Earlier this year, New York City took an important step towards becoming the country’s leader in public green leasing practices when Mayor Bloomberg’s Green Lease Task Force released model green lease language aimed at addressing the split incentive in most commercial office leases. The language was incorporated with much fanfare by Silverstein Properties into its lease with the law firm WilmerHale at the LEED Gold 7 World Trade Center, as well as adopted by the City for all of its future leases.

Now, recently after it was named North America’s greenest city in a study published by Siemens, San Francisco has fired back by launching a Green Tenant Toolkit of its own, created at the recommendation of the San Francisco Mayor’s Task Force on Existing Commercial Buildings. Although designed primarily for San Francisco buildings, the free, on-line resource is being promoted as adaptable for any geographic location. It was developed by a 26-member group of real estate and environmental professionals representing brokers, property management, large tenant groups, attorneys, electrical utilities, and design and construction experts, assembled by San Francisco’s Business Council on Climate Change.

The Toolkit is divided into three sections: a general green leasing guide, tips on stakeholder engagement, and a checklist of items summarizing key sustainability metrics for any property. The toolkit isn’t written for lawyers. But it appears to be a good jumping off point for tenants and landlords that are unfamiliar with green leasing generally and want to get up to speed quickly, regardless of where they may find themselves in the leasing process. And it’s also worth noting that the New York City model language (along with our article discussing the WilmerHale lease at 7 WTC) is included in the Green Tenant Toolkit’s database of additional resources.

As you may recall, San Francisco led two major urban green building indices this year: the study from Siemens and, for a second consecutive year, the city topped Cushman & Wakefield’s Green Building Opportunity Index. We reviewed the Index’s analysis of New York City’s Midtown submarket – which placed second overall in the Index – over the summer here at GRELJ in significant detail.

Last week in Toronto, I had the opportunity to present at the second annual Greenbuild Legal Forum. As my colleague Chris Cheatham points out in his overview of the event at Green Building Law Update, the fact that the green building community is embracing attorneys and the value they can provide to the industry is itself noteworthy. In fact, USGBC General Counsel Susan Dorn indicated at the Forum that her office will sponsor a series of legal webinars next year to address various green building legal topics. We’ll follow up here at GRELJ once those details are announced.

But back to the Forum: all of the presentations were excellent and, in my opinion, demonstrate how far green building law has progressed since 2008, when I lamented the lack of discussion about risk and liability at the Boston Greenbuild. If you’re looking for a blow-by-blow recap, attorney Dan Sheridan of the Sheridan Law Firm has written an excellent summary at his Legally Green blog, which I encourage you to review.

My topic in Toronto was the applicability of the proposed 2010 version of the FTC Green Guides to the marketing of green real estate. Although public comments on the proposed revisions to the Guides closed last October, FTC confirmed to me that it has yet to establish a date for their final release. And, according to one Forum attendee with close ties to FTC, the organization is still culling through a large volume of comments, many of which voiced strong opinions about the proposed revisions. I’ve embedded my slides below for your review:

My presentation’s primary goals were (1) to explain what the Green Guides are; (2) how the Green Guides are enforced; and (3) how they apply to real estate. To accomplish this third point, I presented photographs of how owners and operators have marketed green features and third-party certification of real estate in New York City (in increasing order of acceptability based on the revised Guides).

In preparing for my remarks, one of the most interesting documents I came across was a set of recommendations from USGBC to FTC. USGBC submitted the document after a public workshop in July of 2008 that specifically discussed the Guides’ applicability to green buildings. You can access the document here (scroll down, it’s number 26 in the list).

Although those recommendations were not incorporated into the version of the Guides that is currently pending (though they could be somewhere down the line), USGBC was – and, in my opinion, remains – concerned about how the LEED label is being applied to buildings in pursuit of certification. Indeed, one of the major takeaways I emphasized during my remarks in Toronto was that more guidance from FTC on this topic is inevitable: as you’ll see in my slides, the organization has stressed that it will not hesitate to enforce environmental marketing that is directed at non-consumers.

This past Tuesday, July 26, U.S. District Court Judge Leonard Sand heard oral argument on USGBC’s motion to dismiss Henry Gifford’s amended complaint in Gifford et al. v. USGBC, still pending in the Southern District of New York. As you may recall, USGBC’s motion was fully submitted to the court on May 6. Based on Rule 12(b) of the Federal Rules of Civil Procedure, the motion claims that (1) Mr. Gifford and his fellow plaintiffs lack standing to maintain their suit; and (2) the amended complaint fails to state a cause of action upon which the SDNY can grant relief to Mr. Gifford and his fellow plaintiffs.

Although we don’t have a copy (yet) of a written transcript of the proceedings, Norah Hart, who serves as counsel for Mr. Gifford was kind enough to share some thoughts with GRELJ about what took place during the oral argument, which apparently focused on whether the 2008 New Buildings Institute study (claiming 25 to 30 percent energy savings in LEED-certified buildings) should be considered advertising under the federal Lanham Act.

“Judge Sand was skeptical about two critical aspects of the case: (1) whether the claim of ’25 to 30 percent energy savings’ in LEED-rated buildings can be attributed to USGBC (never mind that the NBI study that arrived at that conclusion was commissioned by USGBC and that USGBC propagates that myth relentlessly); and (2) whether the NBI study’s conclusions can be considered advertising,” Ms. Hart wrote to us in an email.

