Green Buildings Law: What you need to know

Green Buildings Law: What you need to know May 5, 2011 Moderator: Julie Gromer Director of Webinars, LJN s Web Audio Conference Division jgromer@alm.com

Peter S. Britell Peter S. Britell is the author of Green Buildings: Law, Contract and Regulation (Law Journal Press, 2010). Mr.Britell is Of Counsel at Dewey & LeBoeuf LLP where prior to 2010 he chaired the global real estate and construction group. He has broad experience in virtually every area of construction and real estate practice and has been lead counsel in many high profile transactions and projects. He is listed under Real Estate in Best Lawyers in America, New York Super Lawyers and The New York Area's Best Lawyers. He is an Adjunct Professor at University of Miami School of Law where he created one of the first law school courses (if not the first) in the Law of Green Buildings for their L.L.M. Program in Real Property Development. Mr. Britell is a graduate of Harvard College and Harvard Law School and holds an L.L.M in Taxation from New York University Law School. His interest in the legal aspects of sustainability began with a simple question: "What is the role of the lawyer in the green revolution? Mr. Britell can be contacted at pbritell@dl.com.

This is program is for lawyers who think green means just a LEED rating or that green is a fashion trend in the real estate industry. Wrong! It is also for lawyers who seek a quick overview how green impacts their client projects. The green revolution affects (i) every type of real estate agreement and (ii) existing buildings not just new ones. You must know green law to represent your clients. Green is mandatory and growing exponentially.

What is Sustainability? A New Legal Language "Sustainability:" means different things to different people better and cheaper energy; better indoor and outdoor environment; better and cheaper heat and light; reuse of materials; recycling of old buildings; use of local materials; recycling of brownfields; better site selection and land use; wiser transportation use; etc. [1] New Legal Language: Examples: LEED, benchmarking, enhanced commissioning, retro-commissioning, green-washing, LEEDigation, LEED AP, etc. Legal Innovation: New "green clauses" are appearing in legal agreements. [1] One definition: Brundtland Commission of the U.N. (1987): "sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs." Another: the ability to endure, to be self-sustaining

What are Green Ratings? "Green Rating" a system used to measure and certify sustainability as to a new or existing building or component thereof. "LEED" Leadership in Energy and Environmental Design the premier U.S. rating program developed by United States Green Building Council (USGBC) and administered by Green Building Certification Institute (GBCI). Other leading systems: Green Globes [Green Building Initiative]; Energy Star [U.S. Dept. of Environmental Protection]; Ashrae 189.1 [American Society of Heating, Refrigerating, and Air-Conditioning Engineers].

What is LEED? LEED measures/certifies green building design, construction and operation. LEED Rating Systems (i) New Construction and Major Renovation; (ii) Existing Buildings: Operations & Maintenance; (iii) Commercial Interiors; (iv) Core & Shell; (v) Schools; (vi) Retail; (vii) Healthcare; (viii) Homes and (ix) Neighborhood Development. Performance Categories In Each LEED System (i) Sustainable Sites; (ii) Water Efficiency; (iii) Energy & Atmosphere; (iv) Materials & Resources; (v) Indoor Environmental Quality; (vi) Innovation & Design Process and (vii) Regional Planning. A project earns points in each performance category Levels: Certified, Silver, Gold, Platinum These track the main points of sustainability Background how LEED systems were created and continue to develop.

Example of LEED Rating Categories/Points/Credits Rating LEED NC LEED EB LEED CI LEED C&S Certified 40-49 40-49 40-49 40-49 Silver 50-59 50-59 50-59 50-59 Gold 60-79 60-79 60-79 60-79 Platinum 80+ 80+ 80+ 80+ LEED NC LEED EB LEED CI LEE D C&S Sustainable Sites 26 26 21 28 Water Efficiency 10 14 11 10 Energy & Atmosphere 35 35 37 37 Materials & Resources 14 10 14 13 Indoor Environmental Quality 15 15 17 12 Innovation & Design Process 6 6 6 6 Regional Priority 4 4 4 4 Total 110 110 110 110

LEED Process Design Phase project team submits "design phase credits" to GBCI. GBCI determines "credit anticipated" or "credit denied" GBCI responds to Credit Interpretation Requests Construction Phase Project team makes final submittal when construction done to confirm project was built as described in design-phase application. Physical inspection NOT required (contrast Green Globes, which requires third-party inspection). Appeals to seek review of a credit denied in the Final LEED Review; LEED appeal process is still evolving.

