In a recent op-ed piece, Keith Coleman, President of Hamilton Building Supply in Hamilton, New Jersey, and Vice President of the New Jersey Building Materials Dealers Association, argues that the Garden State should reconsider a pending bill (S239) that would require “the design of new public schools [to] incorporate the guidelines developed by [USGBC] known as LEED.”

Mr. Coleman writes that he is “deeply concerned with what would happen if this legislation became New Jersey law. Construction costs for schools would unnecessarily increase, with absolutely no benefit to the students and teachers who use these buildings or the taxpayers footing the bill. Such legislation would also set a dangerous precedent that could lead to all new public buildings in New Jersey having to use lumber certified through the U.S. Green Building Council. Such legislation would quickly waste millions of dollars in taxpayer money.” Mr. Coleman’s specific concerns with respect to increased costs derive from the types of wood products his organization’s constituents would need to stock in the event S239 passes:

Under LEED, the lumber can only be handled through the strict chain of custody by those who are certified in the program. If this lumber is put in the hands of a yard that is unaffiliated, it is actually deemed corrupted and cannot be sold as certified. If my company were to become LEED certified – in which we would be permitted to sell this ‘certified’ lumber – it would cost us thousands of dollars to follow the regulations of the program. We’d also have to stock certified and uncertified lumber in all the dimensions, doubling our inventory, and making sure the products were clearly separated. This would double my costs for such expenses as financing, space allocation, administration, insurance and other related expenses.

First, just as a quick housekeeping matter, USGBC does not certify lumber or any other individual type of product that may qualify for LEED points. As we noted here at GRELJ earlier this year in the context of LEED Version 3.0’s MR Credit 7: Certified Wood, this is because of the high level of scrutiny which private environmental standard-setting organizations such as USGBC receive under controlling antitrust law. It is also important to note that USGBC does not certify individual companies, either. While Mr. Coleman’s constituents may choose to stock more FSC-certified or reclaimed wood products, there is no requirement that those constituents become “LEED-certified” in order to do so.

However, I was particularly interested in Mr. Coleman’s concerns about chain of custody and the requirements for individual New Jersey lumber yards to apply FSC trademarks. According to its website, FSC requires that

[a]ny operation making, changing, trading, re-labeling or repackaging FSC certified products needs to be chain of custody certified in order to use the FSC trademarks and to enable its customers to make an FSC claim about these products. Retailers were traditionally seen as the end of the supply chain; today brokers or agents, who neither take physical nor legal possession of the products, and retailers, who sell FSC products to end consumers that do not want to make an FSC claim, usually do not need to become certified.

According to FSC, there are 133 companies in New Jersey that already hold FSC chain-of-custody certificates, which at quick glance seem to be a relatively even split between lumber and graphics concerns. The actual cost to obtain certification is unclear; on its website FSC states that the “costs and timescale for [chain-of-custody] certification vary depending on the size and complexity of the operation. It also depends on the range of products and processes.”

Nevertheless, although Mr. Coleman’s general points here about increased costs that would ultimately be passed along to taxpayers are duly noted, the more critical issue to consider generally is the scrutiny under which I believe LEED-driven legislation will continue to come in 2010. As Mr. Coleman notes, “[w]ith New Jersey teetering on bankruptcy and local school districts facing major cuts in state aid, this legislation is impractical, unnecessary and does nothing to solve the paramount issues plaguing the state.” Whether or not you are convinced of the technical merits and purported benefits of the LEED program, it is indisputable that state and local governments across the country – including those right here in our own backyard – are facing severe budget problems. Legislators will need to demonstrate bottom-line benefits to taxpayers for policy decisions similar to New Jersey’s S239, particularly if voices like Mr. Coleman’s grow louder and more uniform.

In addition to the points that Mr. Coleman raises, it’s also worth noting that S239 does not explicitly require formal LEED certification, nor does it provide any guidance with respect to what “incorporate the guidelines” might mean. I think that this is another good example of the type of ambiguous language that continues to appear in third-party-driven green building legislation. I would suggest that such language is indicative of a more general lack of understanding about USGBC, LEED, and the various iterations of the LEED system; consider Mr. Coleman’s own remarks, for example, where he refers to companies as actually being LEED-certified! These distinctions do mean something, in the context of both legislation (where taxpayer dollars are at stake) and, of course, construction contract documents.

We talk frequently here at GRELJ about the disconnect between green building policy and the practical aspects of improving building performance. An interesting wrinkle on this intersection is currently playing out in downtown New Haven, Connecticut, where developer Bruce Becker is fighting the state’s Department of Public Utility Control (“DPUC”) over its recent decision to deny his application for net metering of his new 360 State Street development. The residential project is a 32-story, 500-unit apartment complex with retail space and parking for 500 vehicles which is targeting a LEED Platinum rating from USGBC.

According to the Hartford Courant, Becker hoped to power the building – at least in part – with a 400 kilowatt fuel cell, for which he expected to receive a $900,000 grant from the Connecticut Clean Energy Fund (which would cover about 50 percent of the fuel cell’s total cost). In order to finance the rest of the purchase price, Becker anticipated that he could use net metering technology (selling excess capacity from the fuel cell back to the local utility) to cover the balance, while submetering individual residents. However, under existing Connecticut law, residential net metering is only allowed in certain circumstances (at campgrounds and marinas), and so DPUC rejected Becker’s application early last year (a copy of his petition and DPUC’s decision is available here).

But, Connecticut law does allow electrical cooperatives, which “may be organized . . . for the purpose of generating electric energy by means of . . . renewable energy resources.” With the input of the state’s Clean Energy Fund, Becker formed a co-op called the Elm Electrical Cooperative, Inc., and approached United Illuminating (the local utility) about organizing a net metering arrangement. Absent DPUC’s consent, the utility refused. Becker proceeded to file another petition that requested, among other relief, that UI be ordered to power the co-op, that the co-op be eligible for energy conservation and incentive programs, and that the co-op be able to implement Becker’s proposed net metering program. Earlier this month, DPUC rejected Becker’s petition (the written report on which the decision was based does not appear available on DPUC’s website).