Whether the NBI study is advertising is a key threshold issue because USGBC’s moving papers argued that Mr. Gifford’s amended complaint failed to “plausibly allege” a Lanham Act claim for false advertising, and that “the 2008 [press] release [describing the results of the NBI study, concluding that new LEED-certified buildings are on average performing 25 percent to 30 percent better than non-LEED buildings in terms of energy use] does nothing more than accurately report the conclusion of the NBI study and provide a link to the study itself, so that persons in the building industry could make their own judgments about that study.”

No word on when we can expect to see a written decision from Judge Sand, but we’ll keep you posted. The Southern District’s case number is 1:10-CV-07747.

An important article about the roles of USGBC, LEED, and the LEED accredited professional appears in the most recent issue of ArchitectureBoston, a quarterly publication of the Boston Society of Architects.

Written by Michael Liu, a principal at The Architectural Team in Chelsea, Massachusetts, the piece notes the proliferation of LEED-driven legislation at the state and local levels. It observes that “[a]lthough the USGBC’s LEED system has done more to bring the cause of sustainability into the public consciousness than an other, perhaps the time has come to revisit that assumption in the case of a private regulatory body that is not answerable to governmental authority.”

While this issue is not necessarily a novel one, it is significant that a major architectural publication has openly asked the question. The article itself appears to be motivated (at least in part) by Henry Gifford’s lawsuit against USGBC. From that perspective, perhaps Mr. Gifford’s suit can already be deemed a success, regardless of the Southern District of New York’s decision on USGBC’s pending motion to dismiss his complaint.

Liu asks whether “[t]he shrill original allegations aside, at its core, the [Gifford v. USGBC] case raises the question of whether it is appropriate for a private fee-generating nongovernmental organization to assume what amounts to a regulatory role in the building industry.” This legal concept is likely familiar to you: by relying on the LEED system within legislation, state and local governments have effectively punted control over their programs to an unaccountable private third-party organization.

As we’ve noted here previously, although this type of policymaking may have legal repercussions worth discussing under the non-delegation doctrine, Liu’s article is more concerned with the “process of certifying buildings and the creation of a new fee-generating bureaucratic structure to do so.” Although he does not walk through any proposed solution, Liu writes that “[i]t seems fair to ask whether so much administrative complexity and hierarchy actually advances the cause of sustainability.”

The article refrains from critiquing LEED itself. (“The issue then is not the LEED rating system, the virtues and shortcomings of which can be separately discussed.”) But Liu identifies many of the legal process questions that have floated across the green legal landscape since LEED-driven legislation began to proliferate in the mid-2000s.

One open issue is whether the IGCC will become the policymaking tool that LEED itself was never intended to be. Already several states have incorporated it into building codes. The IGCC itself raises a host of issues outside the scope of both this article and Mr. Liu’s. But shining a spotlight on these issues as green building regulatory activity continues is critical, particularly as construction starts increase in an improving real estate climate.

*Attorney Paul D’Arelli has kindly provided us with a copy of his new e-book, Negotiating Leases in the Era of Green Building: Managing Risk and Merging Expectations in Pursuit of the Deal, to give away here at GRELJ. Just add a comment to this post before 5PM ET next Monday, June 13 and we’ll select one commenter at random to receive a free copy by email.

Negotiating Leases in the Era of Green Building is – as far as I can tell – the first publication of its kind and will be an important addition to your green real estate library. Although a handful of other books – including USGBC’s Green Leasing Guide – have been written about green leases, Mr. D’Arelli places his primary emphasis on discussing risk management as it relates to each step in the green leasing process. The book is written in an accessible voice that will appeal to non-attorneys. But even seasoned real estate practitioners will derive significant benefit from Mr. D’Arelli’s ability to explain the intersection of traditional leasing concepts and green building principles.

Here’s the teaser from the book’s website:

This informative 42-page guide provides a “plain English” presentation of issues and concepts that must be considered by landlords, tenants and their representatives in this new era of sustainability where traditional leasing is intersecting with green building pursuits and requirements.

Rather than attempt to move the industry toward some new model of green leasing – a difficult proposition given the variation in local leasing customs – this guide provides an issue-focused approach that can be used as a basis for informed negotiation geared toward accommodating the needs of the parties regardless of local lease preference.

This conversational guide, while written by an attorney who has been at the forefront of the green legal movement, is fortunately not a legal treatise but an easy read about an increasingly complicated subject.

If you can’t wait to find out the results of our giveway, you can download the book for $15 here. Good luck! And congrats to Paul on a well-written, important piece of work.

Late Tuesday, Henry Gifford and his attorneys filed their opposition papers to the USGBC’s motion to dismiss the amended complaint in Gifford et al. v. USGBC, the much-ballyhooed lawsuit that is currently pending in the Southern District of New York (Case No. 1:10-CV-07747).

The original return date for the motion was April 21, but the court granted Mr. Gifford an adjournment to May 2, with USGBC’s reply papers due by midnight tomorrow, May 6. The court noted in a separate filing that it will grant no further adjournments on this motion, and it is likely that a decision will not come down for, at the very least, several months after the motion is fully submitted later this week. (Note that, right now, it is unclear whether the court will require oral argument).

