LEED certification. For example, the Dell Children’s Medical Center (“DCMC”) in Austin, Texas is one of the most dynamic green building healthcare facilities, as evidenced by recently becoming the world’s first LEED Platinum-certified hospital. DCMC has succeeded in accomplishing some amazing results, including, an onsite natural gas power plant providing 100% of the facility’s electricity; recycling 75% of the waste produced during construction; and ensuring that no location in the building is ever more than 32 feet away from a source of sunlight. Various challenges, such as the hospital’s 24/7 operation schedule, required DCMC to overcompensate in other areas in order to reach Platinum certification. The project’s architect admits that the challenges in obtaining certification under a system not designed for healthcare were “enormous,” but apparently worth the cost for the hospital, which predicts that its energy efficiency investments will pay for themselves within six years. There are currently less than 40 other LEED-certified healthcare facilities of any type across the country (including, for example, the
Boulder Community Hospital in Boulder, Colorado, which was the first-ever hospital to be LEED-certified, and the Jewish Hospital Medical Center South in the Louisville, Kentucky area). However, approximately 350 hospitals that are currently under construction are LEED-registered, indicating a desire to achieve LEED certification upon completion. Luckily, for those looking for something more rigorous than the GGHC, but more tailored to healthcare than general LEED certification, the USGBC will soon issue a new LEED for Healthcarerating system. The new certification system will incorporate feedback from pilot projects that used GGHC and will be open to a public comment period before being officially implemented.

Choices and Challenges

Those who are beginning the planning process for green healthcare facilities have three possible paths to choose from at this point: they can wait until LEED for Healthcare is rolled out, use traditional LEED, or use GGHC. All of these choices have positives and negatives: LEED for Healthcare will likely become the new industry standard, but its exact requirements are not yet clear, so healthcare entities might have to delay their projects or could be taking a risk by committing themselves to a program under which they may not be able to obtain certification. Traditional LEED is rigorous and well-recognized, but could impose unnecessary costs and difficulties when applied to the healthcare sector. GGHC has clear metrics that are already tailored to healthcare construction and operations, but does not carry the same weight as LEED since it is a voluntary, self-certifying system.

There are certain actions, no matter what green building rating system decision makers elect to utilize, that healthcare facility decision makers must take in order to limit unforeseen cost, risk and liability. It is important to make green building goals clear and specific early in the planning process. A team of experienced professionals, including architects, construction managers, contractors, lawyers and others, with quantifiable experience on past GGHC or LEED-certified projects is also highly recommended. These experts will be able to properly guide property owners with the unique issues that arise in connection with green building and thus help mitigate further risk.

There are multiple legal risks that green healthcare facility project teams should consider, some of which may include:

• Whether there any potential governmental incentives or other awards that might help supplement the costs of green construction;
• The proper detailing of liability for failure to achieve certain green standards;
• The evolution of labor laws regarding the classification of the construction tasks for new green building work, such as green roofs;
• Lease drafting that requires all tenants at the property satisfy certain green building operational requirements; and
• Avoidance of greenwashing, or misleading the environmental benefits of the facility or services being provided.

There are innumerable other legal issues associated with green building and leasing. As this is an emerging area, it is important to work with professionals in order to avoid unnecessary liabilities when implementing green design features or pursuing any form of third-party certification.

Conclusion

Green building design, construction and operation practices are likely to continue at an exponential growth pattern in the healthcare industry in the years ahead. It is critical for facility owners, managers and stakeholders to fully understand the unique issues that arise for green building in the healthcare arena and work with a team of professionals that can help advise and minimize the risks associated therewith.

