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.

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.

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.

We’re happy to be back here at GRELJ after an extended winter holiday- I hope 2011 is treating you well so far.

Last month, the Ontario Municipal Board considered a variance dispute in Toronto’s Kingsway neighborhood. Specifically, the Board considered arguments from the applicants that the “modernist” design for their proposed 3-story home at 7 Ashwood Crescent - for which they intended to seek LEED certification and would replace an existing bungalow – qualified for a variance to Toronto’s Official Plan and the Ontario Planning Act on the basis that its proposed green features and third-party certification constituted “extenuating circumstances.”

In its decision rejecting the applicants’ request, the Board noted that their case “opened with emphasis on LEED. The architect’s letter called LEED ‘the best guarantee with respect to the quality’” of the project and that “environmental sustainability will be promoted.” (As you review the decision, note that the Board did not provide any overt criticism or critique of LEED, nor did it point to any authority addressing LEED or other green building performance issues).

However, the Board did state that it “must be cautious . . . concerning ‘sustainability’ and various trademarks for ‘green building’ – not for fear of overextending the cause of environmental innovation but, on the contrary, of trivializing it. The Board takes notice that, with so many reported attempts by all and sundry to oversell environmental benefits (notably to expedite approvals), a new word was coined in North America – ‘greenwashing.’ It also applies to construction.” The Board also pointed out that razing the existing bungalow “in the name of environmental sustainability” would “surprise at least some observers.”

Nevertheless, while the Board did note that the term “sustainability” is used in Toronto’s Official Plan, it held emphatically that the project’s claims “promoting environmental sustainability” are “no shortcut” around the statute (which provides that a variance can be authorized if it is minor, desirable for the appropriate development or use of the property, and maintains the general intent and purpose of the municipality’s plan). The Board stated that “[t]here is simply no statutory authority for [third-party environmental certification labels] to sidestep land use planning requirements . . . ‘Certification by a private third party’ is no substitute for a transparent and legally mandated public process, and no guarantee of good planning.”

While interesting on their own, the applicants’ arguments before the Board also reminded me of those that were successfully advanced in the Destiny USA litigation here in New York, 889 N.Y.S.2d 793 (App. Div., 4th Dep’t 2009). There, as you may recall, and contrary to the Board’s decision in 7 Ashwood Crescent, the Appellate Division used the project’s “unique” green features  and “revolutionary” construction financing to carve out an exception to well-settled law, holding that injunctive relief requiring the lender to continue funding the project was proper (notwithstanding, as one justice pointed out in dissent, that it was unclear how Destiny would be irreparably harmed).

We’ll add 7 Ashwood Crescent to Destiny USA on our roster of decisions connecting well-settled real estate and construction legal principles with third-party green building certification, and continue monitoring whether other, similar applications and proceedings manifest themselves here in 2011.

Many thanks to Marshall Leslie for passing along a copy of the Board’s decision.

In what’s becoming an annual year-end tradition here at GRELJ, we take a look back at the five most important legal issues (plus a special bonus issue!) that we discussed during 2010 before moving forward into what promises to be just as wild a ride for green design, construction, and real estate legal issues in 2011.

• USGBC found itself squarely in the middle of the year’s biggest story: Henry Gifford’s $100M class action lawsuit against it, which was filed in the Southern District of New York back in October. While it remains to be seen what – if anything – will come of Gifford’s action from a legal perspective, the filing of the suit itself set off shock waves throughout the green building community. Equally interesting were USGBC’s general silence about Gifford’s allegations and Gifford’s posture in ongoing settlement negotiations. Regardless of whether the suit slowly fades from the green building public’s eye or heats up once again, this will continue to be one of 2011′s most intriguing stories.