As you will recall, the USGBC’s motion to dismiss is based on Rule 12(b) of the Federal Rules of Civil Procedure and claimed that (1) Mr. Gifford and his fellow plaintiffs lack standing to maintain their suit; and (2) the amended complaint fails to state a cause of action upon which relief can be granted.

Among other things, with respect to this second claim, USGBC’s moving papers argued that Mr. Gifford’s amended complaint fails to “plausibly allege” a Lanham Act claim for false advertising. In addressing the 2008 New Buildings Institute study that is essentially the gravamen of the allegations in the amended complaint, USGBC’s papers argued that “the 2008 [press] release [describing the results of the NBI study, concluding that new LEED-certified buildings are on average performing 25 percent to 30 percent better than non-LEED buildings in terms of energy use] does nothing more than accurately report the conclusion of the NBI study and provide a link to the study itself, so that persons in the building industry could make their own judgments about that study.”

Whether or not those conclusions were misleading will be an interesting question for the Southern District to consider and may ultimately decide the motion. However, Mr. Gifford’s opposition squarely addresses this issue:

[t]he NBI study simply does not support the central premise of the LEED myth, that LEED saves energy. . . . USGBC hails the results of the NBI study far and wide . . . . In truth, the data collected for the 66 page study reveals that LEED buildings use 29 percent more energy. . . . [B]alancing the age of the compared buildings would show that the LEED sample has an average (mean) energy use index of 105,000 BTUs per square foot per year, and the CBECS buildings of the same age had an average (mean) energy use index of 81,600 BTUs per square foot per year. To be anything but intentionally misleading, the Defendant [USGBC] would have to qualify the study thus: “by comparing new LEED buildings to older non-LEED buildings, and by comparing the median average of one dataset to the mean average of another dataset, and by carving out a sample of only 22 percent of all the LEED-certified buildings, we arrived at the conclusion that LEED-certified buildings perform better than non-LEED buildings in terms of energy use.” The Plaintiffs can easily meet their burden of proving the study is not sufficiently reliable to conclude that the Defendant’s LEED-certified buildings save energy.

Opposing Memorandum of Law, at 13.

The NBI study has been a long-standing lightning rod for both proponents and critics of LEED, and my hope is that the Southern District provides some measure of guidance and/or closure on how the study was conducted and its conclusions distributed to the green building community.

Mr. Gifford’s papers also dispute that, in order to have standing under the federal false advertising statute (Section 43(a) of the Lanham Act), it is necessary for a plaintiff to be a competitor of the defendant. They cite to a series of cases that “note that the requirement is not set forth in the text of Section 43(a).” (citing Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48, 56-58 (2d Cir. 2002)). “Because Plaintiffs are competitors of USGBC with a very real stake in the market for energy efficient building expertise . . . the USGBC’s assertions are simply incorrect as a matter of law,” Gifford’s attorneys argue. Although USGBC acknowledged in its moving papers that the law in the Second Circuit on this point is not clear, it will be interesting to see how the Southern District handles these arguments – and the ambiguous case law – in its decision.

When reading Mr. Gifford’s papers, I was also reminded that Shari Shapiro questioned the wisdom of USGBC raising the argument in its moving papers that New York’s consumer fraud statutes should be inapplicable to its alleged conduct on the basis that “USGBC’s marketing . . . is directed at businesses and professionals. . . . The mere fact that the USGBC website is publicly accessible does not convert USGBC’s promotion and marketing into ‘consumer-oriented’ conduct.” Moving Memorandum of Law, at 20. At the time, she wrote “it’s pretty clear that the USGBC is marketing directly to consumers, contrary to the Memorandum of Law in support of the USGBC’s Motion to Dismiss.”

Kudos to Ms. Shapiro, because this is exactly what Mr. Gifford’s attorneys argue in their opposition. “If the USGBC website were password protected for professional members only, that assertion would be more convincing,” Mr. Gifford’s attorneys write. “But the USGBC website is aimed at giving the general public an overview of LEED, with ‘What LEED Is’ on the masthead. USGBC’s website explains to the layman consumer: ‘By using less energy, LEED-certified buildings save money for families, business, and taxpayers. . . It’s absurd to think USGBC is not directing its marketing at the tenant-consumer.” Opposing Memorandum of Law, at 14-15.

Finally, Mr. Gifford’s attorneys also acknowledge that the relief sought by the plaintiffs is “primarily injunctive,” and that the relief they “most wish for is full disclosure, compelling USGBC to release actual utility rates in its buildings, in order to foster a healthy marketplace of ideas, as some progressive municipalities have started to require.” Opposing Memorandum of Law, at 16.

We’ll keep an eye out for USGBC’s reply papers and update you accordingly once the motion has been fully submitted for the Southern District’s consideration.

A copy of the opposing memorandum of law is available for download here.

USGBC filed its reply memorandum of law on Friday afternoon, and a copy is available for download here.

It’s been a while since we talked about green leasing here at GRELJ. That’s not because it’s an issue we’re no longer interested in – far from it – but frankly there has not been all that much new to report on the front, notwithstanding the ongoing market rebound.