LEED Process (Cont d) Recertification LEED does not require LEED certification be maintained. Owners seeking to confirm continuing compliance must apply for recertification under LEED Existing Buildings: Operation & Maintenance at least every five years. Some statutes, leases and mortgages require regular recertification. Evolving Issue post-certification challenges by third parties or by GBCI concern for owners, tenants, mortgage lenders,. Exercise review LEED 2009 Core & Shell Development Rating System and consider how you would complete its project checklist - http://www.usgbc.org/showfile.aspx?documentid=8870; http://www.usgbc.org/displaypage.aspx?cmspageid=295 (last visited Apr. 18, 2011).

Some LEED Issues Because statutes and contracts incorporate LEED: Failure to get or loss of LEED rating can mean loss of tax credits, abatements, zoning benefits, funding, and other money benefits; can trigger defaults under leases and mortgages Incorporation of LEED as statutory test leaves government decisions to GBCI/USGBC and raises process issues Gifford v. USGBC [1] alleges (i) USGBC has misrepresented energy efficiency of LEED buildings and (ii) LEED certification does not verify actual energy performance of a building. LEED remains the paradigm central catalyst for US green buildings movement. Similar issues for other rating systems [1] Henry Gifford et al v U.S. Green Building Council, U.S.Dist.Ct., So. Dist. N.Y., 10-cv-7747 LBS

Green Requirements What is a "Green Requirement"? Government green requirements (a) mandates and (b) incentives Contractual green requirements (a) leases; (b) mortgages and other loans; (c) purchase/sale agreements; (d) architect agreements and construction contracts; (e) government grants; (f) insurance policies; (g) management contracts; (h) easements, covenants, conditions, restrictions; (i) others.

Three Stages of Government Mandates Stage One: Government-Owned or Funded Projects Atlanta, GA new city facilities or city funded projects of 5,000+ sq. ft. or costing more than $2 million need enough sustainable criteria to achieve LEED Silver [1] Stage Two: New Private Projects and Alterations Los Angeles, CA to get building permit new building of 50,000+ sq ft must meet criteria for at least LEED Certified [2] Stage Three: Mandatory Retrofit of Existing Buildings New York City 2009 Local Laws require "energy audits" and "retrocommissioning" [LL 88]; upgrades of building lighting systems and submetering [LL84]; and "energy and water use benchmarking" [LL85] [3]

Three Stages of Government Green Mandates (fnotes( fnotes) Footnotes: [1] Atlanta, GA Code #75-19 http://www.atlantaga.gov/client_resources/forms/energy%20conservation/adopte d%20ordinance.pdf (last visited Apr. 11, 2011) [2] Los Angeles, CA, Code 16.10 (2008) [ See, e.g., http://www.paulhastings.com/assets/publications/946.pdf (last visited Apr. 11, 2011) [3] For discussion of economic impact of NYC Local Laws, see Britell and Saft, "Who to Pay for New Energy Laws Compliance," New York Law Journal (June 21, 2010) http://www.deweyleboeuf.com/~/media/files/inthenews/2010/20100621_whopa ysenergylaws.ashx (last visited Apr. 11, 2011)

Types if Government Green Incentives Zoning Income Tax Credits Real Property Tax Abatement Grants and Loans Tax-Exempt Financing Green Bonds Expedited Permitting