Green roofs have been a part of building for over a thousand years. The current green building movement has, however, had the greatest impact on the growth of the green roofing industry. A green roof is commonly defined as a roof that consists of vegetation and soil, or a growing medium, planted over a waterproofing membrane. There are two basic types of green roofs: (i) an extensive roof, which has a few inches of soil cover; and (ii) an intensive roof that has two feet or more of soil for a variety of grass, trees, bushes and shrubs. Green roofs are used in a multitude of buildings, including industrial facilities, commercial offices, retail properties and residences. The benefits of a green roof include reduced storm-water runoff, absorption of air pollution, reduced heat island effect, protection of underlying roof material from sunlight, reduced noise, and insulation from extreme temperatures. A green roof can thus be a critical design element for a green building. As more properties across the country are attempting to obtain LEED certification, it is worth noting that a green roof can help a property obtain over a dozen LEED credits, including credits for reduced site disturbance, landscape design that reduces urban heat islands, storm water management, water efficient landscaping, innovative wastewater technologies and innovation in design. The increase in green roofs and the green building movement is also resulting in an increase in liability resulting from errors in the design, installation or maintenance of green roofs. As a result, owners, design professionals and contractors should carefully consider ways to mitigate the potential risks involved with building a green roof.

In order to mitigate liability, the stakeholders in a project that features a green roof should clearly detail their expectations and performance requirements in their contracts. This will require preparing contracts that might not easily fit within standard forms of architect and construction contracts. A clear example of green roof liability was detailed by Frank Musica at the AIA Convention 2007. In that instance, the green roof contractor and structural engineer failed to communicate the specifics of the green roof. The result was water leakage and significant structural damage. This scenario could have been avoided by simple communication. One can easily imagine potential disputes arising from any of these following situations: (i) failure to deliver the energy efficiency levels claimed by the installation of a green roof; (ii) failure to deliver a green roof that results in the claimed number of LEED credits that should be awarded by the USGBC; (iii) mold or other environmental hazards as a result of poor maintenance of a green roof; or (iv) a roof collapse resulting from a green roof that was not properly constructed, installed or maintained. Parties should look to limit unnecessary liability by drafting contracts that clearly detail how the applicable parties will be responsible for each of the above-mentioned items. Although liability for said items is not able to be eliminated, it is important to all stakeholders that it is appropriately detailed in contract form, instead of by a judge or jury.

Green building owners and general contractors should engage experienced green roofing professionals when building a green roof. The green roofing industry has begun to assist in this regard by designating such professionals in a manner similar to that of the USGBC’s LEED Green Associate or Accredited Professional designations. Green Roofs for Healthy Cities has established the Green Roof Professional (“GRP”), which designation was created to distinguish certain individuals that have achieved a specific knowledge level with regard to green roof design, project management, installation and maintenance.  The goal of the designation level is to allow green roofing professionals to differentiate themselves, establish an increased level of professionalism in the green roofing industry and help protect the public health, safety and welfare by the building of better green roofs. I would strongly encourage clients to seek GRPs when working on a green roof in an attempt to mitigate unforeseen liability. It is worth noting, however, that one likely unintended consequence of this accreditation program for GRPs is that they could very well be held too a higher standard of care should any problems occur following the installation, repair or maintenance of a green roof.

Green roofs provide a benefit to the environment, energy efficiency related savings to property owners and tenants and potential credits for owners seeking LEED or other third-party green building certification for their property. The legal risks and potential liabilities of green roofs should, however, be carefully examined, both by companies considering installing a green roof and by green roof professionals themselves before getting involved with any green roofing project.

Geoff White is a Senior Associate in the Commercial Transactions and Real Estate Group at Frost Brown Todd.  He is a LEED Green Associate (LEED GA) and a Fellow of the Institute of Green Professionals (FIGP).  A sizeable portion of his practice is spent advising clients on the legal issues of green building and sustainable development.  He recently co-authored the chapter “Understanding and Mitigating the Legal Risks of Green Building,” in the Aspatore Books Inside The Minds – Negotiating and Structuring Construction Contracts.  Mr. White is licensed to practice law in Kentucky and Ohio.  Contact him at gwhite@fbtlaw.com or (502) 568-0202.