Recently, though, New York City announced that the law firm WilmerHale signed a lease at LEED Gold-certified 7 World Trade Center. Deals at the first commercial office building in the country to earn LEED certification are always worth noting, but WilmerHale’s lease is of particular import because it is the first to incorporate form green lease language developed by the Mayor’s Office of Long-Term Planning and Sustainability. By our own (admittedly informal and unofficial) count, New York now joins Portland (Oregon), Winnipeg, and various municipalities in Australia where green lease arrangements between private sector players have been publicly disclosed.

The lease, which WilmerHale signed with 7 World Trade Center landlord Silverstein Properties, aims to address the much-discussed split incentive, which remains prevalent in most commercial office leases in New York City. As you may know, the “split incentive” refers to the scenario where a landlord pays for building capital improvements but does not benefit from any reductions in operating expenses that are created because its tenants pay for operating expenses pursuant to the terms of the lease. In addition, although many leases do allow landlords to pass the costs of capital improvements through to tenants, the time frame for recouping those costs – typically over the working lifetime of the improvement, which can extend for decades – creates a practical impediment to owners actually making any energy-efficient capital improvements to their buildings in the first place.

The new New York City lease language, whose development was spearheaded by the NRDC’s Green Lease Forum, was derived from two fundamental concepts. First, to give them an incentive to make such investments in the first place, the language guarantees landlords that they will recover the costs of any energy-efficient capital improvements from their tenants over the projected payback period for the improvement – not over the useful lifetime of the improvement.

Second, the language aims to assure tenants that those improvements will actually result in cost savings that – even when split with the landlord – will still result in a net benefit to the tenant. Accordingly, once improvements are made, tenants will not only realize actual savings, but will pay the landlord 80 percent of the projected savings as assessed by an independent, NYSERDA-approved engineer (creating a buffer in case savings are not as projected) as part of building operating costs. After the payback period compensates the landlord for the investment, the tenant will continue to enjoy the benefits of the energy savings.

Here’s the most pertinent section of the model clause, which sets forth the landlord’s ability to include capital improvements within the lease’s definition of building operating expenses:

Commencing with the first Comparison Year following the year in which such Capital Improvement is completed and placed in service, and continuing for the duration of the Adjusted Payback Period (as hereinafter defined), Landlord may include in Operating Expenses a portion of the aggregate costs of such Capital Improvement equivalent to eighty percent (80%) of the Projected Annual Savings, so that the aggregate costs of such Capital Improvement will be fully amortized over one hundred twenty-five percent (125%) of the simple payback period (such period of time, the “Adjusted Payback Period”). By way of example: If the aggregate costs of such Capital Improvement are $2,000,000, the Projected Annual Savings are $500,000 and the simple payback period for such Capital Improvement is forty-eight (48) months, then Landlord may include $400,000 of the aggregate costs of such Capital Improvement (i.e., an amount equivalent to 80% of the Projected Annual Savings) in Operating Expenses for five consecutive Comparison Years (i.e. sixty (60) months or 125% of the simple payback period).

According to Mayor Bloomberg, the lease “breaks new ground in the field of energy conservation – and we expect it will be a pioneering model for commercial leases. This is part of our broad campaign to increase the energy efficiency of large buildings all across the city. When it is fully realized, this ‘Greener, Greater Buildings Plan’ – the first of its kind in our nation – will be the equivalent of making a city the size of Oakland, California completely carbon neutral.”

More interestingly, all of New York City’s commercial office space leases are negotiated by the Department of Citywide Administrative Services, and DCAS has agreed to add the green lease language to all of its new lease negotiations. The language has also been endorsed by REBNY.

WilmerHale’s lease is particularly important to note because much of what has been written and discussed about green leasing generally over the past few years has been almost entirely theoretical. For a number of reasons, it has been difficult to identify, and subsequently analyze, green lease language which the real estate industry has implemented. While it remains to be seen what types of capital improvements (if any), whose costs Silverstein Properties will seek to pass through to WilmerHale or any other 7 World Trade Center tenants (the building was completed in 2006), the Mayor’s Green Leasing Language should demonstrate to the rest of the New York City real estate industry – and landlords and tenants in other markets – that green leasing principles can be applied in the most high profile of Class A settings.

It is also worth noting that the basic concepts behind the language echo those that underpin the Model Green Lease (which is drafted as a full-service gross lease with an escalation clause and base year expense stop clause). As part of its definition of building operating costs, the MGL allows the landlord to reasonably amortize the cost of projects that will reduce operating costs and treat that amortization cost as an operating cost, so long as that amortization cost does not exceed savings to the tenant. The tenant’s obligation in the MGL is to “pay its pro rata share of any increase in Building Operating Costs over the Base Year.” The actual language in the MGL includes within the definition of “Building Operating Costs” the

[c]osts of any capital improvement made to the Building that reduces Building Operating Costs, the costs of such improvements shall be amortized over the minimum period acceptable for federal income tax purposes, and only the yearly-amortized portion thereof shall be treated as a Building Operating Cost. In no event shall this charge for yearly amortization be more than the actual reduction in the Building Operating Costs.

WilmerHale will be relocating from 399 Park Avenue to 210,000 square feet on the 41st through 45th floors of 7 World Trade Center, which is now 90 percent leased thanks to the deal.

A copy of the Mayor’s Green Leasing Language is available here for download.

I am pleased to announce that the Green Real Estate Law Journal has been recognized by the LexisNexis Environmental Law & Climate Change Community as one of its Top 50 Blogs for 2011. We’re humbled, but happy, to be included with such an esteemed group of sites and we’re looking forward to delivering more content on important legal issues related to green real estate as 2011 continues.