• Green building litigation broke out at New York City’s Riverhouse condominiums. Filed back in May in New York County Supreme Court, Gidumal v. Site 16/17 Development LLC could mark the tip of an iceberg of claims that use the promise of a building’s or tenant space’s anticipated LEED certification or increased energy efficiency as an actionable sword to reform leases, escape purchase agreements, or recover money damages. At least one other similar suit has been filed against a green developer in Toronto, and other unreported cases also exist. Expect more discussion of this type of risk on the owner/sponsor/developer side of the green building equation in 2011.

• Industry stakeholders continued to fight back against proposed increases in energy efficiency requirements at the state and local levels. Federal lawsuits in Albuquerque, New Mexico (AHRI) and Washington State (BIAW) moved forward against proposed building codes, alleging that the codes would mandate energy efficiency standards for certain types of HVAC and other products that exceed controlling federal requirements and were thus preempted as a matter of law.  As USGBC begins to commit to Standard 189P and the International Green Construction Code as a legislative tool in 2011, the potential will increase for similar suits elsewhere in the country.

• The green building legal community was left to wait for another year for the anticipated boom in LEED-related litigation (i.e. “LEEDigation”). We wrote about this recently here at GRELJ: the fact that there was no reported litigation arising out of a project’s failure to earn LEED certification as anticipated in 2010 is extremely notable and could have significant policymaking repercussions in 2011.

• Standard 189P was incorporated into the International Green Construction Code as an optional compliance path. I expect this to be on our list of 2011′s top green building legal issues as USGBC begins to push Standard 189P and the IGCC as a legislative tool for state and local governments while LEED itself returns to the role for which it was originally intended: a voluntary tool for the very top of the marketplace.

Bonus issue:

• The legacy of USGBC’s decision to uphold the LEED Gold certification of Northland Pines High School remains unclear. Are USGBC and GBCI serious about penalizing LEED projects that fail to comply with LEED Version 3.0′s Minimum Program Requirements or other prerequisites? Is “decertification” a legitimate risk or a green building red herring? These questions are still unclear as 2010 draws to a close; perhaps 2011 will begin to shed some light on them.

My sincere thanks to everyone who has participated here at GRELJ in 2010 and best wishes to you for a healthy and happy 2011!

*Earlier today Last Friday, October 8, a group of plaintiffs led by Henry Gifford filed a class action lawsuit against USGBC in United States District Court for the Southern District of New York. The suit alleges violations of the Sherman and Lanham Acts for “deceiving users” of the LEED system about “whether LEED buildings use less energy than conventionally-built buildings.” We will have much more to say about the suit here at GRELJ as further details emerge, but in the interim here’s a copy of the complaint. The Southern District’s docket numer is 1:10 CV-7747.

Some reactions are already beginning to trickle in:

• Henry Gifford Sues USGBC (Real Life Leed)
• Is Henry Gifford Rosa Parks? (Green Building Law Blog)
• USGBC, LEED Targeted by Class Action Suit (Building Green.com, with quotes from Gifford and USGBC)
• $100 Million Class Action Filed Against LEED & USGBC (Treehugger; Lloyd Alter writes that Gifford “is hurting himself and green building in general. I think he’s nuts.”)

From Tristan Robert’s piece at Building Green.com:

Why Sue?

Asked by EBN why he was motivated to go to court, Gifford said, “I’m afraid that in a few years somebody really evil will publicize the fact that green buildings don’t save energy and argue that the only solution [to resource constraints] is more guns to shoot at the people who have oil underneath their sand.” In other words, he says he’s hoping to make the green building movement more honest so that it’s not embarrassed down the road.

USGBC told EBN that it was reviewing the litigation and would respond in due course. In addition to USGBC, other named defendants are David Gottfried, a USGBC founder; Rob Watson, who helped start LEED in the 1990s while working for the Natural Resources Defense Council; and Rick Fedrizzi, a co-founder and currently CEO. Responding to EBN’s request for comment, Watson said, “I can’t comment on ongoing litigation except to say that USGBC is examining the complaint. USGBC has confidence in LEED and in our role in stimulating positive market change.”