Once the sole domain of the ecologically minded, the green building movement has gone mainstream. Part of that push has been the increase in solar power use in homes and businesses. The decision by homeowners and businesses to install solar electric systems, which are also known as photovoltaic (“PV”) systems, may be made for a variety of reasons. Some want to preserve fossil fuels and reduce air pollution. Some want to invest in an energy producing improvement to their property. Still others like the independence of a solar system, making them less vulnerable to increases in energy prices. A number of government incentives have helped spur this growth of the solar market. However, the increased interest in solar energy and solar systems has created certain real estate law issues, including: (1) the creation of solar easements, (2) restrictive covenants and homeowner’s association requirements, and (3) compliance with zoning and building codes. This article highlights the current state of the solar market and government incentives, with future articles highlighting each of items (1) through (3) above.

Market Trends

The solar energy market has dramatically increased in the past decade and as a result, PV systems have become more affordable. Major retailers across the country have begun to invest in commercial solar systems. Target, Staples, Whole Foods, Safeway, Costco, Wal-Mart, and Best Buy, among others, have each installed or announced plans to install PV systems. However, in the current economic climate, the growth of the solar industry has slowed. Banks and financial institutions once eager to finance installation of solar systems are no longer financing renewable energy sources at prior levels. As a result, the government will play a critical role in the continued development of the solar industry. The industry is optimistic that the current administration will continue to push towards “green” energy in the long term and the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) is considered to be a strong initial step in that direction.

Government Incentives

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008, which, among other things, extended tax credits for solar energy systems. The tax credits apply to both residential and commercial solar installations for 30 percent of the cost of a system “placed in service” from January 1, 2006 through December 31, 2016. This energy investment credit also provides businesses with a five-year accelerated depreciation for the cost of equipment used to generate solar electricity. With the eight year extension of the solar investment tax credit, the solar industry is projected to gain 440,000 permanent jobs and $325 billion in investment by 2016.

President Obama signed the Recovery Act into law on February 17, 2009. It provides a personal tax credit for the purchase of qualified solar electric property and defines qualified solar electric property as property that uses solar energy to generate electricity for use in a dwelling.  The credit is equal to 30 percent of qualifying expenditures, and there is no cap. The credit applies to systems placed in service prior to January 1, 2017.  Expenditures for labor costs, including on-site preparation, assembly, or original installation of the solar electric property are eligible for the credit.

The Recovery Act also allows individuals and businesses to qualify for the full amount of the solar tax credit, even if projects receive “subsidized energy financing.” The term subsidized energy financing means financing provided under a federal, state, or local program whose principal purpose is to provide subsidized financing for projects designed to conserve or produce energy. A multitude of states offer such additional tax incentives for solar systems which include, sales tax exemptions on the purchase of solar systems, property tax exemptions, state personal income tax credits, solar rebates, or net metering programs, which enable system owners to sell excess power generated by their system to the utility.

Additionally, the Recovery Act provides developers a choice of either taking a 30 percent tax credit or apply for a grant for 30 percent of the project cost from the Treasury Department for PV systems. However, in order for a project to be eligible for such funds, construction must start in 2009 or 2010. The Recovery Act also expands the existing 30 percent solar investment tax credit to include solar manufacturing equipment. Solar manufacturing equipment is that equipment used to produce solar material and components, such as, solar cells, silicon, solar collectors, and evacuated tubes. The aim of this incentive is to create an American solar manufacturing base and to maximize domestic job opportunities in the solar industry.

As stated above, there is a sense of optimism that the Obama administration will be beneficial to the green building and, specifically, solar energy industries. Only time will tell, but the administration has obviously taken a strong initial step in that direction.

Geoff White is a Senior Associate in the Commercial Transactions and Real Estate Group at Frost Brown Todd. He is a contributing author to Green Real Estate Law Journal. He also oversees the Green Building Series on the Frost Brown Todd’s Construction Law News website. Mr. White is licensed to practice law in Kentucky and Ohio and is a member of the Kentucky Chapter of the U.S. Green Building Council. Learn more about Geoff at http://www.frostbrowntodd.com/geoffwhite

Julio V. Driggs is an Associate in the Commercial Transactions and Real Estate Group of Frost Brown Todd, which has a Resource Conservation Committee that is helping the firm go green.  Mr. Driggs is licensed to practice in Kentucky.  Learn more about Julio at http://www.frostbrowntodd.com/juliodriggs