On another note, it’s been quiet around here for the past couple of weeks while I was out at my brother’s wedding in Palm Springs and getting back into the swing of things at the office. We will be back on a regular posting schedule shortly.

Happy Passover and Easter, everyone!

As expected, earlier today USGBC filed a motion to dismiss Henry Gifford’s amended complaint pursuant to Rule 12(b) of the Federal Rules of Civil Procedure for (1) lack of subject matter jurisdiction; and (2) failing to state a claim upon which relief can be granted. (Under the FRCP, this postpones USGBC’s obligation to answer the complaint until ten days after the Southern District decides the motion, if it is denied). The motion is accompanied by a 29-page memorandum of law and 3-page attorney declaration, which includes a number of exhibits of interest. (The parties had stipulated back in January that USGBC’s response to the amended complaint would be filed no later than today.)

Two of those exhibits – the 2008 New Buildings Institute study and the April 3, 2008 USGBC press release announcing the results of that study as demonstrating that “LEED buildings use 25 to 30 percent less energy than non-LEED buildings” – are particularly noteworthy because of the intense scrutiny that the green building community has given to each. In its memorandum of law, USGBC states that

“the 2008 [press] release does nothing more than accurately report the conclusion of the NBI study and provide a link to the study itself, so that persons in the building industry could make their own judgments about that study. Real estate professionals are free to reject the study’s conclusions, like plaintiffs claim they have done, because of NBI’s express disclosures about how the study was conducted. But that fact does not plausibly or permissibly lead to any inference of false advertising on the part of USGBC.” (emphasis added).

As the memorandum of law notes, a court is permitted to consider documents referenced in a complaint in connection with a motion to dismiss. It will be interesting to see how Mr. Gifford responds to this line of argument in his opposition, and whether the court determines that the NBI study’s conclusions, as presented by USGBC, as well as Mr. Gifford’s other allegations satisfy the heightened pleading requirements of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which require enough facts in a complaint to make it plausible — not merely possible or conceivable — that the plaintiff will be able to prove facts to support its claims.

As you will recall, the amended complaint was restructured to directly assert false advertising claims against USGBC under federal, state, and common law after originally being filed as a class action. The complaint is also seeking injunctive relief against USGBC, enjoining it from promoting the energy efficiency of LEED buildings and/or “benefits of the LEED system” and compelling it to “disclose the actual energy use of LEED properties,” as well as money damages.

Although the discussion of the NBI study is the more interesting aspect of the arguments in the papers, USGBC’s motion is primarily based on the claim that Mr. Gifford and his fellow plaintiffs lack standing on a number of grounds:

Gifford, who alleges he is an energy consultant, has been a longtime gadfly, preoccupied with critiquing USGBC and LEED through the media, internet forums, and the like. Gifford has every right to voice his criticisms of USGBC and LEED in the public forums of his choosing. But unlike the internet and the public square, access to the federal courts is limited to those with standing to sue.

USGBC goes on to allege that (1) the plaintiffs fail to properly allege that they are competitors of USGBC such that they can maintain their false advertising claims; and (2) the amended complaint’s allegations of injury are “conclusory,” “general,” and “too disconnected” from any “specific wrongdoing” by USGBC to demonstrate an “injury-in-fact” to confer standing on the plaintiffs.

USGBC’s motion is returnable on April 21, and we’ll keep an eye out for opposition and/or reply papers in the coming weeks, subject to any changes in the motion schedule. Again, the Southern District’s docket number is 1:10 CV-7747.

It’s not of the magnitude of the Destiny USA fiasco or as meat and potatoes as Bain v. Vertex Architects, but a recent case out of United States District Court for the Central District of California suggests that the growing market for green building products and LEED certification is also greasing the wheels for commercial disputes between industry stakeholders.

In Kinetics Noise Control, Inc. v. ECORE International, Inc., 2010 WL 4449118 (C.D. Cal.), an Ohio-based supplier of flooring products, including rubber acoustical underlayment products, brought a series of antitrust and false advertising claims against ECORE, a Pennsylvania-based manufacturer and supplier of underlayment products, and the holder of the patent giving rise to the dispute. According to Kinetics’ allegations in the complaint, ECORE fraudulently procured the patent, wrongfully enforced it, and “almost exclusively enjoyed [the] increased demand for rubber acoustical underlayment, at the expense of Kinetics, its competitors, and the consumers in the industry.”

In its complaint, Kinetics specifically identifies the growth of the green building industry as fueling that increased demand, and points to the proliferation of LEED in state- and local-level legislation as a major factor in creating this new market. Complaint ¶ 21. Kinetics was thus likely motivated to file the suit in order to defend – and hopefully capture more market share in an industry that its complaint describes as “recession-proof.”

The “Industry Background” section of Kinetics’ complaint is helpful in understanding exactly how acoustical underlayment functions, its role in earning project teams credits towards LEED certification, and how the plaintiff perceived the green building industry’s growth as contributing to the overall market effect of ECORE’s allegedly anti-competitive conduct:

Industry Background

16. Acoustical underlayment is a flat, resilient substrate used under floor finishes to dampen sound. Underlayment products are made using a variety of materials including cork, foam, rubber and a combination thereof.

