Real Estate Development Law Blog : Real Estate Development Lawyer & Attorney : Summit Law Group : Seattle, WA : Land Use & Green Building

I was reading the November 16th issue of BusinessWeek and stumbled upon an article  about how a "recent" Turner Construction survey of commercial real estate executives determined that 75% of such executives - including developers, rental building owners, brokers, architects, engineers, etc. would not be deterred from building "green" by the credit crunch, and that 83% of them would be "extremely" or "very" likely to seek LEED certification for buildings they plan to build in the next three years.  The further I read it became obvious that the "article" was a shameless promotion of a Brazilian energy producer (when I looked closely at the page, I realized it was a "Special Advertising Feature"), but the Turner survey results hung with me.  Was this really the case despite the cratering of commercial real estate development?  Who had they surveyed?  How recently? And was anyone really planning to build something in the next three years? I had to check it out.

It turns out the survey was completed in September of 2008 - a world away from the reality of September 2009.  That said, I would love to know what the same executives are saying today.  The population they surveyed looks diverse in terms of what role they play in commercial real estate, but did they talk to small developers and owners as well as the big players?  Turner completed similar surveys in 2004 and 2005.  Turner Construction, please release another survey soon and give us a better sense of who's providing answers, as I think that provides a necessary context for understanding the results.  In other words, if the little guys as well as the bigger players see the long-term benefits/efficiencies of building green compelling enough to spend the money on LEED certification at a time when little money is available, I'd find that compelling - and heartening.

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The USGBC announced on September 2, 2009 a change in its occupancy requirement for LEED for Existing Buildings: Operation and Maintenance. The occupancy rate required for certification has been lowered from 75% to 50%. The USGBC indicates that this change is in response to current market realities that have disqualified an unprecedented number of properties from pursuing LEED certification.

Bottom line: The requirements for green building certification are constantly changing and building owners and tenants must be aware of how they might be affected by the changes. In this case, it is possible that the lower occupancy requirement will change the building’s performance data. This, in turn, could have an impact on performance specifications in contract and lease documents.

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As discussed in Mireya Navarro's recent New York Times article, the difference between building design and construction and building performance may be substantial. Owner and tenants alike should be aware of how these differences may affect LEED certification.

On August 25, 2009, the USGBC announced its Building Performance Initiative. Under the initiative, the USGBC would begin collecting data from all buildings that have achieved LEED certification for future analysis. This program is voluntary and the USGBC maintains privacy policies, however, as noted in my blog entry on September 2 (Seattle Contemplates Building Performance Reporting!), the reality of the mandatory disclosure of a building’s performance may not be for behind.

This change is in conjunction with a USGBC announcement earlier this year that will require that all LEED certified projects--from new construction to existing buildings provide energy and water usage data for at least five years. Furthermore, the requirement would remain in effect regardless of whether the building changes ownership or lessee. Non-compliance could lead to de-certification of any project that fails to comply with this requirement.

Bottom line: What do these changes mean to owners, designer, contractors, landlords and tenants? Not only should an owner be cognizant of the possibility that a LEED certified building will under-perform, but owners must include the appropriate lease language to allow for the collection of all relevant environmental performance data.

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The City of Seattle is currently developing an ordinance that would mandate disclosure of building performance. This proposed ordinance is an outgrowth of Mayor Nickel's Green Building Capital Initiative. But it wasn't rolled out before, or even discussed in the run up to, the August Primary election. With Mayor Nickles' defeat in the Primary, whether the proposed ordinance will be discussed before the General Election in November, or get to the City Council any time soon is an open question.

If it does, and is passed into law, some real changes in the Seattle real estate market are in the making. The proposed ordinance is built on Section 6 of Senate Bill 5854 (pdf). However, there are some differences. It would also apply to multi-family properties of greater than 4 dwelling units. It would include requirements for mandatory disclosure to current and prospective buyers, tenants and lenders. In addition, energy and performance ratings would be reported to the City of Seattle annually for all buildings over 10,000 square feet (or every 3 years for multi-family properties of more than 4 dwelling units).

Once the City of Seattle collects all this data, its not clear how they would exempt it from Washington's Public Records Act. In other words, in the near future Seattle tenants, brokers, buyers, investors, financiers and developers may be able to obtain the information through a public records request and better assess the energy performance of a particular piece of real estate - before they lease, buy or develop it. The potential impact to the Seattle real estate market would be significant; the era of High Performance Buildings is just around the corner.

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The regulatory and certification structure that governs the evaluation of buildings is changing, and so too will the relationships between those who design, build, own, lease and sell buildings.  Soon, a building's level of sustainability will no longer be evaluated at the moment it's engineered, permitted, occupied or certified.  Rather, it will be evaluated after it's fully operational, on an annual basis, or even each time it's sold.  Some suggest that building owners, commercial and residential alike, will be eventually required to "collect and report" to local authorities their buildings' energy consumption performance.  Once this happens, all that information will be available to prospective tenants, investors, financiers and buyers.  This paradigmal shift is best noticed in the slow but obvious language change from "green buildings" to "high performance buildings" that is evident in the green building industry.