In its article, the Courant makes several points which I think are worth repeating here at GRELJ for your consideration. First, according to the Courant, DPUC suggested both in its report and oral hearing that although Becker’s proposed solutions are novel, the agency itself needs input from the legislature on how it should respond. Connecticut is behind other jurisdictions (including New York) in terms of net metering legislation; I think this is a good example of technology bumping up against an antiquated regulatory regime. Legislation needs to enable – and not restrict – technologies that can improve building performance. A thought that follows is how quickly many state and municipal governments have acted to incorporate third-party building rating systems into legislation without fully considering (1) the corresponding legal implications; or (2) whether those rating systems actually result in higher performing buildings. We’ll be keeping an eye on 360 State Street’s plight and follow up if anything else of import transpires.

On a New York side note, last August Governor Paterson signed a series of bills to allow commercial net metering installations across New York State. Previously, only residential users were allowed to generate their own electricity from renewable sources and sell it back into the grid. Senate Bill 7171 now allows net metering for commercial systems up to 2 megawatts in capacity. It also increased the maximum system size for residential installations from 10 to 25 kilowatts. In addition, for building owners that install solar power systems, Senate Bill 8145 (which applies only to New York City) allows for a four-year real property tax abatement of up to $62,500.00 per year. As we noted recently over at gbNYC, the first such commercial installation in New York City was recently commissioned at 925 Bergen Street in Brooklyn by solar power installer Solar Energy Systems (SES) for Big Sue LLC, a general contracting and consulting firm that specializes in green design-build projects, which owns and operates the property. The installation is a 40 kilowatt solar array and, according to SES, is the largest commercial net-metered photovoltaic system in the entire country.

For the past few years over at gbNYC, we’ve reviewed the annual list of Manhattan’s largest commercial leasing deals for those transactions which took place in buildings that were either certified or pursuing designation under LEED or Energy Star to make some anecdotal observations about the state of the local green real estate market. Here are last year’s leases which were signed in green buildings as reported by the New York Observer in its recent compilation of 2009’s top 20 largest commercial transactions by square footage.  A year ago, we speculated that it was “anyone’s guess” how this list would look for 2009. In that respect, the overall amount of space leased by each of the following tenants is obviously much smaller than what we saw in 2008, but 5 of the top 20 deals identified by the Observer did take place in green buildings.

I was also surprised to note that only one of the deals was for space in an Energy Star-rated building; this could, of course, be purely a function of the market – timing, space requirements, etc. – but thought it was worth pointing out. The fact that an increasing number of commercial real estate transactions are taking place in buildings that have earned (or are pursuing) third-party certification emphasizes the import of many of the risk management issues that we continue to discuss here at GRELJ. Here’s the list, with other pertinent information of interest following where appropriate:

#5: 200 Park Avenue (Not pursuing any third-party certification but notable because the tenant originally intended to take space in Boston Properties’ LEED Gold-hopeful, credit crisis casualty 250 West 55th Street, which remains on hold).

Terms: 261,847 square feet
Tenant: Gibson, Dunn & Crutcher
Landlord: Tishman Speyer
Broker: CBRE
Submarket: Columbus Circle

#12: 1633 Broadway (Registered under LEED-EB: OM on June 19, 2009; also received 2009 Energy Star label).

Terms: 202,495 square feet, 15 years
Tenant: Showtime Networks Inc.
Landlord: Paramount Group
Broker: CBRE
Submarket: Times Square

#15: 1 World Trade Center (Pursuing Gold under LEED for New Construction).

Terms: 190,810 square feet
Tenant: China Center (only private tenant thus far to sign for space at Freedom Tower; will create business and culture center across 64th through 69th floors)
Landlord: The Port Authority of New York and New Jersey
Broker: Jones Lang LaSalle
Submarket: World Trade Center

#16: 731 Lexington Avenue (Registered under LEED-EB: O&M in September of 2007).

Terms: 176,000 square feet (renewal and expansion; sublease from Citigroup)
Tenant: Bloomberg L.P.
Landlord: Vornado Realty Trust
Brokers: CBRE, Cushman & Wakefield
Submarket: Plaza District

#17: 1251 Avenue of the Americas (Registered under LEED-EB 2.0 in May of 2008).

Terms: 169,200 square feet (renewal)
Tenant: Mizuho Corporate Bank, Ltd. (looked at space in LEED Gold-certified 7 World Trade Center and LEED Gold-hopeful 11 Times Square before renewing)
Landlord: Mitsui Fudosan America
Brokers: CBRE, Newmark Knight Frank
Submarket: Plaza District

#18: 1271 Avenue of the Americas (Registered under LEED-EB 2.0 in May of 2008).

Terms: 166,094 square feet
Tenant: Lehman Brothers Holdings Inc.
Landlord: Rockefeller Group Development Corp.
Brokers: CBRE, Studley
Submarket: Plaza District

• ‘Renewal’ Year’s Magic Word (NYO)

USGBC’s LEED 2009 for Commercial Interiors rating system includes a significant number of points which tenants can earn towards their LEED-CI certification simply by choosing to lease space in qualifying base buildings. For the tenant considering a move into space for which it intends to seek LEED-CI certification, working with its broker to perform due diligence by pre-qualifying existing buildings through a carefully drafted Request for Proposal process will assist it in narrowing the available pool of buildings, particularly in a soft commercial leasing market where landlords are more inclined to make accommodations for prospective tenants.

21 of  the available LEED-CI 2009 points are available under the Sustainable Sites Credit Category (40-49 total points earn a project LEED Certified status, 50-59 Silver, 60-79 Gold, and 80-110 Platinum); points available on account of base building features are as follows:

• SS Credit 1: Site Selection. 1 to 5 points are available. In addition to earning 5 points for leasing space in a LEED-certified building, tenants can also earn up to 5 points for leasing space in non-LEED-certified buildings if they satisfy one or more of 12 compliance Paths, including brownfield redevelopment, stormwater runoff management, and light pollution reduction. Tenants will want to incorporate pointed questions within their RFP (i.e., is the building developed on a site documented as contaminated by an ASTM E1903-97 Phase II Environmental Site Assessment or a local voluntary cleanup program?) that tracks the specific language set forth in each of SS-1’s 12 Paths if the prospective building is not LEED-certified. Moreover, they will also want to perform sufficient due diligence to ensure that landlords are not giving them lip service with respect to their building’s LEED certification status; as we have noted frequently here at GRELJ, these types of misrepresentations (whether innocent or not) remain a persistent problem across the real estate industry.