17. Rubber acoustical underlayment is made from recycled automobile, bus and truck tires that are turned into crumb rubber and recombined into a log that is sliced into rolled underlayment.

18. Compared to underlayment made from other materials, rubber acoustical underlayment provides the greatest sound dampening characteristics and points for Leadership in Energy and Environmental Design (“LEED”) certification. Rubber acoustical underlayment also is known for durability and compatibility with all floor finishes including hard surface flooring often used in high rise buildings and condominiums.

19. In the past decade, there has been significant movement in the building industry to build or renovate commercial construction and high rise buildings with sustainable materials that comply with “green” building standards, which include acoustical underlayment described herein.

20. In the United States and in a number of other countries around the world, LEED certification has become the recognized standard for measuring environmentally sustainable construction.

21. In addition to environmental benefits, obtaining LEED certification allows participants to take advantage of unprecedented levels of government initiatives available for green projects and to market buildings as premier projects with increased potential for profitability. These factors, as well as heightened awareness and demand for green construction and improvements in sustainable materials have contributed to rapid growth of the green build market.

22. According to the United States Green Building Council, since its inception in 1998, LEED certified projects have grown to encompass more than 14,000 projects in the United States and 30 countries covering 1.062 billion square feet of development area.

23. Also, according to the United States Green Building Council, the overall green building market is likely to more than double from today’s $36-49 billion to $96-140 billion by 2013.

. . .

25. By its wrongful enforcement of the fraudulently procured [patent], ECORE has almost exclusively enjoyed this increased demand for rubber acoustical underlayment, at the expense of Kinetics, its competitors, and the consumers in the industry.

Although the Central District of California dismissed the case earlier this year on the basis that it lacked personal jurisdiction over ECORE, and it also denied Kinetics’ motion for reconsideration of that decision last month, I think that the lawsuit is still important to note from the perspective of the massive market that green building practices – including the demand for LEED certification – have created for green building materials and technologies.

Indeed, Kinetics’ complaint specifically states that “as a result of the significant demand for sustainable construction, the market for acoustical flooring underlayment made of recycled materials such as recycled tired has rapidly expanded despite the overall decline in the U.S. and world markets and has been called ‘recession proof.’” Complaint, ¶ 24.

While it is not traditional “LEEDigation” or the same factual posture as in Vertex Architects (as we prognosticated late last year), Kinetics suggests that the potential commercial causes of action arising out of a green building dispute could be limitless. If the green building market comes close to meeting USGBC’s ambitious projections for the next decade, the likelihood that other plaintiffs will emerge in an effort to defend – or obtain – market share in similar fashions will also increase.

An interesting green building litigation that was filed last fall last fall in Cook County (Illinois) Circuit Court has flown under the radar. Though details are slim and the only papers I have been able to pull thus far are the complaint, I thought it was worth mentioning here at GRELJ in the context of how ordinary green building projects – as opposed to the maligned Destiny USA mega-development – can still present additional risks for project teams.

The project – profiled here – contemplated the gut renovation of 5354 North Paulina Street in the Andersonville section of Chicago, a 3-story former farmhouse that dates from 1883 (pictured). The owner of the 2200-square-foot house, Laurie Bain, was aiming for a LEED Certified rating from USGBC under LEED for Homes. Vertex’s design earned accolades for its tight building envelope and was touted as “a fantastic example of how LEED can be done affordably.” Total projected construction costs were less than $100 per square foot; the design took advantage of cross-ventilation and other passive energy techniques to avoid the installation of any costly renewable energy systems.

According to the complaint, “the stated objective of the Architectural Contract was to ‘create a sustainable green modern single family home.’” The form agreement the parties used was the B105-2007 (or its predecessor B155-1993), which is the AIA’s standard form of agreement for a residential or small commercial project. (Vertex also served as the general contractor for the project, though there are no specific allegations relating to LEED for Homes certification arising out of the firm’s construction phase services).

The LEED-related allegations are contained in the first cause of action for breach of the architect’s agreement. Bain claims that, among other breaches, the architect “failed to pursue and obtain for the Project certification from the USGBC LEED for Homes Program.” Although the architect’s specific responsibilities under the agreement and its accompanying scope of work are unclear, this allegation is, as far as I can tell, the first to be included in a civil complaint against a design professional (or a contractor) where an owner has alleged breach of contract for failure to pursue and/or obtain LEED certification as required by the contract documents. Note that we will need to wait to review the actual contract language, including the scope of work, before making a more definitive assessment of the parties’ respective obligations and how and what might have gone wrong.

The second cause of action in Vertex is for breach of the construction contract (the AIA’s standard form of agreement between owner and contractor for a residential or small commercial project, the A105-2007, which was also attached as an exhibit). Both causes of action seek damages in excess of $50,000. According to the court’s docket, it appears that the architect has served an answer to the complaint that includes a counterclaim, and the sides are in the middle of exchanging written discovery.

The Cook County Circuit Court docket number for Bain v. Vertex Architects, LLC is 2010-L-012695. We’ll follow up if and when more details about the action become available. Until then, the suit should serve as an important reminder to architects, engineers, contractors, and owners that LEED-related risks are real and must be managed by, among other things, paying careful attention to the scope of work agreed to by contract.

