1. San Francisco
2. Midtown New York City
3. Washington, D.C.
4. Midtown South, New York City
5. Los Angeles
6. Boston
7. Downtown New York City
8. Portland
9. Seattle
10. Oakland

New York City’s Midtown, Midtown South, and Downtown submarkets cracked the top ten, placing second, fourth, and seventh, respectively in the Index, which (among other goals) aims to assist urban planners and policymakers in examining data to understand what new policies and incentives may be useful in accelerating green building practices at the local level.

Specific rankings (again, out of 30 markets evaluated) within each of the Index’s six categories for New York City’s submarkets are:

• Midtown: 3rd in office market conditions; 3rd in investment potential; 5th in green adoption and implementation; 4th in mandates and incentives; 9th in state energy initiatives; and 3rd in green culture.

• Midtown South: 2nd in office market conditions; 2nd in investment potential; 25th in green adoption and implementation; 3rd in mandates and incentives; 8th in state energy initiatives; and 2nd in green culture.

• Downtown: 7th in office market conditions; 7th in investment potential; 20th in green adoption and implementation; 6th in mandates and incentives; 10th in state energy initiatives; and 4th in green culture.

Some of these individual rankings may seem somewhat inconsistent to you (for example, every new commercial office building at the rebuilt World Trade Center site will be LEED Gold-certified, which makes Downtown’s ranking for green adoption and implementation seem unfair). But a closer review of the 10-page national overview should provide some context and clarity to the bare statistics referenced above.

This year’s Index also – for the first time – separately profiled 2 of the top 10 markets, including Midtown Manhattan, in significant detail. The Midtown Profile Report analyzed a variety of factors specific to the Midtown submarket, including general and green office market statistics, major leasing transactions, and a review of the submarket’s LEED-certified and Energy Star-rated commercial office buildings. We’ve reviewed the Report and, below, present some of its conclusions for your consideration in order to suggest some anecdotal conclusions about the state of the Midtown market vis-a-vis green.

Overall Market Inventory & Investment Outlook

Manhattan is the country’s largest office market with a total of nearly 393 million square feet of inventory. 241 million square feet of that space is located in the Midtown submarket. In Midtown, 20.3 million square feet of that space is LEED-certified (8.4 percent of total inventory) and 50.3 million square feet of space is Energy Star-rated (20.9 percent of total inventory). We expect these figures to continue growing. More energy efficiency initiatives will be enacted under the Greener, Greater Buildings Plan, ultimately driving down learning curves and costs of compliance. And large owners and operators like Vornado, SL Green, Durst, and Malkin are likely to remain committed to greening their portfolios.

LEED-Certified Commercial Office Buildings

According to the Report, there are currently 28 LEED-certified commercial office buildings in Manhattan, which total 24.1 million square feet of space. 23 of those buildings are located in the Midtown submarket and constitute 20.3 million square feet of space. 18 of those 23 buildings are certified under the LEED for Existing Buildings rating system; 5 buildings under LEED for Core and Shell.

So far in 2011, the following 9 properties in the Midtown submarket have earned formal LEED certification from USGBC:

• 900 Third Avenue (LEED-EB: O&M Gold; May 5, 2011; 515,200 square feet)

• 250 Park Avenue (LEED-EB: O&M Gold; May 5, 2011; 471,260 square feet)

• 125 West 55th Street (LEED-CI 2.0 Gold; April 20, 2011; 48,000 square feet)

• 909 Third Avenue (LEED-EB: O&M Silver; April 20, 2011; 1,125,000 square feet)

• Two Penn Plaza (LEED-EB: O&M Silver; April 19, 2011; 1,500,000 square feet)

• 1740 Broadway (LEED-EB: O&M Silver, April 8, 2011; 412,704 square feet)

• 11 Penn Plaza (LEED-EB: O&M Silver, April 7, 2011; 1,987,328 square feet)

• 1290 Avenue of the Americas (LEED-EB: O&M Silver, April 7, 2011; 1,987,328 square feet)

• 1120 Avenue of the Americas (LEED-EB: O&M v. 2009 Silver; February 23, 2011; 400,000 square feet)

Energy Star

99 buildings in Manhattan earned Energy Star accolades in 2010, and the total number of Energy Star-labeled properties has more than doubled since the last Green Building Opportunity Index was released in 2010. The Report identifies the Greener, Greater Buildings Plan as a major catalyst for the increase.