Green Income Tax Credits - Examples Maryland [1] allows a credit for commercial and multi-family projects of at least 20,000 sq. ft. in qualifying locations which attain a minimum LEED rating. Credit varies from 6 percent to 8 percent of allowable costs. Unused credits may be carried forward for up to ten taxable years. All credits are apparently now "allocated" New Mexico [2] allows a personal and corporate tax credit for green buildings. Credit is computed on sq. ft. basis and varies depending on type and level of LEED rating and type of building. Example: LEED NC Gold first 10,000 sq. ft. - $4.75 sq. ft; next 40,000 sq. ft. - $2.00 sq. ft; next 450,000 sq. ft.- $1.00 sq. ft. Requires third-party validation of building s level of sustainability [1] http://business.marylandtaxes.com/taxinfo/taxcredit/greenbldg/default.asp (last visited Jan. 21, 2011). Md. Code Ann., [Tax-Gen] 10-722 et seq. (last visited Apr. 11, 2011) [2] N.M. Stat. 7-2A-21 New Mexico Energy, Minerals and Natural Resourced Department, HB534: Sustainable Building Tax Credits, http://www.emnrd.state.nm.us/ecmd/cleanenergytaxincentives/sustainablebuildin gtaxcredit.htm (last visited Apr. 22, 2011).

Green Real Property Tax Abatement - Examples Cincinnati, OH allows up to a 100 percent abatement for new buildings constructed to LEED standards. The abatement can run 10 to 15 years based on type of building involved and is also available for improvements to existing buildings. [1] Howard County, MD All new construction and upgrades to existing buildings are eligible for this voluntary program. Any new construction (using LEED-NC or LEED-Core) can receive a five-year property tax credit. There is a 25 percent tax credit for LEED-Silver, 50 percent for LEED-Gold, and 75 percent for LEED-Platinum. Any existing building (using LEED-EB) can receive a three-year property tax credit. There is a 10 percent tax credit for LEED-Silver; 25 percent for LEED-Gold; and 50 percent for LEED-Platinum. Buildings can receive the three-year tax credit after the completion of the five-year credit if the building is re-commissioned and receives a LEED-Existing Building certification. [2] [1] City of Cincinnati, Commercial Tax Abatement, http://www.cincinnati-oh.gov/cdap/pages/- 3481-/ (last visited Apr. 11, 2011). (b) City of Cincinnati, Residential Tax Abatement, http://www.cincinnati-oh.gov/cdap/pages/-3521-/ (last visited Apr. 11, 2011). [2] Council of Howard County, MD Bill No. 49-2007, 1-2 (codified as amended at Code County of Howard, MD 20.119, 20.129B (2007)), a http://www.co.ho.md.us/dpz/dpzdocs/councilbill49_2007.pdf (last visited Apr. 11, 2011)

Green Zoning Incentive - Example Pittsburgh, PA: Pittsburgh allows a density bonus of an additional 20 percent FAR and an additional variance of 20 percent of the permitted height for all projects that earn LEED Certified for New Construction or for Core and Shell. The bonus is available in nonresidential zoning districts but may not be applied in addition to other height or FAR bonus or exceptions or in addition to any additional height or FAR variances or special exceptions granted by the Zoning Board of Adjustment. [1] Question: how do zoning, income tax, and real property tax incentives differ in impact? [1] Pittsburgh, Pa.,Code,tit.9, 915.04l(2007). http://legistar.city.pittsburgh.pa.us/attachments/5507.doc (last visited April 8, 2011).