Michael Italiano, the only key USGBC founder not named as a defendant, told EBN that while he hadn’t reviewed the case, “To me it sounds frivolous and it doesn’t have much chance.” He noted, “LEED doesn’t guarantee anything, and I think LEED gives people the tools to understand that.” Owners who want to verify performance can enroll in LEED for Existing Buildings, monitor their energy bills, and take other actions, he noted. A lawyer and currently CEO of Market Transformation to Sustainability, a nonprofit behind green standards, Italiano said that lawsuits targeting standards that have allegedly constrained trade typically focus on lack of a bona fide consensus process of standard-setting. In the case of LEED, he said, a broad array of stakeholders has been involved in writing and reviewing LEED standards.

*Updated Thursday, October 14

Late last week, United States District Court Judge Martha Vazquez ruled on a motion for summary judgment filed by the plaintiffs – three trade associations representing manufacturers, distributors, and installers of HVAC products and water heaters, including AHRI, and twelve local distributors who sell and install HVAC products – back in September of 2009. As you will recall, in October of 2008 Judge Vazquez had granted the plaintiffs’ application for a preliminary injunction against the enforcement of Albuquerque’s Energy Conservation Code on the basis that certain portions of the Code are preempted by federal law. A copy of Judge Vazquez’s decision on the summary judgment motion is available here for your download and review.

The decision grants the plaintiffs summary judgment on their claims that the prescriptive compliance paths in Volume I of the Code (which applies to commercial and multi-family buildings) and Volume II of the Code (which applies to one- and two-family detached dwellings and townhouses) are expressly preempted by applicable federal legislation. In her opinion, Judge Vazquez notes that “[t]he plain language of the preemption statute makes clear that Congress intended the preemption to be broad in scope” and that “Congress recognized that the National Appliance Energy Conservation Act ‘preempts state law under most circumstances.’”

However, Judge Vazquez denied (without prejudice) the plaintiffs’ claims that the performance paths contained in each Volume are also preempted. Perhaps most interestingly, on pages 9 and 10 of her opinion, she discusses the plaintiffs’ claims that the LEED Silver and Build Green New Mexico compliance paths in Volume II of the Code should not qualify for the building code exception to preemption. (The building code exception is set forth in 42 U.S.C § 6297(f) and allows state and local governments to set energy efficiency targets for new construction which can be reached with equipment or products whose efficiencies exceed federal standards, provided the enabling legislation also includes other means to achieve the targets with products that do not exceed the federal standards. The building code exception’s preemption analysis is performed under what some have described as a “convoluted” 7-part test that is outlined in 42 U.S.C. § 6297(f)(3)). In denying summary judgment for preemption of these two compliance paths, Judge Vazquez writes that “[t]he preemption statute applies to ‘products.’ Plaintiffs state that LEED Silver and Build Green New Mexico . . . are regulations concerning energy efficiency or energy use of covered products but do not point to the relevant provisions of LEED Silver or Build Green New Mexico.”

We will have much more to say about both this opinion and its implication for the Building Industry Association of Washington et al. v. Washington State Building Code Council litigation, which remains pending in United States District Court for the Western District of Washington, here at GRELJ in the coming weeks; in the meantime, please feel free to chime in with your reactions to the opinion (only 13 pages and a relatively quick read) in the comments below.

Many thanks to my friend and colleague Cullen Howe, who publishes the recently-launched Green Building Law Update Service blog through Columbia Law School’s Center for Climate Change Law, for forwarding me a copy of the decision.

Last month during our summer sabbatical here at GRELJ, Model Green Lease Task Force head Alan Whitson forwarded us an article he published in a recent issue of Office Insight magazine. In “How to Add Value and Avert Lawsuits: Avoid the Conflicts Between LEED-EB:OM and LEED-CI,” Mr. Whitson describes how the interplay – or lack thereof – between these two different LEED suites may create unanticipated liabilities for landlords and brokers who market LEED-EB:OM-certified space to tenants that subsequently seek to pursue LEED-CI.