Midtown currently stands heads and shoulders above the other New York City submarkets in terms of LEED and Energy Star adoption, ranking 5th overall in the Index with Downtown and Midtown South trailing at 20th and 25th, respectively. While the Midtown South submarket lacks Midtown’s volume of Class A trophy properties that have almost uniformly pursued LEED-EB: OM ratings, we do expect Downtown to perform better in future Indices as the new World Trade Center towers come online.

Mandates & Incentives

This section of the Report starts by noting that “New York’s passage of the Greener, Greater Buildings Plan in late 2009 has already had a definitive impact on commercial office properties, as the number of Energy Star certified properties in Manhattan has more than doubled since the last iteration of the Green Building Opportunity Index a little over a year ago.” Specifically, it focuses on the first private sector phase of the Greener, Greater Buildings Plan: the benchmarking law that is requiring all residential and commercial owners of buildings larger than 50,000 square feet to benchmark their energy and water usage against 2010 results. The Report also points to two public initiatives that we’ve yet to discuss here at gbNYC:

• Back in March, Con Edison announced that Lockheed Martin would run its Industrial Energy Efficiency Programs, which provide cash rebates and incentives to facilitate reduction in gas and electricity usage by its commercial and industrial customers. Thus far, more than 250 applications have been received which are generating over $3 million in rebates and incentives for Con Ed customers.

• Second, NYSERDA’s Focus on Commercial Real Estate Program (FOCUS CRE) is another program we’ve yet to note at gbNYC. The program provides building owners with a variety of strategies to assist them in assessing various performance factors, including energy consumption, efficiency, and how costs and savings will accrue to the owner as opposed to tenants. It’s a great resource for owners and tenants alike that are interested in greening their leasing practices.

Finally, we were also pleased to note that the Report identified Mayor Bloomberg’s Green Leasing Language in this section, as well as the city’s commitment to including the language in all new leases in which the city is a tenant.

Overall, Midtown ranked second among the thirty markets surveyed (behind Washington, D.C.) in the Mandates & Incentives category.

Green Culture

The Index’s Green Culture category seems inherently more subjective than the others. Nevertheless, Midtown ranked first in the Transit Ridership and second in the Walk Score subcategories that were used to produce each submarket’s overall Green Culture score. According to the data that the Index pulled from SustainLane, “New York City’s per capita emissions are a third of those in the rest of the country because of public transit use, densely packed buildings, and smaller homes.” SustainLane is a peer reviewed study whose results, factors, and methodologies are available here.

Final Thoughts

Ranking cities in the Green Building Opportunity Index is an important step towards promoting competition and improvement among the 30 markets that participated. We’re pleased that New York City has performed so well thus far, but work remains if Gotham is to be as successful in 2012. For example, we hope to see both Midtown South and Downtown improve in the number of Energy Star-labeled and LEED-certified buildings. But as the Report notes, the Manhattan office market “is one of the healthiest in the country, with investor demand in core central business district markets continuing to put upward pressure on property values.” As the commercial real estate climate continues to – hopefully – improve into 2012, we do expect New York City to fare just as well in next year’s Index. What we do hope to see regardless are detailed Profile Reports for the Downtown and Midtown South submarkets, which could identify specific green pressure points within each local submarket.

Again, a fully copy of the Midtown Profile Report is available here for your download and review.