• SS Credit 2: Development Density and Community Connectivity. 6 points are available under two different options. Option 1, Development Density, requires the tenant to select space in a building located in an area with a minimum density of 60,000 square feet per acre net. Option 2, Community Connectivity, requires that the building is (i) located within 1/2-mile of a residential area or neighborhood with an average density of 10 units per acre net; ii within 1/2 mile of at least 10 basic services (as described within SS-2); and (iii) offers pedestrian access between the building and the services.

• SS Credit 3.1: Alternative Transportation – Public Transportation Access. Again, 6 points are available under two different options. Option 1, Rail Station Proximity, requires the building to be within a 1/2 mile walking distance of an existing (or planned or funded) commuter rail, light rail, or subway station. Option 2, Bus Stop Proximity, requires the building to be within 1/4-mile walking distance of 1 more stops for 2 or more public campus or private bus lines that the tenant’s employees or occupants can utilize.

• SS Credit 3.2: Alternative Transportation – Bicycle Storage and Changing Rooms. 2 points are available. In order to earn these points, the base building must provide secure bicycle racks and/or storage within 200 yards of a main entrance for 5 percent or more of the tenant’s employees or occupants as measured at peak periods. In addition, the base building must also provide shower and changing facilities in the building or, again, within 200 yards of a main entrance, for 0.5 percent of occupants.

• SS Credit 3.3: Alternative Transportation – Parking Availability. 2 points are available. For projects with an area less than 75 percent of the total base building area, the parking spaces provided to the tenant must meet – but not exceed – the minimum number required by local legislation, and preferred parking must be provided for carpools or vanpools capable of serving 5 percent or more of tenant occupants. Alternatively, the base building must not provide or subsidize any parking for tenant occupants. (Note that the text of LEED-CI suggests tenants include “limited parking” provisions in their leases as a potential strategy for achieving SS-3.3). For projects with an area greater than 75 percent of the total building area, parking capacity must meet – but not exceed – the minimum required by local legislation and preferred parking must be provided for carpools or vanpools capable of serving 5 percent of the base building’s total occupants. Alternatively, no new parking can be added for rehabilitation projects and preferred parking must be provided for carpools or vanpools capable of serving 5 percent of the base building’s total occupants.

USGBC’s Green Office Guide suggests that these considerations, among others that relate more specifically to the prospective tenant space that the base building is offering, be built into a questionnaire which the tenant – or its broker – should forward to the building’s property manager or leasing agent in advance of – or as a part of – the RFP process. In addition, tenants should also request – to the extent the building will make the data available – information that will allow it to assess the base building’s ability to earn 5 points from the 12 Paths under SS-1 (i.e., does the building meet the 30 reduction in water use requirement for the entire building under Path 10 for 1 point, or does it employ on-site renewable energy systems under Path 11 for up to 2 points?)

The significant number of points available under the Sustainable Sites category that are purely a function of the base building make the RFP process – and working concurrently with knowledgeable brokers and counsel – an imperative for tenants who intend to seek Commercial Interiors certification under LEED 2009.

According to a recent energy study that was prompted by an inquiry from the Charlotte Observer, Charlotte, North Carolina’s ImaginOn library building is using twice as much energy as predicted by the project’s LEED Version 2.0 for New Construction energy model. The $41 million project was completed back in 2005, earned LEED Silver on April 29, 2006, and both satisfied LEED-NC Version 2.0’s Minimum Energy Performance Prerequisite No. 2 under the Energy & Atmosphere credit category and earned 4 points under Credits 1.1 and 1.2, Optimize Energy Performance (by 30 percent over the energy cost budget for regulated energy components as described in ASHRAE/IESNA Standard 90.1-1999).

Factors that the study identified as responsible for the increase included:

• The building averages 450,000 visitors per year, not the 300,000 anticipated by the model;

• Its two theaters operate for 7 hours daily, not the 2 hours anticipated by the model; and

• Office space is used 7 days a week, not 5.

According to a spokesperson quoted in the Observer article, the library did not track its energy consumption “due to the cost.” Rather, it was “a reflection of [the library's] faith in the LEED certification process that [it] did not go back and second-guess the efficiency of the equipment.” As the Observer notes, the building’s increased energy requirements are, in some sense, due to its own success. However, as ASHRAE Fellow and Distinguished Lecturer Larry Spielvogel, P.E. pointed out in a letter to the New York Times which we reproduced here at GRELJ last summer, “[b]uildings alone do not use energy. The occupants, operators, and systems do.” The factors driving ImaginOn’s performance gap are another example of why the type of predictive energy modeling on which LEED relies is so imprecise and why project teams need to remain careful about the types of representations they make to their clients about the performance-related results of potential LEED certification.

I also think it is also useful here to emphasize again that, under LEED 2009, this type of performance gap would not be the basis for a LEED 2009 decertification proceeding. Rather, the decertification discussion which was so heated last summer related to LEED 2009 projects which fail to commit to sharing performance data or to satisfy any of the other new Minimum Program Requirements- not if projects simply use more energy than anticipated.

• ImaginOn’s Energy Use Grows With Popularity (Charlotte Observer)

Back in December, the City Council passed four pieces of legislation which Mayor Bloomberg introduced last April as part of his “Greener, Greater Buildings Plan” for New York City. Predictably, building owners had immediately opposed one of the bills (Int. 967: Audits & Retrocommissioning), which would have required them to implement a bundle of energy efficiency upgrades with a payback period of less than five years after the results of a rolling audit process. While auditing remains part of the approved legislation, owners will not be required to make the improvements, which will now just be identified based on a “reasonable” payback period. (Public buildings, however, must still install any retrofit measure that the audit pegs with less than a seven-year payback.)

Although the costs of auditing were raised by opponents to the bills earlier this year, mandatory energy audits are now required every ten years, though buildings certified under LEED 2009 for Existing Buildings: Operations & Maintenance or which receive EPA’s Energy Star label are exempt. It’s this exemption that’s of particular interest to us here at GRELJ; here’s the pertinent text from the body of the bill:

No energy audit is required if the building complies with one of the following as certified by a registered design professional:

• The covered building has received an EPA Energy Star label for at least two of the three years preceding the filing of the building’s energy efficiency report.