Quoted in the article is Alex Spilger, who serves as Sustainability Manager for BCCI Construction in San Francisco. Mr. Spilger observes that

“[i]t’s a common misconception among tenants, real estate brokers, and building owners . . . that LEED-EB:OM certification guarantees LEED-CI certification. It’s easy to imagine there would be some cross-over between the LEED-EB:OM and LEED-CI rating systems. Green strategies put into action in the base building should help a tenant earn points for LEED-CI and vice versa. But, this is not always true since there is little overlap between the two rating systems – they are structured differently.”

Some of the examples which Mr. Whitson presents in the article are particularly noteworthy because they suggest the dangers that may arise out of an indiscriminate marketing strategy implemented by the landlord and its leasing team. For example, a building that scores in the 98th percentile for energy efficiency will earn 18 points under LEED-EB:OM, but a tenant in pursuit of LEED-CI will not receive any points for the base building’s exemplary energy performance. A base building can also receive up to 15 points under LEED-EB:OM for alternative transportation where employees carpool to work; under LEED-CI, unless the base building is sufficiently close to mass transit, the tenant will not receive any alternative transportation points, even if its employees all carpool.

Indeed, Mr. Spilger also describes in the article a recent project where a tenant leased space in a LEED-EB:OM Gold-certified building with the expectation that – it too – would earn LEED-CI Gold for its own interiors. Rather, because LEED-CI’s prerequisite water efficiency requirements are higher than those for LEED-EB:OM, the tenant was unable to pursue a LEED-CI rating without completely replacing the bathroom fixtures. Mr. Whitson notes that

“[i]f the requirements for LEED-CI were considered before upgrading the building’s restrooms, fixtures with higher water efficiency could have been selected at little or no extra cost, while creating a competitive advantage for the building. Imagine the liability a real estate broker or interior designer with a LEED AP designation might have if they fail to explain the ramifications to their client before the lease is signed, or if this blows a lease deal for a building owner.”

Risk management, of course, is not strictly the province of outside counsel; LEED consultants and real estate professionals need to understand the mechanics of each individual LEED rating system – and how they interact, or fail to interact, with one another – when presenting certification alternatives to their clients. For example, we wrote previously here at GRELJ about how a base building’s green features can offer tenants up to 21 points for tenants seeking LEED-CI certification. However, Mr. Whitson’s remarks above should ring all the more salient in a construction environment where controlling costs continues to remain paramount, and USGBC continues to place an increased emphasis on existing buildings.

Earlier this year, Pat Penfield of Syracuse’s Whitman School of Management and Rene Germain at SUNY’s College of Environmental Science and Forestry published a study titled “The Potential Certified Wood Supply Chain Bottleneck and Its Impact on LEED Construction Projects in New York State,” which was recently profiled on the Science Blog. The study is interesting because its conclusions echo – from a practical perspective – the calls by many in the industry for USGBC to open up its MR-7 Certified Wood credit to wood products certified under other sustainable forest management systems apart from FSC. It’s also of particular personal interest to me because of its focus on the timber industry as it exists here in New York State.

Penfield and Germain’s purpose in performing the study was to determine whether end users in New York are having difficulty in sourcing FSC-certified wood products, as well as to assess exactly how FSC wood is being specified and used on LEED-certified projects across the Empire State. The authors identified these questions based on “anecdotal evidence from suppliers and users over the past several years suggesting a supply shortfall,” as well as a 2008 study from the Yale Program on Forest Policy and Governance. According to the data that the authors were able to assemble, 38 million board feet of FSC-certified sawlogs were produced in New York State in 2010 on 1.46 million acres of FSC-certified forest. However, because only 1 FSC-certified sawmill exists in New York State, and FSC certification requires an intact chain-of-custody, the authors calculated that 28 million board feet of FSC-certified sawlogs leave New York State’s supply chain annually.

