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

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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On Sunday, Eric Pryne, The Seattle Times business reporter, broke the story many of us knew was coming.  Seattle's commercial real estate market is long due for recalibration, and many commercial real estate fortunes will be lost.  Seattle real estate mogul, Micheal R. Mastro, and his many investors now being among them. 

In his Sunday, September 27, 2009,  front page story "Hundreds Lose Big as Real-Estate King Falls", Pryne methodically outlines how Mastro took in funds to finance his real estate deals from so-called "Friends & Family Investors", giving them promissory notes pledging interest returns in the 8, 9 and even 12% level, while conveying "I couldn't care less if you invested attitude" as the investors asked questions of him.  After several decades of success, word of mouth notoriety, and a well-cultivated disinterest in selling his investors, many flocked to Mastro whose reputation of paying his investors was legendary.  But now his pending bankruptcy puts at risk well over over $100 million owed to over 200 investors, many of who are from Seattle's Italian community.

With $587 million in debt and $249 million in assets, Mastro's debt/equity ratio is not unlike over commercial real estate moguls.  But with market crash, the probably need to recapitalize his investments in order to refinance his properties, and the shortage of equity investors, bankruptcy was all but inevitable for Mastro and many others to come.  Of that, I'm sure.

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For several years states have competed to attract the development of datacenters with tax incentives, developers have reshaped their building portfolio mix to include building them, and local communities have challenged their elected leaders to prove just how many jobs the datacenters will provide the local economy in exchange for reduced taxes.

While the debate continues, commercial interests with significant electronic information storage needs can't help but embrace the move toward data storage centers.  Numerous companies have for years flocked to central Washington to build datacenters, including Microsoft, Yahoo, Ask.com, Intuit and Sabey Corporation.   Traditional commercial developers like Sabey Corporation have been in the datacenter market for a while now, recently announcing a $100+ million datacenter project.   

With Washington's Governor Gregoire predicting that over 50% of government agency's IT data needs will be outsourced in the near future (i.e. government agencies will get out of the often costly and redundant server/information storage business), can one reasonably say that datacenters are a recession proof building typology for developers?  The answer is probably no, at least until the development and operational costs of datacenters cease to be inextricably tied to state tax incentives.  That's the experience in Washington.  Many of the datacenter projects mentioned above are now on hold, because state lawmakers could not agree on tax incentive legislation.

As those projects have been developed, the competition to keep them has also been fierce.  Take for example, Washington's own Microsoft, which well be the proverbial Canary in the mine, given it's reported consideration of moving a 470,000 square foot datacenter in Quincy, Washington to Texas for cheaper electricity and better tax incentives.  

Passive observers of the technological age can't help but wonder with Google digitizing libraries whether the community library is soon to be a thing of the past, with datacenters the reality of the future.  Bottom line: keep you eyes on datacenters as recession proof economic engines! Buildings to store information in the age of cloud computing may lease up quicker than your traditional speculative Class A office building.  If the development agreements are structured to fairly allocate risk, when and if the lessee defaults, the developer may well find themselves managing and operating a datacenter at a fraction of the original cost.

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Community Development Agreements allow developers to negotiate with permitting agencies to build more than the current zoning restrictions allow for their developments.  Apparently, these agreements are conspicuously prevelant and may be a issue in the City of Seattle's Mayoral race - as evidenced by today's Chamber of Commerce sponsored debate between mayoral candidates Mike McGinn and Joe Mallahan - where the issue was among many discussed. 

Certainly, at a minimum, the agreements are a possible symptom of the potential need for a grander vision for the City of Seattle that is consistent with its zoning code.  And without question, the City should not use them to extract concessions from developers seeking to develop, if those concessions could reasonably lead to the development not penciling out!  If you're curious about what one looks like, here's an example of one currently under consideration by Seattle's City Council.

Since the agreements are contracts, the question is what "must" a City like Seattle require developers to include in the agreements as a predicate to building outside the current zoning requirements.  Must labor issues be addressed?  Should developers be required to provide more below market housing in exchange?  What other improvements should be required, if any?  Should there be basic legislative guidlines on what can and cannot be in them?  Traditional contract law would say - - leave it to the parties!  But is that the right choice here, given the impact to City residents on the whole?

Ultimately, given the myriad of issues these agreements could address, issues that have a direct impact on the City's residents, the central question is "How does the City advance progressive and visionary development that improves the lives of City residents and our economy, if such agreements are not the direct function of a larger and comprehensive vision for the City?"  Students of city development history would say, it cannot.

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The City of Bellevue is on the verge of fulfilling the promise of Washington's Growth Management Act ...ensuring smart growth and higher densities in our commercial corridors.  The Seattle Times reported yesterday that the City has in place all the necessary agreements to allow farmers in specified rural areas of King County to transfer development rights to developers who want to build more densely in the Bel-Red area.  The farmers who offer to sell their land's development credits, which would result in preserving the land for farming, could receive as much as $20,000 per credit.  The actual value of the development credits will be dependent on the negotiations between the farmer and developer.  Every credit purchased allows a developer to build an additional 1,333 square feet.  The City's transfer of development rights program will be limited to the first of 75 credits purchased, or 100,000 square feet of development area.  The City's plan (pdf) is ambitious, but a definite model for capitalizing on the light rail system and advancing transit-oriented growth essential to the economic vitality of the region.

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How do we move away from community development as we know it today, which often occurs one building at a time, over several decades (if not longer) and with enormous competing interests, to incentivizing the development of high performance commercial and residential communities?  It's an interesting question that Mithun Architects in Seattle, Washington, has been considering.  Mithun's answer is for state lawmakers to create a Climate Benefit District (CBD).  The CBD would provide communities with a strategy for participating in the impending carbon regulated future and in making their communities sustainable.

Here's how it would work.  State law would allow a community to petition to become a CBD, or a local government could instigate the creation of a CBD in a certain area.  The Washington Department of Commerce would provide the CBD with technical assistance and ensure that its work was compatible with statewide greehouse gas reductions goals.  The CBD would have a governing community body that would indentify, implement and review climate-friendly actions within the CBD.  The CBD area would implement a sustainability plan, work toward and ultimately achieve the desired sustainability level.  The CBD governing body would - and here's the punchline - be capable of receiving and distributing carbon market revenues.

It seems to me that Mithun's proposal could go one step further and provide for the CBD to levy a "local benefit charge", which would be offset by a proportionate reduction in city of county taxes in the CBD, for the continuous improvement of the CBD's high performance community amenities.  It's an idea worth debating in Olympia.

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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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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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