• There is no EPA Energy Star rating for the building type and a registered design professional submits documentation, as specified in the rules of the department, that the building’s energy performance is 25 or more points better than the performance of an average building of its type over a two-year period within the three-year period prior to the filing of an energy efficiency report consistent with the methodology of the LEED 2009 rating system for Existing Buildings published by USGBC, or other rating system or methodology for existing buildings, as determined by the department.

• The covered building has received certification under the LEED 2009 rating system for Existing Buildings published by the USGBC or other rating system for existing buildings, as determined by the department, within four years prior to the filing of the building’s energy efficiency report.

Legislation which incorporates LEED into local-level legislation is something we’ve noted frequently here at GRELJ, and a couple of recurring issues immediately come to mind with Int. 967.

First, although the bill does allow buildings to earn certification under “other rating systems as determined by [DOB],” the bill does not provide any input on what those other systems might be, or how DOB will “determine” those that would qualify a building for the exemption. Does this language sufficiently address non-delegation doctrine concerns? (i.e., a private third-party organization is effectively determining whether an energy audit is unnecessary under Int. 967 by proxy).

Second, there is no language that allows the legislation to track changes in LEED; for example, if USGBC releases a next-generation LEED system subsequent to LEED 2009, what happens? We have noted this specific issue recurring in various types of legislation. For example, when we wrote about San Francisco’s decision to reconsider its LEED-driven green building ordinance, we pointed out that “LEED itself continues to be a moving target and policymakers must guide themselves accordingly when considering the merits of [LEED-driven] legislative activity.”

Finally, could design professionals balk at signing off on the energy audits given that LEED-EBOM is subject to the same Minimum Program Requirements which, if violated by the building owner, could result in a decertification proceeding, the consequences of which remain unclear?

These questions are obviously theoretical at this point and are designed to elicit your thoughts in the comments. However, I want to stress that the New York City legislation emphasizes the import of assessing and understanding LEED-related risks as the rating system continues to permeate into the private sector in a variety of legislative contexts.

Just as a side note for your reference, the other three bills that constitute the “Greener, Greater Buildings Plan” are:

• Int. 564: New York City Energy Conservation Code. Closes the “50 percent loophole” in the current New York City Energy Code, which does not require owners who renovate less than 50 percent of their building’s total space to comply with the most current – and energy-efficient- version of the Code.

• Int. 476: Benchmarking. Requires buildings to perform an annual assessment of their water and energy use using EPA’s Portfolio Manager tool for the purpose of comparing themselves with their peers, but exempts certain buildings for which public disclosure would be problematic (i.e. high energy users such as data centers).

• Int. 973, Lighting Retrofits and Submetering. Requires large tenants to be submetered and lighting systems to be upgraded during renovations (whether or not those renovations contemplate electrical work) or, at the latest, by 2025. Residential tenants are exempt. Renovations where construction costs are less than $50,000 are also exempt.

Other than the revisions to the Energy Conservation Code under Int. 564, the legislation applies to all New York City buildings larger than 50,000 square feet (or buildings that stand on the same tax lot and, together, are larger than 100,000 square feet).

• GGBP Passes City Council (Urban Green Council)

One specific issue I am focusing on in connection with preparing for a presentation later this month is enforcement mechanisms in green leases: if either the landlord or tenant breaches a green provision in the lease, what specific rights and remedies – if any – does the lease provide to the parties? I have discussed this issue previously at GRELJ, particularly in the aftermath of last fall’s panel at the Urban Green Expo here in New York City where the consensus was that most landlords would likely not want to create self-imposed gaps in their building’s net operating income by evicting tenants who breach green lease provisions. Attorney Larry Schnapf of Schulte Roth & Zabel echoes these sentiments in an article he published in the November 2009 issue of The Practical Real Estate Lawyer, writing that “[i]n most cases, the ‘nuclear’ option of lease termination is probably not a reasonable remedy. The best solution may be rent abatement [if the space fails to perform or the building fails to earn the anticipated certification] or increased rent if a tenant space exceeds certain energy demands or water consumption. The parties may want to negotiate ‘cure’ provisions to provide a reasonable period to correct the deficiency.”

Perhaps unsurprisingly, then, I had difficulty identifying specific buildings or spaces where the breach of specific green obligations in a lease give either party the ability to declare a default and terminate the lease. However, and as Schnapf suggests, I was able to find some details on the leasing structure for the New South Wales Police Headquarters Building, just outside of Sydney in Parramatta, Australia, which provides a specific remedy for the tenant in the event that the landlord fails to satisfy certain terms of the green lease. Designed by architects Bates Smart and completed in 2003, the 15-story tower’s lease document between the landlord, the Department of Commerce, and the New South Wales Police Service requires the landlord to earn a 4.5 star NABERS rating (National Australian Built Environment Rating System, an environmental self-reporting system that’s roughly equivalent to our Energy Star program) over the lifetime of the lease. The rating is evaluated annually and, if the landlord fails to earn 4.5 stars, the tenant’s rent is reduced by the amount of any increased energy and water costs that arise as a result.

This is an interesting arrangement which we haven’t heard much about here in North America. Is it conceivable that a tenant could demand that the landlord build in a rent rebate provision into its lease in the event the building or space fails to earn (or maintain) the rating required by the terms of the lease? I think it would be difficult to quantify the difference in operating expenses between a LEED Silver building and a LEED Gold building, but the concept is interesting to consider. (Of course, such an arrangement would depend on whether the lease is gross (the landlord pays for building operating expenses) or net (the tenant pays)). What about tying a reduction in rent to a lower level of third-party certification? Again, the question would be how to quantify such a reduction, but I would think a landlord would only agree to using its “reasonable efforts” to pursue the third-party rating anticipated by the tenant. Nevertheless, in a soft leasing climate where deals are far and few between, tenants may be able to insist on stricter language in green leases during negotiations.

Just as a side note, the USGBC’s Green Lease Guide suggests, under its form Defaults and Remedies section, that “[t]he remedies included in a lease for breaching environmental objectives will reveal how critical these obligations are to the parties. If the objectives are aspirational, the lease will include something less than an absolute obligation to comply, such as reasonable efforts. On the other hand, if the objectives are critical, the lease will include an absolute obligation to comply.” For example, if a tenant is required to occupy space in a LEED-certified building or LEED-CI-certified buildout (as is the case for the General Services Administration, which must occupy LEED Silver-certified space pursuant to federal legislation), the landlord’s failure to deliver that space at the required level may necessitate the tenant insisting on a right to terminate in the body of its lease. Conversely, for the landlord pursuing LEED-EBOM certification pursuant to a similar mandate or, more significantly, in order to comply with applicable legislation, certain green lease provisions may need to have more teeth.