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)

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)

Unlike the BOMA Green Lease Guide (created by Jones Day partner Steve Teitelbaum, who also participated on the panel), the Model Green Lease is an extremely compact document, drafted from scratch, which is fundamentally based on the theory that, in order to make a more compelling business case for green buildings, leases must be crafted as gross (i.e., the landlord is responsible for building operating expenses, unlike in a net lease, where the tenant pays for its own share of those costs). The document, which also includes a corresponding reference guide, comprises just 17 pages plus exhibits and incorporates ten essential elements that aim to support a specific definition of a green building created by the Task Force for purposes of the project: “[a] building that is environmentally responsible, profitable and a healthy place to live or work.”

The ten essential elements of the Model Green Lease as developed and subsequently drafted by the Task Force are as follows:

• Environmental performance objective clauses (broad aspirational provisions that purport to provide context and clarity to the lease, which also recognize that the parties who draft the lease may not be the parties that ultimately operate the building);
• Gross lease rent structure (acknowledging that the landlord is in the best position to optimize building performance, provided it has the financial incentive to do so);
• A fixed per square foot energy allowance for tenants;
• Objective building performance standards;
• An annual building performance reporting requirement; and
• Provisions related to green cleaning and recycling, building rules and regulations, tenant fit-out guidelines, and a tenant manual and development guidelines.

With respect to the gross lease rent structure and addressing the split incentive, defining the scope of building operating expenses is a major green leasing challenge, particularly with respect to landlord-initiated capital improvements to the building’s infrastructure during the term of the lease. The Model Green Lease addresses this issue by including within its definition of building operating expenses the amortized cost of any capital expenditures that reduce those expenses, but only to the extent that they create actual savings for the tenant. One important related point which we did not delve into on the panel is whether the ongoing costs of certifying the building under a third-party green building rating system – such as LEED-EB: OM, Green Globes or Energy Star – should be included in the definition of building operating expenses; the Model Green Lease does not include these costs, the BOMA Green Lease does (within its Section 4.2 definition of building operating expenses).

One of the many interesting issues that were raised during the course of the panel discussion that followed the presentation of each leasing effort was a hypothetical proposed by one of our audience members. Suppose Tenant A leases space in a multi-tenant LEED-certified or Energy Star-rated building. Tenant A’s lease is green, Tenant B’s is not. In the course of conducting its business, Tenant B does something that jeopardizes either the building’s LEED rating (under LEED-EB: OM or with respect to one of the new Minimum Program Requirements under the LEED 2009 system) or pending Energy Star application (by using an increased amount of energy over what is contemplated by the lease). Now suppose that Tenant A is a public company with a shareholder mandate to occupy space in a LEED-certified building, or for similar reasons relied on the landlord’s representations regarding Energy Star. Could Tenant A sue the landlord for Tenant B’s actions based on violating certain provisions in its green lease?

As the panel pointed out in response, it’s rare that a lease would obligate either party to perform in a certain manner with respect to other third parties, but a broadly drafted environmental performance objective clause might provide the tenant’s attorney with, at a minimum, the ability to assert a claim that might either assist the tenant in renegotiating more favorable lease terms, or rescinding the lease outright. Nevertheless, as we noted previously here at GRELJ, the Model Green Lease puts the onus on the landlord in Section 5.02.3 to “use its reasonable efforts to cause other tenants of the Building to conduct their operations in the Building and their premises in conformity with the Environmental Performance Objective.” Accordingly, everyone on the panel stressed that form green leasing documents are tools and not designed for imminent signature; it’s clear that these types of issues will need to be discussed and vetted in detail as green leasing practices continue to disseminate.

I also thought that the discussion on enforcement of green lease provisions was particularly insightful; the panel discussed whether certain breaches might be more egregious than others from a sustainability perspective. The Model Green Lease, for example, provides tenants with an allowance for electricity. If the tenant exceeds that allowance, it is required to reimburse the landlord the extra per kilowatt hour cost; the landlord, however, is not given the right to terminate the lease. (Of course, a significant boost in energy consumption might be indicative of the tenant violating the lease’s use provision (Section 4.01 in the Model Green Lease), which would give the landlord the right to terminate). Little consensus was reached during this line of discussion.