The American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) offers multiple opportunities for property owners, developers and other stakeholders in the green building arena. There are tens of billions of dollars in funding initiatives for green building in the Recovery Act. Many of the provisions are complex and the specific projects that are to be have yet to be fully provided. That being said, the commitment to green building is clearly apparent throughout the Recovery Act and a quick summary of the critical green building funding proposals are detailed below:

• Federal Building Efficiency: At least $4.5 billion is allocated to the U.S. General Services Administration (“GSA”) to convert GSA facilities to “High-Performance Green buildings”, thus making federal buildings more energy efficient. Pursuant to that certain GSA Memorandum to Assistant Regional Administrators, PBS Regional Realty Service Officers from Samuel J. Morris, III, Acting Assistant Commissioner for the Office of Real Estate Acquisition – PQC, dated December 27, 2007, the GSA has adopted the U.S. Green Building Council’s (“USGBC”) LEED certification system and has set a goal that new construction or substantial renovation of a building or leased space over 10,000 rentable square feet receive at least LEED Silver certification.

• Establishment of Office of Federal High Performance Green Buildings: $4 million in funds were set aside for the establishment of the Office of Federal High Performance Green Buildings within the GSA, which office was created by the 2007 Act. The Office of Federal High Performance Green Buildings may have the longest lasting impact on the green building movement based upon the future actions it will take regarding federal government office space and buildings overseen by the GSA

• Green Building Training: $3 million has been allocated for a green building training and apprenticeship program for federal buildings.

• Renovation of Department of Defense (“DOD”) Buildings: A portion of the $4.2 billion in funds to modernize various DOD facilities will go toward green building related improvements.

• Local Government Energy Efficiency and Conservation: $6.3 billion in grants to help state and local governments make investments that make them more energy efficient and reduce carbon emissions.

• Energy Star Appliances: $300 million to provide consumers with rebates for buying energy efficient Energy Star products to replace old appliances.

• Public Housing Capital Fund: $4 billion is allocated for the Public Housing Capital Fund to retrofit the public housing projects to make them more energy efficient.

As detailed above, the specific projects that will receive allocations pursuant to the Recovery Act have not been fully released. A multitude of websites are being increasingly utilized and/or created in order to provide up-to-date information as to the available Recovery Act projects. The website www.fedbizopps.gov is an excellent resource for federal projects. As of March 1, 2009, conducting a “Quick Search” using the term “LEED” results in 313 specific federal opportunities. Another useful site is www.recovery.gov, which provides specific details regarding the Recovery Act, including a useful tool that contains links to each of the individual state websites that have been created in connection with the Recovery Act. Here at GRELJ, we will continue to track the Recovery Act and keep our readers aware of where things go from this relatively early point forward.

Geoff White is a Senior Associate in the Commercial Transactions and Real Estate Group at Frost Brown Todd. He is a contributing author to Green Real Estate Law Journal. He also oversees the Green Building Series on the Frost Brown Todd’s Construction Law News website. Mr. White is licensed to practice law in Kentucky and Ohio and is a member of the Kentucky Chapter of the U.S. Green Building Council. Learn more about Geoff at http://www.frostbrowntodd.com/geoffwhite/

Much like the rest of the green building industry, green leases contain a collection of legal risks that landlords and tenants have not previously had to consider. This article considers a small sample of such problems, specifically in relation to certification requirements, cost issues, insurance provisions and green product issues.

Many companies and government agencies require their space to satisfy an applicable LEED for Commercial Interiors certification level. These entities look for a lease to specify that the space will meet such standards. Landlords are not generally in the position to guarantee such certification level. The project architect, general contractor, subcontractor and USGBC all have a much greater impact on whether the space meets the required certification level. The landlord will thus need to make sure it is working with contractors and architects that understand the issues and are able to work towards achieving the necessary certification levels. It will need to protect itself in its applicable project contracts. The landlord and tenant must work together in attempting to craft a lease that adequately protects each of their respective interests and avoids liability outside of either of their control. Crafting lease incentives such as free rent periods or rental abatements are the best way to incentivize a property owner to deliver a green lease space without undue penalty for items outside of its control.