Using USGBC’s database of LEED-certified projects, the authors identified 48 public LEED projects in New York State. 14 of those 48 projects (29 percent) used FSC-certified wood (i.e., earned the MR-7 credit). The authors then proceeded to contact the architects for each of those projects, and administered a 20-question telephone survey which yielded some interesting results about architect attitudes towards FSC:

• 92 percent said they used FSC because of the available “LEED points” and “good stewardship.”
• 25 percent said FSC products were requested by the client;
• 27 percent had difficulty identifying an FSC supplier;
• 42 percent perceived a shortage of FSC-certified wood in the marketplace; and
• 73 percent said they paid a premium for FSC-certified products.

These last two points lead Penfield and Germain to make some interesting conclusions. First, they were “surprised” to find a price premium for FSC-certified wood products given that “[m]ost of the literature on certified wood products has reported that price premiums are rare (Jenson et al. 2003, Anderson et al. 2005, Perera et al 2008). . . . [I]t is noteworthy that most LEED projects were rquired to purchase FSC-certified wood at a premium price from neighboring states, which suggests a lack of product in New York and evidence of supplier leverage on a regional basis.” 

Critcally, they also note that “[a]nother alternative for alleviating this potential shortage of certified wood in the marketplace is for the USGBC to reconsider their certified wood criteria for LEED to possibly include other certification programs, such as the SFI. The SFI-certified products are recognized by many leading green building rating programs in the United States, Canada, and overseas, including the National Green Building Standard, National Association of Home Builders, and Green Globes. Including the SFI program would add a considerable area of certified forestland and stumpage, which in turn would make more certified logs available for processing.”

This study is a timely addition to the antitrust aspects of the debate – which we’ve noted previously here at GRELJ - as USGBC reviews the most recent public comments to the proposed revisions to MR-7.

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.

We’re back here at GRELJ after a break for the July 4 holiday. I hope you enjoyed yours as much as I did; my wife and I spent a very relaxing long weekend down in southwestern Virginia with her family.

The night before we left town last week, I sat on a green leasing panel here in Midtown that was sponsored by the Greater New York Chapter of the International Facility Management Association’s Sustainability Committee. In addition to discussing some general issues – legal and otherwise – arising out of the green leasing process, there was significant input from the brokers in attendance about the state of the local green leasing market. More particularly, the discussion focused on how smaller tenants (in the 10,000 to 20,000 square foot range), who do not have the leverage of some of the larger companies (like Deutsche Bank, represented on the panel ) which have successfully demanded green concessions from potential landlords, might nevertheless be able to insist on similar provisions in their leases. Although the panel stressed both landlord and tenant education as what will ultimately drive green practices into these smaller leases, we did not reach any real practical consensus on how green leases might gain more traction in this context.

I point this out in light of a recent report from Portland, Oregon that two small commercial tenants have signed green leases with Unico Properties at the historic 13-story Commonwealth Building, located downtown at 421 SW 6th Street between Washington and Stark Streets. The Northwest Energy Efficiency Alliance (“NEEA”) and Green Building Services (“GBS”) took 20,000 and 10,000 square feet, respectively. According to a Unico press release, “[b]oth NEEA and GBS required green lease provisions which contractually bind both tenant and landlord to choose green products and practices. Green leases are relatively new in the Portland market and they include . . . following strict sustainability LEED-CI guidelines for tenant improvement projects.” In the release, Unico’s general manager for its Portland portfolio, Brian Pearce, said that “[a]lthough Unico does many of these things voluntarily, we want our tenants to know that sustainability is not an option for us- we are fully committed to it.”