Has anyone come across arrangements in leases similar to the New South Wales Police Headquarters or other provisions where green obligations were more than merely aspirational?

California’s recent adoption of a state-wide green building code once again has green building legal practitioners focused on the legal issues surrounding green building legislation. Although the California legislation does not directly implicate it, one topic which has received mostly lip service to date is whether the mass adoption of LEED into state- and local-level building codes could raise antitrust problems. Last fall, I published an Article in the William & Mary Environmental Law & Policy Review which used the USGBC’s ongoing review of Credit 7 under the LEED 2009 New Construction rating system’s Materials and Resources Credit Category to take a closer look at federal case law where environmental standards promulgated by private third-party organizations – like USGBC – were challenged by stakeholders on antitrust grounds. (The citation for my full piece is 34 Wm & Mary Envtl. L. & Pol’y Rev. 239 (2009); I’d be happy to email you a copy of the full article if you’re interested in reviewing it).

As you may know, in order to earn LEED’s MR-7 credit, projects must “[u]se a minimum of 50 percent (based on cost) of wood-based materials and products that are certified in accordance with the Forest Stewardship Council’s principles and criteria for wood building components.” In other words, wood-based products that are not certified by FSC are effectively excluded from earning this credit under LEED 2009 for New Construction, Core and Shell, Commercial Interiors, and Schools. USGBC, however, expressly disclaims on its website that the organization “does not certify, endorse or promote products, services or companies, nor do we track, list or report data related to products and their environmental qualities. LEED is a certification system that deals with the environmental performance of buildings based on overall characteristics of the project. We do not award credits based on the use of particular products but rather upon meeting the performance standards set forth in our rating systems. It us up to project teams to determine which products are most appropriate for credit achievement and program requirements.”

Nevertheless, USGBC is currently reviewing proposed amendments to MR-7 which would create a USGBC Forest Certification System Benchmark. The Benchmark would recognize certain forest certification systems, and the credit would be awarded for only wood products that “use a minimum of 50 percent (based on cost) of wood-based materials and products that are certified in accordance with a forest certification scheme that is recognized after evaluation against the USGBC Forest Certification System Benchmark for wood building components.” More than 50 forest certification regimes currently exist globally; the four major players in the North American market are FSC, the Sustainable Forestry Initiative, the Certified Family Forest, and the American Tree Farm system. It’s unclear how many in addition to FSC the Benchmark would recognize.

The leading Supreme Court case in this space which I analogize in the Article to the ongoing issues with the MR-7 credit is Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988). In Allied Tube, a manufacturer of plastic electrical conduit claimed that a rival member of the National Fire Protection Association which manufactured steel conduit had packed the organization’s annual meeting with sympathetic interests in order to vote against the plastic manufacturer’s proposal to include plastic conduit in the Association’s National Electric Code. The Supreme Court noted that “private standard-setting associations have traditionally been objects of antitrust scrutiny,” that the Code was “the most influential electrical code in the nation,” and that many governments had adopted it into state- and local-level legislation by reference. It also suggested that “members of such associations often have economic incentives to restrain competition and that the product standards set by such associations have a serious potential for anti-competitive harm.” The significant factor for the Court in finding antitrust liability against the manufacturer of electrical conduit was the adoption of the Code into legislation. Although my Article does not suggest (nor am I suggesting here) that this sort of activity is taking place within USGBC, I do think the Supreme Court’s identification of legislation driving market effect in this context is an important consideration for policymakers.

What’s also interesting when reviewing the line of case law presented in my Article is that USGBC’s Antitrust Compliance Policy states that “from an antitrust standpoint, [USGBC] will be commonly referred to as a trade association. Trade organizations are subject to antitrust scrutiny because they involve meetings of competitors, but they frequently engage in a number of legitimate, pro-competitive and lawful activities. In order to avoid allegations of illegal price signaling, there should be no communications or discussions between any USGBC members either at USGBC meetings or at any other time about (a) current or future prices, pricing plans or production plans, or (b) announcements of price changes or output changes. . . . As a general matter, each member should be extremely careful and seek legal advice before engaging in any conduct that could possibly provide evidence to support allegations of collusion.”

As it turns out, though, the antitrust issues raised in my Article are more than just legal theory. As you may know, back in October,  the Coalition for Fair Forest Certification filed a complaint with the Federal Trade Commission (FTC) alleging anti-competitive behavior on the part of FSC and USGBC. Among other things, the complaint alleges that “the preference shown for FSC-certified products by the USGBC raises concerns about the viability of fair competition with other domestic certification programs. The Coalition submits that USGBC and FSC operate in tandem to disadvantage wood products certified by SFI and other certification systems. Thus, to the extent an investigation is warranted, the [FTC's] Bureau of Competition should look closely at the conduct of USGBC and its favoring of FSC certification.” It’s unclear what the current status of the complaint is and whether FTC has initiated any sort of investigation.

My Article concludes with some recommendations for policymakers, including a suggestion that the “LEED Certifiable” concept and general trend towards flexibility in how green building legislation is implemented may be an implicit acknowledgment of these emerging antitrust issues. I also present a number of other federal cases that are similarly interesting to review in light of current green building regulatory activity.  I would also note that the bases raised in my Article are by no means the only antitrust grounds on which LEED or other third-party systems might be challenged at some point.

Finally, I do expect many of these antitrust considerations to crystalize further during the course of 2010 as USGBC begins to evaluate various forest certification systems against its Benchmark and the Coalition for Fair Forest Certification’s complaint moves forward within the FTC.

On November 10, 2009 the Virginia-based ConsensusDOCS organization released its Green Building Addendum. The document joins the AIA’s B214-2007 scope of services document as a form contract exhibit for green building projects promulgated by a major North American A/E/C industry organization. Unlike the B214, though (which purely addresses scope), the Addendum includes a section that specifically addresses the allocation of green building risk. The Addendum is also important to note in a variety of other contexts; it is rating-system neutral, for example, and is designed to be implemented as an exhibit to a set of underlying design and construction agreements (which, from the construction lawyer’s perspective, may raise other important issues with respect to implementation).