In addition, green building is generally more costly and timely than the standard building process. Landlords and tenants must realize this when determining the tenant improvement allowances detailed in the lease. Although green space is obviously important for a company, having a finished space is a far more important issue.

The improvements must also be are properly insured. A party entering into a green lease must carefully consider the increase in both (a) the replacement cost and (b) the rebuilding period following a casualty event, due to specific green building issues. As detailed above, the cost of green building products are generally more expensive than standard materials. There will also be additional costs incurred if the space needs to re-obtain its LEED certification level following a casualty event. It is important that each of those points is considered when determining replacement value and how that is detailed within the lease. If the casualty event is not the fault of the tenant, the lease should also consider who will be responsible for the costs of the LEED re-certification. The rebuilding of the space will also take longer due to both (i) the installation of many energy efficient systems and (ii) the LEED re-certification process following the casualty event. Such issues must be considered in the sections of the lease detailing the rebuild obligations of the parties following a casualty event.

The use of certain green products can also create unforeseen issues for both the landlord and the tenant. Some specific examples were detailed in Frank Musica’s “Don’t Let Green Design Cause Red Ink” presentation at the 2007 AIA National Convention in San Antonio.

The first example to consider is one in which a design firm specified cork flooring in kitchen areas. Unfortunately, this product had not been properly tested for use in high traffic kitchen areas. As a result, the cork flooring eventually saw growth of mold created by the high traffic and water spillage of the kitchen area. Another example was a tenant that provided the government with military systems designs and terrorism identification systems. The tenant invested in green design and extensive daylighting systems, including skylights and large window systems. Upon inspection of the new space by the government, it was determined that the tenant was putting confidential information at risk. The tenant faced a threatened revocation of its contractor’s security rating and cancelation of existing contracts. These outcomes show why tenants must work with their landlords in the installation of green building products and systems within their spaces in order to avoid potential liabilities that may have been unforeseeable for the landlord, contractor or architect.

In conclusion, green leasing, much like the green building movement itself, is here to stay. There are a multitude of new legal issues and risks that both a landlord and a tenant must consider if they elect to lease green space. These potential risks are further reasons to work with the most skilled professionals in the green building and leasing industry, whether that is an architect, contractor or attorney in site selection, plan preparation, lease negotiation and the final build-out of the space in connection with a green lease.

Geoff White is a Senior Associate in the Commercial Transactions and Real Estate Group at Frost Brown Todd. He is a contributing author to Green Real Estate Law Journal. He also oversees the Green Building Series on the Frost Brown Todd’s Construction Law News website. Mr. White is licensed to practice law in Kentucky and Ohio and is a member of the Kentucky Chapter of the U.S. Green Building Council. Learn more about Geoff at http://www.frostbrowntodd.com/geoffwhite

Green building and leasing is increasingly becoming a best business practice for many of the largest retailers in the country. The generally perceived benefits of leasing a green building or tenant space is (i) increased worker productivity, (ii) profitability through long-term utility cost savings, and (iii) reputation enhancement, to both customers and potential employees. Although far from an exhaustive list, companies such as PNC Bank, Wal-Mart, McDonald’s, Subway, Target, Staples, Kohl’s, and Best Buy have either all opened “green” stores, or are currently constructing a “green” store or branch.

As noted in the New York Times article linked above regarding best business practices, many of these companies view green building as a tool to reduce costs during this challenging economic time. In December of 2007, President Bush signed the Energy Independence and Security Act (“EISA”) of 2007, which set goals and standards to reduce energy use in federal buildings, including buildings in which the federal government leases space. These are the types of tenants that developers need to be able to attract during challenging times. As a result, green leasing will likely exponentially expand in the years ahead.

What is a green lease?

Much like the term green building, green lease is a term without a widely accepted definition. (Editor’s note: this is a critical point that we will be exploring in detail in future articles in this series). A green lease can take many forms. However, the key concepts in any green lease are: (i) rent structure and operating expenses; (ii) build out of tenant improvements; (iii) sustainable development principles and regulations (throughout the building or larger development); (iv) the use and disposal of hazardous materials, including cleaning supplies; (v) recycling; and (vi) environmental management plans. A green lease will generally detail environmentally friendly products to be used, water and energy conservation methods and targets, the use of alternative sources of energy on-site, such as solar or wind, indoor air quality standards, and dispute resolution procedures.