I had the opportunity to speak with Mr. Pearce about the green obligations in each of the two leases. Interestingly, NEEA actually approached Unico about inserting certain green provisions into its lease, including dedicated recycling space, access to bicycle storage, changing rooms, and showers, and a definition of building operating expenses that allows Unico to recover the costs of any capital improvements to the building which increase the tenant space’s energy efficiency. “The $65,000 question is whether any other tenants come along like NEEA,” Mr. Pearce said. Unico has also set LEED-CI certification as a “green benchmark” for all of its tenant improvements. “LEED-CI certification is important to these types of tenants, so baiting them with Certified spaces made sense for us,” he noted, “but if tenants want to go beyond Certified, that’s on their nickel.” Mr. Pearce also explained that although Unico has – in other deals – provided allowances to certain tenants for various levels of LEED certification or other green improvements, the two leases in the Commonwealth Building were turn-key. During our conversation, I was particularly interested to hear that both NEEA and GBS also asked Unico to commit in their leases to pursuing a LEED-EB rating for the property, but for many of the legal reasons which we have stressed here at GRELJ previously, Unico refused to make that representation. “Certification is handed down by a third-party entity over which we have no control,” Mr. Pearce said.

The property itself is now 75 percent leased; other tenants include the National Fish and Wildlife Foundation, IMAGINiT Technologies, RAND Worldwide Company, and Element Power which recently earned LEED-CI Gold for its interiors space. Notwithstanding Unico’s concerns about third-party certification, the Commonwealth Building should earn a 2010 Energy Star label and is pursuing formal LEED-EB certification. Unico recently upgraded its HVAC system, installed submeters in individual tenant spaces (including NEEA’s and GBS’s), and the tower is located adjacent to the Portland light rail line. Colliers International represented NEEA in the transaction, Cushman & Wakefield represented GBS, and Pacific Real Estate Partners represented Unico.

Just as a brief aside, the Commonwealth Building was designed by Pietro Belluschi and constructed between 1944 and 1948, debuting as the Equitable Building and headquarters of the Equitable Savings and Loan Association. It was added to the National Register of Historic Places in 1976 for its place in architectural history as one of the first glass box towers ever built; it actually predates Gordon Bunshaft’s seminal Lever House here in Manhattan and was the first building in the country to feature double-glazed windows and be fully sealed and air-conditioned.

Early last week, the Newark (Delaware) City Council postponed a vote on proposed amendments to Newark’s building codes that would require new construction to earn 25 points under either LEED 2009 for New Construction or LEED 2008 for Homes. In addition to the typical green building regulatory concerns relating to costs and red tape which were raised by local designers, builders, and developers, one architect who participated at the City Council session suggested that – as drafted – the ordinance might violate the copyrights which USGBC holds in its various LEED systems. According to the Newark Post, the city’s staff has contacted USGBC and is investigating the issue, and expects resolution at another council meeting shortly.

The first question I asked myself when I saw this story is whether a state or local government enjoys immunity from suits for copyright infringement, which must be brought in federal court pursuant to 28 U.S.C. § 1498. (Of course, whether USGBC would choose to assert a claim against a government which has allegedly infringed one of its copyrights is a totally different question). Although local governments (towns, cities, counties, etc.) are not immune from suits brought under federal law, the answer is not straightforward with respect to state immunity. (The federal government, on the other hand, has expressly waived its immunity from claims for copyright infringement, though the only available remedy is money damages and not injunctive relief.)

Section 511 of the Copyright Act was adopted by Congress in 1991 in the aftermath of BV Engineering v. University of California at Los Angeles, where UCLA successfully defended a copyright infringement claim on the basis that it enjoyed sovereign immunity under the Eleventh Amendment. 858 F.2d 1394 (9th Cir. 1988). Section 511 states clearly that “[a]ny State . . . shall not be immune, under the Eleventh Amendment of the Constitution of the United States, from suit in Federal court . . . for a violation of any of the exclusive rights of a copyright owner.” 17 U.S.C. § 511. (Just a reminder that the Eleventh Amendment immunizes states from suits for money damages or equitable relief without their consent).