Tax-Exempt Green Bonds IRC Section 142(l)(1) - qualified green building and sustainable design project must meet following requirements: (1) at least 75 percent of the square footage of commercial buildings must be registered for USGBC s LEED certification and reasonably expected (at time of designation) to receive such certification; (2) must include a brownfield site as defined by section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. 9601) (CERCLA) (3) must receive specific State or local government resources of at least $5,000,000; and (4) must includes at least (a) 1,000,000 square feet of building or (b) 20 acres. [1] [1] See, e.g., Internal Revenue Bulletin 2005-27 http://www.irs.gov/irb/2005-27_irb/ar11.html (last visited April 20, 2011)

Contractual Green Requirements - Overview Leases Mortgages Purchase/Sale Agreements Architect/Construction Contracts Insurance Policies Management Contracts Easements, Covenants, Conditions Restrictions

Green Due Diligence New Green Due Diligence Categories many new types of green diligence - including matters not readily available on the public record: (a) review LEED or other green rating applications for projects in development; (b) review LEED or other green ratings for completed projects; (c) review compliance with government green codes for new and completed projects; (d) review compliance by existing tenants with green lease requirements; (e) review compliance with green mortgage covenants; (f) review of tax credit, property tax, zoning, green bond incentive rules and compliance/qualification for new or completed projects; and (g) other project-specific green due diligence. New Green Consultants architects, engineers, construction consultants, attorneys, accountants, LEED Accredited Professionals, commissioning agents, etc. experienced with green issues - to provide green due diligence reports and advice.

Green Issues in Leases New Leases Major new tenant may seek to impose green requirements on landlord and existing tenants [1]; Green rules of landlord or existing major tenant may be imposed on new tenants Impact of New Green Rules on Existing Tenants key issue is whether landlord can impose new green rules on existing tenants including pass-through of green costs incurred by landlord for new tenants or to comply with new green laws or mortgage requirements. This needs careful review of operating expense and capital cost pass-through clauses and also "compliance with law" clauses in existing leases. Issues can also arise when existing tenant seeks landlord consent for new alteration and landlord imposes green rules not contemplated when lease was signed. Sublease and Assignment Landlord may condition approval of sublease or assignment on compliance by subtenant or assignee with new green rules not in original lease. Innovations in Lease Clauses Several model "green leases" have been published. [2] New NYC lease has tenant sharing costs of energy-saving investments keyed to projected reduction in base building energy costs. [3] [1] U.S. General Services Administration Green Lease Policies and Procedures http://www.gsa.gov/portal/ content/103656 (last visited Apr. 11, 2011) [2] See, e.g., The Model Green Lease, Corporate Realty, Design & Management Institute, http://www.squarefootage.net/tmgl.html (last visited Apr. 11, 2011) [3] New law firm lease at 7 World Trade Center; NYC Dept. of Citywide Administrative Services (DCAS) will require this new lease provision in all new lease negotiations (see, e.g., http://www.wilmerhale.com/about/ news/newsdetail.aspx?news=2570=no (last visited Apr. 11, 2011)

Green Issues in Purchase/Sale Agreements Representations and warranties, conditions, covenants, and remedies should cover green business and legal points Examples [see many examples in Ch. 5 of Green Buildings: Law, Contract and Regulation]: Existing Building (a) LEED rating was duly issued; (b) no pending LEED issues; (c) annual compliance report or certification has been properly filed to comply with a government, mortgage, or major lease requirement; (d) NYC property complies with LL 84, 85, 87, 88; (e) if green tax credits or abatements were issued, current status (carryover balance, procedural compliance, all filings are complete, etc.); (f) continuing qualification for green zoning bonuses; (g) no known defects with green roof, renewable energy installation, or other novel green construction; (h) other green conditions or qualifications Development/Construction Project (a) status of LEED application/certification process; (b) that, based on status of design and prior filings, Seller can/will attain required LEED or other needed green ratings; (c) that, based on status of design and specific program requirements, Seller can/will satisfy requirements for green funding, tax credits, tax abatements, zoning bonuses, bond requirements, mortgage requirements, etc.; (d) status of tax-exempt "green" bonds issued for the project; (e) design and construction agreements include appropriate provisions for securing LEED or other green certifications or benefits; (f) other project-specific points.

