Leading off the presentations was David Blake of Seyfarth Shaw’s Washington, D.C. office who discussed green building risks, laws and litigation. David offered a concise and informative summary of thirteen LEED-related disputes which have been either decided or filed since 2007. In this wide array of cases, there is an extraordinarily diverse group of claimants, defendants and issues.  Among the cases involving public entities, the primary claims have involved bid protests and challenges to code requirements, whilst private parties have addressed failure to obtain LEED certification, non-satisfaction of LEED standards, additional costs of LEED compliance, and whether and to what extent “green” damages are cognizable and calculable. Clearly representing only the LEEDing edge (sorry, couldn’t help myself) of green building litigation, David’s presentation offered valuable insight into the depth and breadth of affected parties and the diversity and complexity of legal issues unique to green building.

Following David was a great panel discussion of green building construction contracts by Tom Giordano of Lend Lease, Mike Deane of Turner Construction and Dave McPherson of Watt, Tieder Holfar & Fitzgerald. This primary focus was on allocation of contractual responsibility and potential liabilities of owners, design professionals and constructors for achieving identified “green” targets, be they LEED certification, energy efficiency, or some other green building performance metric. Issues such as assigning responsibility (often at the “task” level), waivers of consequential damages (both inside and outside of the government contracting context), and allocation of risk of non-performance were discussed, and helpful examples from actual projects presented. Giordano and Deane both emphasized the necessity of a careful (and sometimes surgical) allocation of responsibilities, as well as a cooperative spirit when negotiating these matters.  In some respects, the discussion echoed several themes identified in Wednesday’s presentation on “Sustainable Building Law” during which Joshua Ballance, Associate Counsel on the American Institute of Architects’ Contract Documents team, provided a helpful overview of the AIA’s Guide for Sustainable Projects (a free download). Rounding out the discussion of transaction and contract issues was Keith Sutherland of Stewart McKelvey, a leading Canadian firm. Stuart covered key “green leasing” issues, with particular attention to Canada’s Realpac Model Green Office Lease. This form, which incorporates a separately negotiated “Environmental Management Plan”, provides a useful drafting approach for incorporating green lease requirements.

Next up was Jeff Lesk of Nixon Peabody’s Washington, D.C. office who discussed legal issues in the context of green building financing.  This guy is not only on top of his game, he has true passion for this stuff. Realistic about the nature of the challenges facing green building finance, including the glaring lack of standards through which the real property appraisal community might quantify the economic benefits and enhanced asset values of green buildings, Lesk focused instead on the availability of a variety of tax credits (and associated monetization schemes) as the best hope for financing green building projects.  Renewable energy tax credits, which in many circumstances can be “bundled” with tax credits for other project attributes (such as affordable housing credits), is often the only way many green projects are realized.  It also accounts for the fact that today so much affordable housing is being built to green standards.  Jeff’s current Holy Grail is an affordable housing project which utilizes wind-based on-site renewable energy. If you have a project that fits this description and needs additional funding, send it his way!

The next two segments of the program shifted back to risk management – and how various insurance products and construction sureties might be used to help bridge some of the unique risk gaps encountered in green building. Keith McGlamery of The McGlamery Law Firm, PLLC described some newly available builder’s risk coverage offered by Zurich, Ace and others for green construction projects. These policy forms (which are often negotiable) offer enhanced coverage for losses resulting from construction delays for the acquisition of special equipment or materials, waste recycling, and loss of tax credits and other financial incentives.  And while no company is insuring that a building will achieve an identified standard or performance level, an AIG affiliate now offers to design professionals “green reputation insurance” which provides limited defense coverage should the architect or engineer be sued if a project fails to achieve a specified standard.  Keith then walked through a hypothetical (that would be the envy of many a law school professor) involving hurricane damage to a green roof.  Think about the doomsday scenarios that were predicted when Hurricane Irene hit Manhattan and all of the sudden none of this sounds much less “hypothetical”.  While expensive, coverage for these kinds of losses is available.  However, project owners must now make sure that their underlying policies cover special risks to green buildings, and obtain a separate “difference in conditions” or DIC policy to cover wind damage from a hurricane. Next up was Edward Lee of Whiteford Taylor Preston to discuss many of the misinformed expectations regarding the role of the construction surety in a green building project.  Ed emphasized that a surety company only guarantees performance by the obligated party (contractor).  It does not guarantee achievement of any performance or construction standard, such as LEED, and should not be relied upon for this purpose. Harking back to the earlier discussion regarding construction contracts and related risks, he reiterated that a surety’s obligations can rise no further than the contractor’s, again highlighting the importance of clearly allocating in the contract documents responsibility for activities related to LEED or similar certifications. Ed also echoed with some dismay the observations made on several occasions by Chris Cheatham in his Green Building Law Update regarding the D.C. Green Building Act, which still contains a performance bond requirement that simply is not offered in the market. This requirement, which amounts to a “forfeiture bond” (like when someone skips bail), will be effective in less than three months.