We’ve been talking quite a bit over the past few months here at GRELJ about many of the darker legal issues associated with green building and real estate. With daylight savings time and, hopefully, spring just around the corner, I thought it might be timely to spotlight CleanTech REIT, a new Manhattan-based real estate investment trust that will exclusively invest in real property that can be used for the generation – or transmission – of energy produced from wind, solar, geothermal, and hydroelectronic sources. (REITs, as you may know, are companies that own and/or operate income-producing real estate and distribute at least 90 percent of their taxable income to shareholders annually as dividends.)

According to a Barclays analyst, CleanTech is the first and only REIT with this type of exclusive investment strategy. The firm was established – at least in part – in response to a “land grab” that its founders (former Clifford Chance attorneys) are observing among European developers, who have been coming into the U.S. and trying to exploit the ongoing instability in the oil markets (note yesterday’s triple digit dip on Wall Street fueled by the oil markets and ongoing conflict in northern Africa) by purchasing real estate with the potential to produce and/or transmit green energy. Although CleanTech is not limiting itself to any particular geographic region or technologies – a strategy which its founders believe should reduce overall risk for investors – its business model effectively depends on the properties’ value appreciating on account of continued flux in the energy markets.

One of the issues that CleanTech – or any other investor in green technologies – will face in the medium term is whether the short-term incentives for renewable energy installations that were extended for varying durations in the stimulus package and TARP will sustain the long-term viability of the underlying technologies. For example, in 2009, only 8 percent of total U.S. energy consumption came from renewable energy sources; whether incentives can bridge the gap until pricing and efficiency can help the technologies stand on their own remains to be seen. The success of firms like CleanTech will obviously be a good litmus test for the industry’s long-term ability to account for a much larger share of America’s needs.

Unless you’re enjoying an extended President’s Day vacation this week, there’s a good chance you’ve already read Rick Moriarty’s fantastic piece from last weekend’s Syracuse Post-Standard about the latest hurdle facing the developer (Robert Congel) of the star-crossed Destiny USA mega-mall project in Syracuse, New York. If that project sounds familiar to you, it’s because we’ve written about it here at GRELJ previously; as you may recall, in November of 2009, the Appellate Division for the Fourth Department here in New York upheld (in a split 3-2 decision) the Onondaga County Supreme Court’s decision that Destiny was entitled to a preliminary injunction requiring its construction lender, Citigroup, to continue funding Destiny’s construction loan. (Destiny USA Holdings, LLC v. Citigroup Global Markets Realty Corp., 889 N.Y.S.2d 793 (App. Div., 4th Dep’t 2009)).

However, it is the federal “green bonds,” which the Appellate Division specifically identified as so “unique” and “revolutionary” that money damages alone would not be sufficient to compensate Destiny if the injunction were denied, that find themselves as the stars of this chapter of the Destiny saga. The American Jobs Creation Act of 2004 authorized up to $2 billion of green bonds that state or local governments could issue for certain qualified green building projects. (See 26 U.S.C. 142(l)). The Destiny project received $228 million in green bond proceeds, which investors purchased at a lower, tax-free interest rate, effectively giving Destiny a $120 million subsidy over the 30-year term of the bonds. (Interestingly, the USGBC purchased $50,000 in bonds in 2007 “in a gesture of support for the program,” according to Moriarty. The bonds were insured by XL Capital and rated AAA.).

Proposed as a 4.5 million-square-foot, LEED Platinum-certified entertainment destination, Destiny USA was to be constructed as a three-phase expansion of Syracuse’s existing Carousel Center and include 1,300 hotel rooms, an indoor aquarium, a water park, an indoor recreation of the Erie Canal, a stadium and performing arts center, three golf courses, a 100-acre glass-enclosed indoor park, and a 20-acre artificial lake; green features were to include a 45-megawatt biofuel plant and 290,000 square feet of solar panels. At the time, Citi, which underwote the bonds, said that “[t]he financing of the Destiny project using these new Green Bonds is groundbreaking and represents a step forward in addressing climate change in the U.S. because this project incorporates sustainable design, energy conservation and renewable energy sources on a large scale.”

Now, though, after construction stopped before phase one was even completed, Destiny’s tax-exempt financing is in jeopardy. As part of the basic eligibility requirements for the green bonds, Destiny was required to “demonstrate and provide written assurances” in its application to the IRS for the exemption that it would allocate the tax-exempt financing for financing the purchase, construction, integration, or other use of energy efficiency, renewable energy and sustainable design features of the project. As construction has stalled, most of Destiny’s promised green features – including its LEED certification – have failed to materialize. With respect to green building and sustainable design, the IRS explained in Notice 2005-48 that:

[a]t least 75 percent of the square footage of commercial buildings that are part of the project [must be] registered for United States Green Building Council’s LEED certification and [must be] reasonably expected by the applicant (at the time of the designation) to receive such certification, based on all the facts and circumstances, including statements of the United States Green Building Council, opinions of independent experts in green building and sustainable design, and relevant experience of the project developer. The application must include: (1) LEED Letter Templates indicating which LEED credits the applicant plans to pursue and the applicant’s planned approach to pursuing such credits; (2) documentation demonstrating the applicant’s plans to design and construct LEED-certified, sustainably-designed buildings, including, where applicable, architectural plans, drawings and specifications, policy statements, contracts, leases and other applicable documents, and other related applicable information; (3) information on how plans to build LEED-certified, sustainably-designed buildings will be implemented through the management structure, for example, by placing LEED-accredited professional(s) and other experienced green building professionals in positions of authority over the project to ensure that the applicant’s green building plans are realized; (4) information on any plans to attract broader expertise and perspectives to the project that could support the effort to achieve LEED certification through such means as green building design charettes or consultation with additional green building experts; and (5) information on financial incentives and penalties that will be included in the design, construction, engineering and other building contracts and subcontracts to tie a part of the contractors’ and subcontractors’ compensation to their level of success in designing and constructing LEED-certified, sustainably-designed buildings.