It can also be noticed in recent legislation.  Take a quick look at Senate Bill 5854 (pdf), which passed in the Washington State Legislature during the 2009 Session.  The bill, entitled "Reducing Climate Pollution in the Built Environment" is the first of many that legislatures across the nation will pass to address the next biggest environmental pollutor behind vehicles and heavy industry, that's right, buildings!  

To the extent a building's energy consumption is being tracked under this bill, let me first say that SB 5854 is focused on public buildings.  See Section 6.  But the Legislature's grander vision is clear....

In Section 1, the Legislature states that it's intent is to spur the state's economy by "promoting super efficient, low-enery use building codes; requiring disclosure of building's energy use to prospective buyers."   There are no exceptions in the language.  Public, commercial, industrial and residential buildings are all within the intended objective - even though the active portions of the bill are not as broad. 

In Section 3, Washington's Department of Commerce is required to develop and implement a strategic plan by December 2010 (to the extent funding is available) that reduces "greenhouse emissions from homes, buildings, districts, and neighborhoods."  Again, the grander vision is clear; perhaps this means we'll be talking about "high performance communities" with their own taxing authority in the near future.  That same section requires the agency to propose a transition from "prescriptive [building] codes" to "performance based codes."  And there is the coup de grâce to the old system of evaluating the health and life safety of buildings. 

To evaluate how the built environment is functioning, we have to move away from evaluating buildings at the moment they are engineered, permitted, occupied or certified, to evaluating their actual performance over time. 

Managing high performance building risks just took on a whole new meaning.

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Green building is booming, especially in the Pacific Northwest. Look no further than your local Starbucks. Starbuck’s goal is LEED certification for all for all new and renovated company-owned stores worldwide beginning in 2010.

Despite the growing green building trend, few commercial leases have been updated to reflect the legal issues surrounding green leasing. Although there are some green leases out there, a brief survey of owners of commercial developments in the Seattle area indicates that few landlords, even those focused on sustainable building, have “greened” their lease language.

In the construction industry too, neither the architects nor the law firms representing the developers that we contacted had updated their design and construction contracts to reflect green building issues. They seem instead to be addressing those issues on a case-by-case basis. Likewise, the standard form AIA documents are silent on sustainable building issues, and do not address those issues that must be addressed regarding the owner’s green building goals and the corresponding allocation of risks.

Sustainability building and leasing risks are real, particularly in light of rapidly increasing regulatory activity at the state and local levels. Third-party sustainable building certification, and the maintenance of that certification, in combination with new building systems and technologies may provide a recipe for potential legal exposure. It is critically important to have clear contract language for each stakeholder on green construction projects and green leases. The alternative could be exposure to unanticipated liability for every participant.

Bottom line: because of the popularity of eco-friendly building projects, increasing state and local incentives, as well as possible funding opportunities from the American Recovery and Reinvestment Act, sustainability building is extremely attractive and viable in commercial real-estate when the risks are adequately addressed. As green building and green leasing continue to become the standard, the corresponding legal issues should be addressed in a coherent and comprehensive fashion.

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Yesterday G2B Ventures, a Seattle-based hedge fund, launched a $50 million fund that will be used to purchase distressed residential properties and convert them into more energy efficient homes for resale.

This approach has been used with success in the commercial market too - examples below. I’m hoping that the reported drop in office rents in Seattle (and the Eastside) means we'll see more of this sort of sustainability-focused, value-add investment, as its time has come. A report released last August by Deloitte and environmental consultant Charles Lockwood argues that within three years "companies that do not have green workplaces will be at a competitive disadvantage from higher operating costs, lower productivity, declining attraction and retention of skilled workers, and an increasingly negative brand image." 

Earlier this year, an article by Matt Hudgens in the National Real Estate Investor reported on the partnering of L.A.-based builder Shangri-La Industries and Thompson National Properties, who announced a $100 million fund - dubbed the TNP/SLI Green Building Fund - targeted retrofitting and redeveloping commercial and industrial buildings to add significant value.  Hudgins lists examples of similar funds: the Hines CalPERS Green Development Fund (created in 2006), with a current equity commitment of $277 million; and the $100 million Rose Smart Growth Investment Equity Fund.  He points specifically to the Rose fund's $23 million acquisition of Seattle’s Joseph Vance Building (right) and an adjacent property in 2006, followed by a $3.5 million green retrofit guided by Energy Star and LEED standards. 

As someone fully behind green retrofits - both from a financial and environmental perspective, I'm hopeful funds like G2B's in the residential market and TNP/SLI Green Building Fund and Rose Smart Growth Investment Equity Fund in the commercial market proliferate and prosper.

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The Cap & Trade system being proposed in Washington D.C. will almost certainly regulate both vehicle and industrial emissions as it will emissions from buildings. Let’s not forget what’s happening right here in Washington State. The Legislature is considering its own Cap & Trade system (HB1819 and SB5735), changes to the Growth Management Act to make it more green (SSB5687 and SHB1490), and greening the building code (SHB1747).

With construction costs falling a project 5.8% in the first quarter of this year, many have realized that the initial premium (6.5%) on building and maintaining the highest level green certified building (Platinum) can be recoup immediately. We all know that law is slow to respond. But the time is now to dust off your design, construction and management contracts, as well as in your financing documents and leases.

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