Green Issues in Mortgages Main Point green factors directly impact value of loan collateral. Lenders must (a) know 'green law'; and (b) draft loan documents to minimize loss if borrower defaults under green covenants. Green 'Value-Generators' Green property tax abatements; zoning bonuses; tax-exempt interest on "green bonds"; income tax credits all add directly to capitalized value of a building e.g., $1 million property tax abatement. Loss of a green value generator such as failure to obtain, or loss of, a tax abatement - can mean big loss of collateral value. Green 'Market Enhancers' - a green rating like LEED Gold or Platinum - adds perceived value to property. (Contrast 'green value generators' which add direct value). But loss of green rating can also mean loss of direct value e.g., if a major lease requires landlord to maintain LEED rating or suffer a rent abatement. Due Diligence Issues/Loan Documentation in loan commitments and loan agreements lender has same green due diligence issues as buyer of property; loan documents should include green representations and warranties, covenants, and conditions similar to those in purchase/sale agreement. New Development/Construction Existing Building Typical Remedies Don't Help: Typical mortgage remedies do not protect against green defaults e.g., acceleration of debt, foreclosure, default interest rate. Foreclosing on a $75 million building which just lost $10 million in value for loss of real property tax abatement does not help the lender. Need Targeted Green Remedies: Lenders need to develop remedies which are targeted to specific green issues and which can withstand bankruptcy.

Green Issues in Architect Agreements Basic Issues scope of services and liability Scope of Services must clearly define green services and compensation in all phases of project Responsibility for LEED process and/or other green filings and certifications Coordination with LEED AP, independent commissioning agent, other green consultants Basic Services versus Additional Services Standard of care no guarantee Liability Issues Problems of novel design Liability issues for independent commissioning agent vs. architect Green damages as "consequential" vs. "direct" for example, loss of tax credits or abatement Limitation of green liability

Green Issues in Insurance Policies Property Insurance does a risk policy cover the cost to rebuild to new green governmental or contractual requirements after a casualty? Issues under existing policies if the policy covers compliance with updated codes, arguably it should cover rebuilding to comply with new green code requirements but may not cover elective or 'incentive' green requirements. New 'green' policies are being offered each policy should be reviewed to confirm that it covers the insured's expectations for example, not just compliance with green building code but also cost to get an 'elective' green rating and/or to qualify for green incentive benefits for the reconstructed building. Other Coverages Green issues in liability and professional malpractice policies

Hot Topics in Green Law Increasing green litigation examples: (a) Gifford v. USGBC case [noted above] (b) Minnesota case dispute over copyright in a green rating program, "MN GreenStar" [see, e.g., "Construction Law Musings", http://constructionlawva.com/builders-association-seeks-cut-downgrassroots-green-building-program-guest-post/ (last visited Apr. 11, 2011)] (c) Shaw Development v. Southern Builders delay in construction caused developer to forfeit $635,000 in Maryland tax credits. [see, e.g., http://www.globalclimatelaw.com/2009/03/articles/environmental/shawdevelopment-v-southern-builders-the-first-green-building-litigation-issettled/ (last visited Apr. 10, 2011)] (d) Albuquerque Fed. Judge preliminarily enjoined City's green building code said federal statutes governing energy efficiency of HVAC and water heating products expressly preempt state regulation [see, e.g., http://www.greenbiz.com/news/2008/10/06/federal-judgeputs-albuquerques-green-building-code-hold (last visited Apr. 11, 2011)]

Hot Topics in Green Law Destiny USA Green Bond Controversy see Chris Cheatham, The Destiny USA Debacle, http://www.greenbuildinglawupdate.com/uploads/file/destinyusaebook(2).pdf (last visited Apr. 10, 2011) "Benchmarking" How to compare, for example, energy use in different buildings for new regulatory compliance for example, new ASTM E2797-11 Building Energy Performance Assessment (BEPA) standard see, e.g., http://www.srmnetwork.com/wp- content/uploads/bna_astm_bepa_standard_as_safe_harbor_03-24- 11.pdf (last visited Apr. 11, 2011) Proliferation of New Codes; Pace of Change

Q&A

Thanks for joining us today! For Upcoming Webinars visit: www.ljnonline.com/conferences