The Addendum also creates a new role for design professionals, contractors, or consultants: the Green Building Facilitator, responsible under the terms of the Addendum for coordinating and facilitating the process of obtaining the owner’s desired green building status or certification, identifying green building measures (both procedural and physical), potential design and construction alternatives, and other services as required by the terms of the Addendum. The Green Building Facilitator is identified explicitly in Section 4 of the Addendum and can be the architect, engineer, contractor, or other corporate entity (or individual). However, the Addendum places certain risks on the Facilitator, and parties that choose to accept this role pursuant to the Addendum should review its terms and conditions carefully.

What’s most interesting for purposes of this article, though, is that Article 8 of the Addendum is devoted exclusively to risk allocation. Article 8.2 provides that the parties- including the Green Building Facilitator- will be subject to any limitations on liability that are included in their underlying contracts. However, this provision explicitly acknowledges that the owner’s “loss of income or profit or inability to realize potential reductions in operating, maintenance, or other related costs, tax, or other similar benefits or credits, marketing opportunities and other similar opportunities or benefits, resulting from a failure to attain the [project’s green building goals as defined in the Addendum] shall be deemed consequential damages subject to any applicable waiver of consequential damages” in any underlying design or construction contract. Compare this provision to the discussion which arose out of the Shaw Development litigation, where many commentators wondered what types of damages flowing from the breach of a green building contract would be deemed consequential in nature rather than direct. It’s therefore particularly noteworthy that the Addendum (i) acknowledges the types of unique damages that may flow from the breach of a green construction contract; and (ii) actually makes an initial effort at defining them. Of course, parties are free to negotiate the terms of the Addendum, including (depending on the project’s scope) (i) the types of damages which would be included in the provision; and (ii) any waivers – mutual or otherwise – in the underlying agreement. In Shaw, as you will recall, the issue was whether the lost tax credits were consequential and therefore waived by the owner through the A201’s mutual waiver provision; under the form terms of the Addendum, they would have been explicitly categorized as consequential. Had the parties in Shaw implemented a document like the Addendum, it would have assisted them in more comprehensively assessing the green building-related risk associated with the project and allocating that risk accordingly.

The Addendum also makes it clear that no project participant other than the Green Building Facilitator will be “liable or responsible for the failure of [any procedural or physical green measures] to achieve the [project’s green building goals as defined in the Addendum],” including the project’s failure to earn any third-party certification as designated in the Addendum. However, the Addendum also makes clear that these limitations on the project team’s liability do not relieve them “from any obligation to perform or provide [procedural or physical green measures]” as required by their underlying contracts. It will be interesting to see if additional form green building contracts and/or addenda are issued in 2010, whether they take these types of risks and limitations on liability into account, and, if so, in what particular fashion.

As you may know, ConsensusDOCS was founded in 2007 and, to date, its suite of form design and construction agreements has been endorsed by 23 different A/E/C organizations. You can download a copy of the Addendum via the link below. As always, the Arent Fox Green Building & Sustainability and Construction Practice Groups are happy to assist you with any additional questions you might have about either the Addendum or working with construction contracts generally.

• 310 Green Building Addendum (ConsensusDOCS)
• New Document Defines Role in Green Building Projects (Arch. Record)

Back in November, in Destiny USA Holdings, LLC v. Citigroup Global Markets Realty Corp., the Appellate Division for the Fourth Department upheld (in a split 3-2 decision) the Onondaga County Supreme Court’s decision that Destiny, the developer of a highly publicized mega-mall project in Syracuse, New York which is currently seeking LEED Platinum certification from USGBC, was entitled to a preliminary injunction requiring its construction lender, Citigroup, to fund certain pending draw requests under Destiny’s construction loan. 889 N.Y.S.2d 793 (App. Div., 4th Dep’t 2009). The decision is noteworthy from a green building legal perspective because the court specifically identified the Destiny project’s sustainable design features – and construction financing, which employed federally-backed Green Bonds – as so “unique” and “revolutionary” that money damages alone would not be sufficient to compensate Destiny if the injunction were denied; this allowed the court to find, under New York law, that the potential existed for irreparable harm to Destiny if the project did not move forward while Destiny’s suit against Citigroup for breach of contract was pending.

In New York (like most jurisdictions), one of the elements for obtaining a preliminary injunction is whether there will be irreparable injury to the moving party if the court denies provisional relief. However, if the court can calculate the moving party’s damages with precision, there can be no irreparable injury while the action is pending because the moving party would be adequately compensated by money damages if it were to prevail at trial. The Destiny court, however, found two exceptions to the irreparable injury test based explicitly on the project’s green features. It held that

“an exception is warranted because the Project’s unique character renders it difficult to calculate any damages sustained by Destiny Holdings. Citigroup stated through its managing director at a U.S. Green Building Council Presentation on November 8, 2007 that the Project is a ‘visionary project’ that has created a ‘new financing paradigm for green economic development’ that is ‘revolutionary.’ Citigroup Chairman and Chief Executive Officer Charles Prince called the use of newly-created Federal Green Bonds [created under the American Jobs Creation Act of 2004 and authorizing up to $2 billion in tax-exempt, private activity bonds to be issued by state or local governments for qualified green building and/or sustainable design projects] in financing the Project ‘groundbreaking [and] a step forward in addressing climate change in the U.S. because the Project incorporates sustainable design, energy conservation, and renewable energy sources on a large scale. He further commented that the Project ‘is good for economic development and good for the environment.’ Thus, the unprecedented nature and scope of the Project makes it unique, so that it has no established market value and any damages sustained could not be calculated with reasonable precision.”

The court also found a second exception to the general rule because of the project’s highly touted green features, stating that “Destiny Holdings has established the enormous potential for harm to its reputation and the reputation of the entire ‘Destiny USA’ project. Harm to business reputation is harm for which money damages are insufficient and for which injunctive relief may be appropriate.” I don’t think it’s unreasonable to infer here that the court was connecting the project’s green features to its “reputation” in order to carve out another exception to the general rule barring injunctive relief in similar contexts. For both of the foregoing reasons, the Appellate Division upheld the trial court’s decision, but modified the order granting the preliminary injunction to require Destiny to post a bond in order to compel Citigroup’s performance under the loan agreement.