The two most prominent green leasing standards currently available are promulgated by the United States Green Building Council (“USGBC”) and the Building Owners and Managers Association International (“BOMA”) USGBC’s Leadership in Environment and Energy Design (“LEED”) program utilizes widely accepted standards in the green building movement to certify tenant spaces through its Commercial Interiors certification process. This process is able to provide all parties with a framework and a third party classification following the construction of the tenant space. As detailed above, many tenants are now requiring certain levels of LEED certification as it provides a clear and industry wide accepted benchmark as to the company’s commitment to going green.

BOMA was founded in 1907 and is made up of members that are building owners, managers, developers, leasing professionals, facility managers, asset managers and the providers of the products and services necessary to operate commercial properties. Its 16,500 plus members own or manager more than nine billion square feet of commercial properties in North America alone. In the summer of 2008, BOMA released its Guide to Writing a Commercial Real Estate Lease, including Green Lease Language (the “BOMA Guide”), which was designed to facilitate the ongoing implementation of sustainable building practices. The BOMA Guide provides both property owners and tenants with a framework to enter into a green lease, although without the rigidity of the USGBC classification and certification process. Although the BOMA Guide will not be universally adhered to, it provides building professionals with the tools necessary to craft greener leases. These smaller steps are also critically important for the movement, as it will allow more property owners and tenants to be able to consider more sustainable features in leases without undertaking the rigorous LEED certification process.

Geoff White is a Senior Associate in the Commercial Transactions and Real Estate Group at Frost Brown Todd. He is a contributing author to Green Real Estate Law Journal. He also oversees the Green Building Series on the Frost Brown Todd’s Construction Law News website. Mr. White is licensed to practice law in Kentucky and Ohio and is a member of the Kentucky Chapter of the U.S. Green Building Council. Learn more about Geoff at http://www.frostbrowntodd.com/geoffwhite/.

As the world financial headquarters has shifted from Wall Street to Washington, D.C., many commentators are expecting that green building will be a common condition of allocation of federally funded real estate projects whether in the form of direct subsidies or grants or public/private partnerships. This article will briefly examine a small portion of the unique legal risks that should be considered by lenders and property owners and developers in regard to obtaining financing for green buildings. It will specifically focus on ways lenders should attempt to mitigate risk through a basic understanding of green building, the careful examination of leases, construction documents and loan document covenants.

Basic Understanding of Green Building

Lenders must have a basic understanding of green building before financing green properties. They should be aware of the multiple third party green building certification systems and the specific limitations of the systems. Lenders should have teams that are familiar with the United States Green Building Council’s (“USGBC”) Leadership in Energy and Environmental Design Green Building Rating System (“LEED”) and preferably underwriters or loan officers that are either LEED Accredited Professionals (“LEED APs”) or the newly designated LEED Green Associates. If a lender does not have this level of green building experience or accreditation then they should seek outside counsel with the necessary understanding to assist them in order to minimize exposure. This level of knowledge will provide lenders with the necessary background to properly assess risks in financing green real estate.

Review of Green Leases

Leases, at a commercial property, are the most important factor in determining the value of a property. Most loan officers and underwriters are well versed in determining the property value based upon the rental stream and term of a lease. They are not as experienced in assessing the risks that may be contained within a green lease. Attorneys must assist the lender in carefully examining how the green elements of the lease could impact the value of the property. The first consideration is determining the required green elements of the lease and what happens if they are not achieved. Does the lease mandate the leased premises or property achieve a certain LEED or other third party certification status? What happens if the leased premises or the property fails to achieve said status? The lender should inquire as to the status of the LEED or other third party certification requirements, determine whether the landlord is able to satisfy its requirements and what the impact might be if landlord fails to satisfy the requirements. From a lender’s perspective, it is more palatable to see a lease provision that provides that it is the parties’ intent to achieve a certain LEED or other third party certification standard, but the failure to achieve such standard will result in some form of lease abatement or minimal free rent period instead of lease termination. Lenders are able to properly assess the value of a property with a lease abatement or free rent period, but if lease termination is available to the tenant then it is unlikely the lender will proceed with the financing, especially considering the current credit environment.