Despite this seemingly clear statutory provision, two Supreme Court cases from the late 1990s suggest that Section 511 might not allow a copyright infringement claim to proceed against a state government. In Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 119 S.Ct. 2219 (1999) (patent) and College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 119 S.Ct. 2199 (1999) (trademark), the Court rejected patent and trademark infringement claims against the state of Florida that were purportedly authorized by similar provisions in the patent and trademark statutes (35 U.S.C. § 271(h) and 15 U.S.C. § 1125(a)(2), respectively). Justice Stevens suggested in a footnote in the patent decision that Section 511 might nevertheless receive different treatment, but some brief follow up research did not identify any subsequent cases in this line which confronted the Copyright Act. It is also worth noting that the Court’s holding in both cases was grounded in Congress’s inability to enact statutes that effectively circumvent constitutional protections.

Regardless of where the law currently stands on the interplay between sovereign immunity and Section 511 of the Copyright Act, it’s unclear here exactly how Newark’s proposed amendments could violate USGBC’s copyrights because the text of the proposed amendments does not incorporate any language from the rating systems directly. Nevertheless, it’s an interesting and important consideration for state and local governments that do, in fact, pull relevant sections from third-party rating systems directly into proposed legislation, and a good reminder that a broad range of legal issues exist for policymakers to analyze as they consider and ultimately craft legislation.

Late last week, CBRE Investors’ CBRE Capital Partners investment entity originated $61 million in first mortgage financing for the LEED Gold-hopeful Riverhouse condominium project in Battery Park City. The mortgage is backed by the 77 units that remain available at the 262-unit, 31-story building, and is for a three-year term with a one-year extension option, putting to bed some of the rumors that have been swirling for the past year about the project’s financial difficulties and poor unit sales performance. The news is also interesting because of the backdrop it provides to the fledgling Gidumal litigation, which we first reported here at GRELJ a couple of weeks ago.

In terms of the project’s somewhat sordid financial history, the Riverhouse was originally developed by Lehman Brothers and the Sheldrake Organization pursuant to a $282.4 million senior mortgage from Helaba Bank and a $74 million junior loan from the AFL-CIO trust. Although the former loan was paid off, the developers defaulted on the junior loan at maturity in November of 2009, resulting in a $48 million lis pendens filing against the property in February. Just before the filing, the Lehman entity alleged that Sheldrake had misappropriated over $12 million in funds from Helaba which had been earmarked for ground lease payments and construction expenses by submitting falsified invoices to the lender. Lehman served Sheldrake with a Notice of Removal (from its capacity as the development team’s day-to-day manager of the project), and Sheldrake unsuccessfully sought an injunction in Supreme Court barring its removal.

Afterwards, what was left of the development team hired CBRE to sell the junior note, but CBRE ultimately decided to originate the financing itself. According to Frank Scavone, COO at CBRE Capital Partners, the Riverhouse “exemplifies an otherwise successful development project in need of additional time to realize full sell out.” Affidavits submitted earlier this year in connection with Sheldrake’s application for injunctive relief indicated that 17 additional sales contracts have been signed, with another 7 out for signature – positive signs that the project is back on track.

It would be purely speculative to consider whether any of Riverhouse’s issues – at least indirectly – led to the allegations set forth in the Gidumal complaint; indeed, intra-development team power struggles are relatively common and don’t typically impact unit purchasers in any meaningful manner. However, this is the first time we’ve heard – at least publicly – these types of allegations on a green building or LEED project; whether they impacted the overall quality of Riverhouse’s construction or the performance of its building systems is the type of question mark which the Gidumal litigation could shed light on if the lawsuit proceeds through discovery.

As a final side note, the Riverhouse has yet to receive formal LEED certification; it registered with USGBC in June of 2005 under LEED for New Construction Version 2.1.