However, one final thought about enforcement struck me as particularly noteworthy; Michael Brooks of REALpac explained that while studying green leasing practices in Australia, he met a landlord whose form lease included a variety of green provisions which- if breached- entitled it to terminate the lease and evict the offending tenant. Although this is a drastic remedy, and the panel agreed that most landlords would likely not want to create such a self-imposed gap in their building’s net operating income, it could suggest the direction in which green lease enforcement might head in a rapidly shifting domestic regulatory climate.

The legal issues associated with green leasing are fascinating, emerging, and present an opportunity for the real estate community to make a major contribution to the more efficient operation of commercial and industrial buildings. As energy efficiency continues to rank as a high priority, and retrofit work expands as the economy slowly turns around, the four green leasing tools presented at last week’s Urban Green Expo will become increasingly important for landlords and tenants alike to review, implement, and build upon. Simultaneously, the requirements of LEED 2009 and other third-party systems will need to be translated into or otherwise sufficiently addressed by such documents in order to safeguard the rights and remedies of the parties. We’re looking forward to continuing the discussion here at GRELJ about these critical issues, with particular continued emphasis on the legal implications of various green lease provisions.

• It’s Not Easy Leasing Green (GlobeSt.com)

The reductions are staggered between 2010 and 2013 and beyond (10 percent through 25 percent, though the benchmark against which those reductions are measured is not set forth in the pending bill); Energy Star ratings would increase from 55 in 2010 to 75 in 2013 and beyond. An independent consultant would determine whether the required energy reduction is met; if not, the contractor (or, interestingly, another entity warranting the energy use) will be responsible for reimbursing the city for the cost of the excess energy use. The amendment is BL2009-503; a vote is slated for later this month. “This would allow an alternative that focuses on the performance of the building, not on the process of how you got to that performance,” Dominy told the Tennessean.

The genesis for the amendment is a 16-classroom addition to Antioch’s middle school, which uses an HVAC and building envelope system that does not qualify for credits under LEED (though it’s unclear exactly why this is the case). The contractor which designed and installed the system- Energy Systems, Inc. of Cookeville, Tennessee- is owned by Bob Southerlan, a former aerospace engineer who is “worried about being knocked out of the Metro construction market.”

I think that this is a critical battle to watch as it may suggest that local governments are coming to view LEED as something less than the mark of building performance; Mr. Dominy’s thoughts about process versus performance are particularly noteworthy in this context. It also echoes some of the remarks in the comments to Pat Murphy’s recent article as presented here at GRELJ (i.e., Mr. Murphy himself noted that “[t]here is a crying need for accurate, verificable and reliable energy rating systems. If LEED doesn’t fill the bill, other options will come forward.”) In addition, if it is true that Southerlan’s system is somehow excluded from the purview of LEED, there may be other, more serious problems with Nashville’s legislation from an antitrust perspective, which we’ll get into in a subsequent article.

• Nashville’s Green Building Code Under Review (Tennessean)

The authors used a standard commercial real estate valuation formula that related the logarithm of the rent per square foot or sales price per square foot of each building cluster to a variety of hedonic building characteristics, including quality, amenities, age, and location. Some pertinent conclusions as set forth in the report are as follows:

• “The results suggest that the LEED rating has no statistically significant effect upon commercial rents, but the Energy Star rating is associated with rents higher by 3.3 percent.”

• With respect to sales price, “[w]hen the certification is reported separately for the Energy Star and the LEED systems, there is no evidence that hte latter certification is associated with higher selling prices.”

• “The premium in rents and values associated with an energy label varies considerably across buildings. It is positively related to the intensity of the climate surrounding the rated building; a label appears to add more value when heating and cooling expenses are likely to be a larger part of total occupancy cost.”

I am extremely curious to see the reaction to the RICS study in the coming weeks. Already, several major media outlets have reported that it demonstrates “certified green buildings rent and sell at a higher price than non-certified buildings,” failing to note the study’s conclusions about the role a LEED rating may play in obtaining that higher price.

I look forward to your comments on the merits of the study once you have had the opportunity to review it; the study is available for download via the link below.

• Doing Well By Doing Good Study (RICS)

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/