Interestingly, two justices joined in filing a dissenting opinion that ignored the project’s green features. The dissent stated that “there is no support in the record for the majority’s conclusion that an ‘enormous potential’ for harm to the reputation of Destiny Holdings exists, other than the bald assertion of a principal of Destiny Holdings that its reputation would be damaged as a result of its failure to complete the project. The core of the majority’s argument is that the nature of the project makes it unique and thus that Destiny Holdings would be entitled to specific performance [of the construction loan agreement]. While the scope of the Project may be unique to the region in both its size and impact, the record clearly establishes that the [construction loan agreement] itself is simply one to loan money in order to finance construction.”

I think that there are a few important things to take from this opinion. First, notwithstanding the Destiny project’s massive scope, the Appellate Division has given owners a basis for arguing that green building projects – regardless of their financing mechanism – are inherently unique.  In the event of any type of dispute, owners or other parties which might be seeking provisional remedies or are engaged in other motion practice (that, like in Destiny, is unrelated to the project’s green design features) can now rely on appellate authority that green building projects are different and deserve different treatment under applicable law.

Conversely, the opinion suggests why construction and real estate attorneys need to be well-versed in the green building space; if you were asked to oppose a similar motion where the movant was arguing that “green buildings are different,” you would likely want to argue in opposition how, to date, many green building projects have not resulted in such different outcomes from conventional projects (i.e, by identifying the ongoing LEED performance gap and studies analyzing the alleged rental and asset premium for different types of certified green buildings).

The decision is also important to note from a lender’s perspective. If potential borrowers looking to finance a green construction project have the ability to argue that their projects deserve special treatment in connection with any lending dispute, lenders may consider, for example, revisiting the terms of their construction loans or otherwise pricing this type of risk into the loan itself.

Are there other green real estate-related legal issues arising out of this opinion that you might anticipate arising in connection with these types of construction lending disputes?

My thanks to Kevin Garrison of Baker Donelson for forwarding a copy of the Appellate Division’s opinion in this matter to my attention. Either of us would be happy to forward you a copy of the opinion upon request.

As we move into the first full week of 2010, the Northland Pines decertification proceeding is casting a long shadow over the short-term green building legal landscape- but more on that in a bit. Before we push forward here at GRELJ and continue dissecting them in much more detail this year, I think it makes sense to look back at what I think were the five most important green building-related legal issues which emerged during 2009:

• The stimulus package contained numerous green building-related provisions, including significant funds for state and local governments to implement energy efficiency codes. However, most of these funds have yet to be distributed, so it will be interesting to track legislative implementation during the course of 2010. Some municipalities are beginning to look more closely at the logistics of  implementing third-party-driven legislation, including in our own backyard here in New York. This will be a critical and ongoing issue to monitor.

• USGBC acknowledged the legal risks implicit with building green, but its white paper on the subject dubbed them “old wine in new bottles.” We reviewed the white paper here at GRELJ and concluded that it seemed “to be an effort to sweep many of the thornier legal issues that may indeed ferment into ‘new wine’ under the rug.” My reasons for disagreeing with the paper’s conclusions stemmed (and continue to stem) from the pace of regulatory activity, the lack of input from the insurance industry on green building risks, the uncertainty over the prevailing standard of care for design professionals practicing in the green building space, and the questionable body of green building performance data.

• Critiques of LEED building performance moved into the mainstream; USGBC mobilized in response. The ongoing debate about the energy performance was picked up on in media outlets that included the New York Times after Henry Gifford and USGBC’s Brendan Owens debated the merits of LEED at the NESEA forum last March. LEED Version 3.0 was released with the obligation for owners and landlords to report data on building performance to USGBC, though many of you wondered what USGBC would actually do with that data upon its compilation. USGBC’s Building Performance Initiative, which was launched in advance of Greenbuild in Phoenix, is ongoing; we’re likely to start seeing results and further studies and critiques of LEED building performance throughout 2010.

• The National Institute of Building Sciences convened a Task Group to review various third-party building performance rating systems, which identified associated risk and policy problems for the A/E/C community to contemplate. The Task Group’s recommendations to NIBS’ Board of Directors included the development of various white papers analyzing risk and policy issues in greater detail; we emphasized the import of this effort in the context of NIBS’ political backing and the scope of the report’s conclusions.

• The potential for decertification of LEED Version 3.0 projects that (1) fail to report building performance data or (2) provide a legal mechanism for the reporting requirement to carry forward after a sale or sublease caused a firestorm of blogosphere commentary. Interestingly, though, the first publicly reported decertification proceeding- the Northland Pines High School complaint, which USGBC is currently reviewing – received comparably little attention.

In my opinion, these last two items were clearly the most important green building legal stories of 2009. Although the Northland Pines proceeding is not the full-blown green building litigation that many have predicted, it implicates all of the legal issues associated with decertification that were discussed last year. It is also the type of scenario out of which green building litigation could arise in the event USGBC/GBCI revokes the school’s LEED Gold status. For all of these reasons, and regardless of the outcome, the Northland Pines proceeding will be the first major green building legal story of 2010, particularly because we are (publicly) witnessing USGBC/GBCI follow the procedures of its Certification Challenge Policy for the first time.

If there are any other noteworthy issues we missed, please feel free to note them in the comments below. Happy New Year, everyone!

For those of you reading this article in a reader or by email, we recently gave GRELJ a makeover and encourage you to visit the site in your browser. Hopefully the new design is easier to read and better organized. One new feature is threaded comments, which allow you to reply specifically to a given comment in each thread. I look forward to any feedback on our new look.

Earlier this year, in the aftermath of USGBC’s release of the new LEED 2009 Minimum Program Requirements (“MPRs”), there was extensive discussion here at GRELJ and elsewhere with regard to the potential for decertification of LEED projects that fail to comply with the MPRs. A LEED 2009 decertification proceeding, though, would not be the first presented to USGBC/GBCI; according to an article that appeared last week in Eagle River, Wisconsin’s Vilas County News-Review, a group of local residents have filed a 125-page complaint with USGBC that challenges the award of LEED Gold certification to the Northland Pines High School, which was completed in the fall of 2006 and earned formal certification under LEED for New Construction Version 2.0/2.1 on May 10, 2007. It’s unclear when the complaint was filed or what specific allegations it asserts. However, according to the article, the residents initially raised concerns about the project during the design phase, claiming that a more efficient HVAC system was available and should have been specified by Hoffman LLC, the Appleton, Wisconsin-based firm that designed the school. A site visit from Hoffman and USGBC representatives is scheduled; the article reports that a December 7 conference call was to address certain areas of the complaint which USGBC was unable to clarify to the school board.