The lender should also take a more careful review in the long term property operation and management requirements within a green lease. Green building requires an active long term management plan to maintain the efficiency characteristics of the property. Certain green building classification levels may require re-certification after a certain period of time to show the property still complies with the necessary third party standards. Lenders will want to make sure that developers thus select property management companies that are able to provide the necessary services and that the property management agreement details these requirements. They may also want to review the operations and maintenance (“O & M”) plans to ensure that they are in place that are designed to comply with the green building systems in place at the property.

Finally, if the property is leased to multiple tenants then lenders should examine each lease to ensure that there are not conflicting green lease provisions that could create further challenges. For example, the lender must be able to determine the differences if one tenant requires the premises achieve LEED Silver for Commercial Interiors and another tenant requires LEED Gold for Commercial Interiors and that the property achieve LEED Silver for New Construction. These specific provisions are not in direct conflict, but if the second tenant also required that all other leases over 10,000 square feet also achieve LEED Gold for Commercial Interiors then an issue would arise if the first lease was for 15,000 square feet. A lender should also understand how the costs of the utilities may be detailed within the lease. Lenders routinely underwrite properties where all utility costs are passed on to the tenant. As some tenants are moving into green leases, in part, to have lower long term utility costs, they may have lease provisions that cap utility costs. A lender will need to determine whether the landlord is able to satisfy such lease requirements, potentially before there is even a history of performance at the property.

Construction and Building Design

Lenders that provide construction financing for green building projects should be involved in the selection of the construction team and the review and negotiation of the construction documents. The risks of green building have been detailed by commentators in this and other publications, time and time again. If a lender is willing to provide construction financing during these difficult times then they should have far more influence in the selection of qualified and experienced green building professionals then they would have in years past. Developers will hopefully work with experienced professionals in building a green project, but lenders should also examine the green building experience of the architect, contractor and subcontractors and make the approval of such professionals a condition of the financing. Lenders should review the owner-architect agreement and construction contract to make sure the responsibilities in planning and constructing the green building are clearly detailed. They will also want to make sure that there are penalties to the appropriate parties for failure to deliver the required green building. These penalties should correspond with the leases. For instance, if a lease requires a LEED Silver Commercial Interiors space and failure to provide such space will result in a two-month free rental period, the construction contract and owner-architect agreement should contain provisions that requires either a holdback or penalty in the amount of the loss of two months of rental payments to landlord, provided the failure to achieve the standard is not the fault of the property owner. The landlord may not be able to make the mortgage payments without such a provision, and the lender will obviously want to protect itself from such a possibility.

The Greening of Loan Documents

In addition to the added due diligence considerations, lenders may also need to modify loan documents in providing financing for green building projects. The first consideration will be in determining whether additional escrows are required to mitigate the risk of free rent or rental abatements in connection with certain green considerations detailed within the lease. These determinations should be relatively straightforward for the lender and again are not necessarily unique to green building. The loan documents will also provide that the landlord shall either comply or materially comply with the leases. Lenders should carefully review these provisions and may need to detail that the green building provisions are material lease provisions and failure to comply with said provisions will constitute a default under the loan, as well as the lease. Lenders may also consider adding additional covenants that acknowledge the green lease requirements and provide the specific details as to how the landlord will comply with such requirements in order to avoid any potential ambiguity.

Conclusion

Green building will continue to grow and likely become the best practice in the construction and development industry. Lenders must thus become familiar with the unique risks associate with green building. They must also be able to mitigate the risks, from the lenders perspective, when providing financing for green buildings. This article briefly examines a small sample of these issues and strongly encourages lenders to assemble a “green team” when financing green real estate developments.

Interested in contributing to GRELJ? Contact Stephen Del Percio via email here.