Beginning on November 1, Australia will require landlords to disclose the energy efficiency of their office buildings when they either sell or lease space that is larger than 21,530 square feet (2,000 square meters). Ratings will be based on the National Australian Built Environment Rating System (“NABERS”), which is on a scale of 1 to 5 stars (Australia’s current median market performance stands at 2.5 stars). After an initial one-year transition, landlords will also be required to provide other information, including an assessment of tenant lighting. The new regulations also extend to foreign REITs that own buildings in Australia (incidentally, foreign investors are responsible for over 70 percent of all real estate transactions in Australia and have purchased over $1.2 billion in assets there over the past 12 months).

According to CB Richard Ellis’s Mark Willers, who is quoted in a press release detailing the new requirements, Class A and Class B buildings should be able to earn a NABERS rating of between 3.5 and 4 stars by “fine-tuning” their existing plants and systems, but “[t]he ability of a building to achieve NABERS . . . in excess of 4 stars will depend on its configuration and construction, and may require significant capital works.” In Australia, government entities have committed themselves to occupying space in buildings with NABERS ratings higher than 4.5 stars by 2011, though only 11 percent of the overall Australian market has achieved this rating to date.

One of the thornier green real estate questions that the new requirements may help answer is whether a higher NABERS rating correlates to increased rents and asset values. Unlike the numerous studies performed here in the U.S. (which have been critiqued on a variety of grounds by many commentators), there have been no comparable studies performed to date in Australia. One particular U.S. study, authored by Piet Eichholtz and Nils Kok of Maastricht University and John Quigley of Berkeley, released by the Royal Institution of Chartered Surveyors (“RICS”) in 2009, and actually noted in the press release, concluded that there were “no significant market effects associated with the LEED label. Energy Star concentrates on energy use, while the LEED label is much broader in scope. Our results suggest that tenants and investors are willing to pay more for an energy-efficient building, but not for a building advertised as ’sustainable’ in a broader sense.”

(As you may recall, the RICS study was titled “Doing Well By Doing Good? An Analysis of the Financial Performance of Green Office Buildings in the USA,” and the purpose of the study was to determine whether investors are currently willing to pay any premium for green (Energy Star- and LEED-certified) commercial office buildings and, if so, what that premium was.) If any Australian studies are eventually undertaken, it will be interesting to see if their conclusions mirror those from RICS and offer any insights that will be transferable to the North American market.

Just before the July 4 holiday, Fireman’s Fund, which launched the green building property insurance market back in 2006, released what it is calling its “next generation” of green building policy endorsements. Calling it a “significant enhancement to what’s currently available in the marketplace,” Fireman’s Fund’s Steve Bushnell also introduced a “Green Financial Incentive Coverage” policy that provides policyholders with protection from the loss of green building-related financial incentives, including tax credits and deductions, utility rebates, and loan discounts, for a period of two (2) years after the loss.

According to Mr. Bushnell, the new endorsement evinces Fireman’s Fund’s “deeper understanding of evolving green building construction and insurance issues.” David Cohen, the company’s senior director of real estate, called the policy “a powerful incentive as many new green buildings are built with these cost savings factored in. Every day, new incentives are introduced – both from the utilities and the government at the local, state and federal level – incenting property owners to build green and losses could get in the way of that.”

This latter point, of course, is one we make frequently here at GRELJ in the context of design and construction agreements and leases; the pace of regulatory activity continues to make translating legislative requirements into contract documents a major challenge. The new endorsement also appears to be – at least implicitly – an acknowledgment of the $600,000.00 in lost tax credits which the developer suffered in the Shaw Development litigation, though it is unclear whether – under the terms and conditions of the endorsement – the developer’s loss would have been covered.

In addition to the new endorsement, Fireman’s Fund simultaneously announced that it has made further refinements to its existing line of green building coverage, including:

• Broadening eligibility for post-loss green upgrades to include all real and personal property that more efficiently uses energy or water, improves human health or reduces environmental impact (such as alternative energy generating equipment and water systems or green roofs);

• Combining four of its endorsements – three commercial and one manufacturing – into a single endorsement, which also includes coverage for building commissioning;

• For certified buildings, coverage now allows the insured to attain certification at one level above the certified green building level that the insured had prior to the loss or damage (i.e. LEED Gold instead of Silver);

• Vegetated roof coverage has now been extended to vegetated swales and other vegetation that reduces the heat island effect, including vegetated walls. This coverage now applies to both certified and traditional buildings (previously it was only for certified buildings); and

• Coverage has also been expanded to include porous paving – water permeable paving that allows water to drain into the ground to help manage water flow.

Perhaps what’s most interesting about the press release is Fireman Fund’s acknowledgement that, to date, approximately 1500 commercial property insurance policyholders have purchased one of the company’s green building endorsements (though there is no information on how many claims have been asserted against those policies).  It goes without saying – as always – that you should review your policies of insurance – property, professional liability, builder’s risk, or otherwise – with heightened scrutiny in connection with your green construction project to confirm exactly what additional insurance – if any – you may need to procure.

This comment reminded me of language in the NIBS report which noted that “[a]t an increasing rate, state and local governments and their code/regulatory agencies are adopting building rating/certification systems, intended as voluntary systems, to be their code or regulatory requirements, often without fully understanding their benefits, tradeoffs, and costs.” While the Atlanta restaurant industry seems more concerned with what it perceives to be a green building cost premium, the fact that its opposition is also grounded in the lack of sufficient input from stakeholders also echoes many of the policy issues we’ve raised here at GRELJ over the past year, particularly with respect to the rush to mandate green building requirements.

In that vein, it’s also interesting that although Atlanta’s Bureau of Buildings will enforce the ordinance, the city council has yet to determine what types of fines or other enforcement mechanisms would be imposed on buildings that fail to comply. “This is still a work in progress,” a spokesman observed, and the restaurant industry is pointing to this specific comment as one of the bases for arguing that the ordinance needs more work before the city council even considers passing it. Again, this echoes the types of observations noted in the NIBS report. While these types of details are being worked out, the restaurant industry is instead advocating for additional financial incentives (such as tax credits and building permit fee reductions); this also reflects the conclusions of the NAIOP report issued earlier this year, which called for financial incentives rather than mandates to bridge landlords’ payback period gap for most types of energy efficiency improvements.

On another note, the ordinance may present some novel green leasing implications which the restaurant industry has picked up on. Although building owners will bear the responsibility under the text of the ordinance for ensuring that the required standards are satisfied, the restaurant industry is warning restauranteurs who do not own the premises out of which they are operating to review their lease documents and confirm that they will not be responsible for executing the legislation’s required retrofits. It is not difficult to imagine the scenario where a lease includes a clause obligating the tenant to comply with all applicable codes and regulations, and the landlord pinning responsibility for any such retrofits on that tenant in the absence of affirmative language to the contrary.

Just a quick editorial note- this article will be the only new post here at GRELJ for the rest of the month as I am getting married this Saturday and then off on the honeymoon. Thanks to everyone for your support and comments since we launched this site almost a year ago (and patience over the past couple of weeks while the pace of our posts has slowed in advance of the wedding). See you on the other side!

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