Note, however, that there is no requirement that actual, formal certification be achieved; a point that Destiny’s attorneys have made to the IRS in a letter that was sent to the agency last week by the Syracuse Industrial Development Agency (through which the bonds were issued). SIDA wrote the letter because Destiny is facing an end-of-month deadline to provide a compliance report through SIDA (a required submission under the Act, 4 years after issue of the bonds) describing whether it has met – or anticipates meeting – the commitments it made to green building practices in its application for the exemption. Destiny’s letter also argues that the project – when complete – will still satisfy the spirit of the Act, even if its final composition is different than what the developer initially contemplated, and that the developer “remains deeply committed to sustainability and renewable energy goals.”

Regardless of what action – if any – the IRS takes upon receipt of the letter, it is obligated by the Act next year (5 years after issue of the bonds) to determine – after consulting with EPA – whether the project has “substantially complied” with the Act. If not, at that point in time, Destiny would forfeit $2.3 million being held in a Treasury reserve account, and the bonds could lose their tax-exempt status; Destiny would pay a higher interest rate on the bonds to pay the taxes on the interest earned by the investors who purchased the bonds. Note that the IRS has the ability to extend the 5-year period for up to 2 more years before making the “substantial compliance” determination.

The fallout if Destiny loses its tax-exempt status would read very much like a law school hypothetical. Complicating matters further is that there are – at least as far as I can tell – no Treasury Regulations or other IRS rulings interpreting or applying the Act as it relates to the loss of tax-exempt financing for green bonds – not surprising given that the program was created specifically for Destiny and three other large-scale, brownfield remediation demonstration projects across the country. Indeed, Moriarty notes that Senators Clinton and Schumer “helped to insert the [green bonds] program into [the Act] . . . and [it] was specifically written to favor Destiny USA and three projects in other states” (Colorado, Georgia, and Connecticut). Accordingly, whether the Section 142(l) issues confronting Destiny will have any broad-based applicability for other types of similar financing arrangements remains to be seen.

More generally speaking, Destiny’s woes remind me very much of those that have plagued the Xanadu project in the New Jersey Meadowlands. Similarly conceived for, and commenced during, a much different economic climate, the project stalled, changed hands several times, and after some political wrangling appears close to getting back on track. Given the political clout behind the Destiny project, lack of any precedential Treasury Regulations, and the somewhat improving lending climate, it seems premature to assume that Destiny is slated to become a white elephant. That’s not to say what’s happening right now in Syracuse isn’t troubling from a policy perspective, or an indictment of how the language in the Act providing for the green bonds program was crafted, but I do think it remains to be seen what the ultimate legacy of these financing issues will be from a green legal perspective.

Nevertheless, there is no doubt that a messy situation is brewing in Syracuse; we’re looking forward to Mr. Moriarty’s continued excellent coverage on the project and we’ll be following it closely in the weeks and months ahead here at GRELJ.

I am pleased to announce that an article I co-authored with Professor Darren Prum of Regis University has been published as the lead feature article in Volume 23, Issue 2 of the Loyola Consumer Law Review. The pinpoint citation is 23 Loy. Consumer L. Rev. 113 (2010).

Green Building Contracts: Considering the Roles of Consequential Damages & Limitation of Liability Provisions begins by tracing the development of the legal concept of consequential damages at common law through modern decisions applying those concepts to construction disputes. It proceeds to analyze the competing concerns of construction project participants when negotiating consequential damages and limitation of liability provisions, underscoring those that are particularly salient for green building projects. The article then considers those concerns in the context of pertinent provisions in various AIA, EJCDC, ConsensusDOCS, and Design-Build Institute of America form documents. It concludes by providing a set of recommendations for owners, design professionals, contractors, and consultants to consider when negotiating similar provisions, most of which are relevant for any type of construction project whether green or not.

A copy of the article is available for download here; Professor Prum and I look forward to any feedback in the comments below.

The amended complaint – which also features two engineers (Andrew Ask and Elisa Larkin) and an architect (Matthew Arnold) as plaintiffs – is notable because it is no longer structured as a class action, and essentially asserts false advertising claims directly against USGBC under federal, state, and common law. However, the plaintiffs continue to seek injunctive relief against USGBC, enjoining it from promoting the energy efficiency of LEED buildings and/or “benefits of the LEED system” and compelling it to “disclose the actual energy use of LEED properties,” as well as money damages. Also of interest is that Rick Fedrizzi, Rob Watson, and the other individuals named as defendants in the class action are no longer parties.

The Southern District’s docket numer is 1:10 CV-7747, and the USGBC (which is being defended by Proskauer Rose) has until April 7 to respond to the complaint, presumably by way of a motion to dismiss.

A copy of the First Amended Complaint is available for download here.