In a suit that was filed earlier this month in New York County Supreme Court under Index Number 105958/10, the owners of a condominium unit at the LEED Gold-hopeful Riverhouse development in lower Manhattan’s Battery Park City are seeking the recovery of $1.5 million in damages from the project’s developer for a variety of alleged construction defects. While this type of construction litigation is not uncommon, the purchasers also claim that “the building’s much-heralded ‘green’ heating system consistently fails to provide adequate heat” to their unit and that this failure is a condition which is “is materially different from those represented by the project sponsor and its principals in the condominium offering plan.” These allegations – which are the the basis for two claims in the complaint alleging fraud and misrepresentation – mark the first time we have seen claims asserted against the developer of a green building for the developer’s alleged failure to deliver the project as represented during pre-construction. (Note that this is not the scenario which many in the legal community predicted would arise out of green building projects, but rather a much more specific type of claim that has been folded here under other allegations of design and construction defects).

More specifically, the Riverhouse complaint alleges that the building “was marketed as being at the cutting edge of ‘green’ technology. It is supposedly a LEED Gold-rated building featuring fresh filtered air, filtered water, eco-friendly materials and is designed for low energy consumption. However, plaintiffs have consistently experienced cold drafts and insufficient heat in their Unit. An energy audit performed on plaintiffs’ Unit revealed a number of defects in the Unit that contribute to the unsatisfactory heating situation. First, too much cold air is infiltrating the Unit through doors, windows, and exterior walls. Plaintiffs’ engineers found a deviation of 49 percent over the USGBC’s LEED and [Battery Park City Authority] standards in the cumulative size of holes and cracks allowing infiltration of cold air.”

This line of allegations goes on to describe pipes that are not insulated, heating unit covers that are not sealed, and air filters that are clogged. The purchasers then allege that these failures constitute a breach of contract under the offering plan, and that the developer’s representations in the offering plan about the building and its units were false and therefore fraudulent. However, it is important to note that there are no specific allegations in the complaint with regard to the representations – if any – that the developer made in the offering plan related to the building’s LEED application and/or green features which were allegedly breached.

While the allegations of the project’s construction defects are noteworthy standing alone- and will likely be fleshed out in more detail through discovery if the lawsuit moves forward – it is the fraud allegations that are particularly critical to analyze in the context of the project’s offering plan. For this reason, it is important just to briefly consider here why this type of alleged fraud or misrepresentation may be actionable under New York law.

Offers to sell residential condominiums in New York are governed by a particular section of the Martin Act (Article 23 of the General Business Law), whose purpose is to provide prospective purchasers with sufficient factual information for them to make an informed decision about purchasing the property through an offering plan. Accordingly, an offering plan must be filed with and approved by the state Attorney General’s office. Under the Martin Act, the offering plan must “not omit any material fact or contain any untrue statement of material fact.” Although there is no private cause of action under the Martin Act (i.e., the Attorney General is invested with exclusive authority to investigate and prosecute alleged violations), the Martin Act does not preclude a private party from prosecuting an otherwise valid common law fraud claim in connection with the sale of securities – including under an offering plan – whenever the alleged fraudulent conduct is such that the Attorney General would be authorized to bring a statutory action against the same defendant under the Martin Act. See, e.g., Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 A.D.3d 457, 844 N.Y.S.2d 18 (1st Dep’t 2007). In other words, if representations in an offering plan about a project’s green features or pursuit of third-party certification turn out to be inaccurate, the sponsor and/or developer of the project may be exposing itself to liability.

For your reference, the 31-story, 264-unit Riverhouse development is located at One Rockefeller Park in Battery Park City and continues to seek LEED Gold under New Construction Version 2.1. Specific green features that the project promoted in its pursuit of LEED Gold were a geothermal heating and cooling system, photovoltaic cells, low-E double-pane windows, a green roof, Energy Star appliances, recycled-content and locally-sourced building materials, a $1 million wastewater treatment plant, and a 60kW microturbine installation. It has faced financing and other problems, but celebrity purchasers Leonardo DiCaprio and Tyra Banks have made the project somewhat of a media favorite over the past two years and – after significant price cuts earlier this year – the building is reportedly 75 percent sold out.

We’ll keep an eye on this lawsuit and follow up here at GRELJ if it eventually becomes a full-blown litigation, or if it spawns other similar lawsuits at other green condominium buildings.