In terms of the procedures which both the residents and USGBC/GBCI are obligated to follow in addressing the complaint, the GBCI’s Certification Challenge Policy is important to review. It states, in pertinent part, that “GBCI may revoke previously granted LEED certification or take other action regarding LEED certification such as determine to reduce points or category of LEED certification previously granted, if GBCI determines that credits/prerequisites for LEED certification were granted based on erroneous documentation or falsely submitted documentation. Persons concerned with possible inaccurately granted LEED certification are encouraged to contact the GBCI, provided, however, that GBCI reserves the right to institute an investigation and review of such possible errors or inaccuracy or veracity of documentation without third party complaint.” In the full version of its article (which is not available online), the Vilas County News-Review reports a USGBC official as stating that USGBC “gets challenges from time to time on certification designation” but that the Northland Pines challenge is “off the wall.”

Independent from the technical merits of the complaint – which I am curious to review – the article raises many critical legal questions. First, if the allegations are indeed true, will GBCI exercise its ability to decertify the building? If it does, will the party or parties alleged to be responsible face legal action for those failures? Will the complaint – and any written record created pursuant to the requirements of the Certification Challenge Policy – result in precedent that GBCI will follow in any subsequent decertification proceedings? If so, could Northland Pines become the next Shaw Development, cited as the seminal case for LEED decertification and subsequent green building litigation? If other decertification proceedings take place in jurisdictions where legislation is tied to formal LEED certification, how will state and local governments penalize projects that are decertified (if at all)? Finally, to what extent – if any – will USGBC make decertification materials available to the public for peer review? The Northland Pines proceedings may not answer any of these questions, but because it is the first time a decertification proceeding has been reported publicly, we will be keeping a close eye on what transpires in connection with GBCI’s review of the complaint, a copy of which I am attempting to obtain.

• Citizens Challenge Green Certification of Pines School (VCNR)

*USGBC has kindly provided us with a copy of its Green Office Guide to give away here at GRELJ. Just add a comment to this post before 5PM ET next Wednesday, December 16; we’ll select one of you at random and pick up the tab for shipping. We’ll email the winner directly for contact information.

One of the reasons why New York City’s Greener, Greater Buildings Plan, which our City Council passed earlier today, does not (as originally drafted) require owners to pay for capital improvement projects that boost energy efficiency is that, under most local leases, landlords who pay for those improvements can’t pass along associated costs to their tenants, who benefit from the resulting decrease in operating costs. USGBC’s Green Lease Guide, which was published earlier this fall, does much more than just discuss the split incentive that’s a major barrier to implementing a truly green lease; it provides tenants with a form environmental impact questionnaire designed to assist them in vetting potential properties, as well as eleven pages of sample green lease provisions (many of which we’ve written about here at GRELJ previously). The Guide is primarily written for commercial office tenants, but landlords will find its background information – which describes LEED’s accreditation and certification processes – useful as well. More specifically, here’s how the Guide breaks down:

Section 1 – Why Green the Leasing Process?

- How Buildings Affect the Environment and Tenants
- Primer on LEED

Section 2 – Greening the Leasing Process

- Environmental Strategies for the Leasing Process
- Implementing Environmental Strategies at Renewal and in New Space Searches
- Greening the Lease
- Best Practices for LEED for Commercial Interiors Project Management, Design, and Construction
- Implementing Environmental Strategies Under Existing Leases

Section 3 – Tools for Greening the Leasing Process

- LEED for Commercial Interiors Scorecard
- Basic Environmental Impact Questionnaire
- Sample Criteria for Qualifying Project Team Professionals
- Sample Green Building RFP Guidelines
- Building Questionnaire for Tenants Seeking LEED for Commercial Interiors Certification
- Sample Green Lease Provisions
- Sample Environmentally Preferable Purchasing Policy for Tenant Operations

Resources

Copies of the Green Lease Guide are available for purchase here; our thanks again to USGBC for providing us with a complimentary copy to give away here at GRELJ. We’ll have much more to say on various specifics of the Guide moving forward, particularly with respect to its discussion of aspirational green lease provisions and enforcement mechanisms. In the interim, if you have any questions or require assistance in connection with greening your leasing documents, the Arent Fox Green Building & Sustainability Practice Group would be happy to help you out.

I’m glad to be back after a great wedding and honeymoon- thanks to everyone who passed along their regards.

Back in August, you may recall that Community Solutions executive director Pat Murphy authored the first piece of a three-part survey titled “LEEDing from Behind: The Rise and Fall of Green Building,” which we noted here at GRELJ. Our article pointing you to the piece generated quite a bit of commentary and, now that Mr. Murphy has completed Parts 2 and 3, we thought we’d point you to his new book compiling the survey which is titled “The Green Tragedy: LEED’s Lost Decade.” The book was released while I was away last month and builds on Part 1 by tracing the historical argument promoting minimal green building cost premiums, reviewing the ongoing marketing efforts behind LEED, and concluding that policy makers should demand energy efficiency standards more akin to the German Passive House rather than “cheap quick ‘green’ solutions.”

Interestingly, in the preface, Murphy observes that “[w]e are now faced with a movement to adopt LEED as part of our building codes. An over-marketed standard that is under serious attack for its poor energy performance is now being proposed and accepted by cities as a requirement for our buildings. The idea of accepting as law an inadequate standard that has been developed by the building industry – thereby allowing that industry to usurp the long-established methodology of setting building standards by government policy- is absurd and dangerous.”

In addition to their significant legal implications, these remarks resonate with the conclusions of the recent NIBS report and, in my opinion, portend the types of critiques I believe we will see more forcefully in 2010 if LEED buildings do not perform at a statistically higher level under Version 3.0. Mr. Murphy’s book is available here, and I look forward to continuing the robust discussion that emerged after we noted Part I here at GRELJ in the comments below.

• The Green Tragedy: LEED’s Lost Decade