Up next was Stephen Del Percio of Arent Fox, blogger extraordinaire and publisher of The Green Real Estate Law Journal, who shared an insightful (and entertaining) analysis of greenwashing issues associated with green buildings. First was the news that we will apparently be waiting much longer for final promulgation of the long awaited and now twice-proposed revisions to FTC’s Green Guides.  Steve provided several useful examples of misleading (or potentially misleading) claims regarding the environmental or sustainability features of green buildings, including claims of LEED registration and certification status.  As you may know, it was green building performance claims that were front and center in the  recently decided case of Gifford v. United States Green Building Council.  And there is little doubt that there will be more where that came from.  One very positive outcome of that case (and related media reports) is the extraordinary emphasis now being placed on actual performance of LEED certified buildings. Many of the educational sessions at Greenbuild addressed topics related to green building performance measurement, as well as LEED certification and recertification.

Also making an appearance on behalf of the Canadian green building law community was John Haythorne of Fraser Milner Casgrain LLP.  John observed that, mainly as a result of a well-defined public-private partnership finance structure, the certification and performance risks which were discussed at great length by the U.S. based panelists are managed and allocated in a more straightforward manner in Canada.  In John’s recent experience, much greater emphasis is placed on long-term building lifecycle risk, especially those related to either product or materials failure associated with green building components, not unlike the claims being litigated in The Chesapeake Bay Foundation, Inc., et al. v. Weyerhauser Company, which is scheduled to go to trial next month. It was helpful to gain the Canadian perspective.  Maybe we could learn a thing or two from our very hospitable friends north of the border, eh?

Rounding out the presentation was Stuart Kaplow of Stuart Kaplow, P.A. and its consulting affiliate, Ajhon.  With due apologies to Letterman, Stuart presented his “Top 10” list of what green building lawyers can and should do to help move the industry forward.  In particular, he emphasized the “internationalization” of LEED and stressed the level of opportunity this has created for U.S. based legal professionals.  He also suggested that lawyers consider leveraging their talents through non-traditional business vehicles, such as consulting practices, noting that his business has experienced explosive growth by performing services through a “non-legal” affiliate.

So there you have it folks. While green building law has made great strides in the past few years, there is a sense that we are still only at the beginning, and many growing pains are yet to be endured.  Green building lawyers are presented with ongoing opportunities to shape and influence the direction of this industry, and perhaps do a little good along the way, a unique advantage not enjoyed by most of our colleagues.  I hope to see many more of you at Greenbuild 2012 in San Francisco next November.

I’m not really the intrepid reporter type, but since I am here I thought I would share some of the highlights from the conference. I haven’t (yet) figured out how to be in several places at once, so I can share only about those sessions I attended.  For those of you interested in keeping up with other Greenbuild news, check out the posts under Twitter hashtag #GBNEXT .

This year marked the addition of a new Greenbuild program: The Green Jobs Forum.  Kimberly Lewis, VP of Conferences and Events for USGBC, received  well-deserved kudos from Rick Fedrizzi (Founder and Co-Chair of the USGBC) and others for launching this program and for keeping the issue of green jobs front and center.  Fedrizzi kicked off the opening session of the forum with a dual message.  First, he firmly rejected the current political paradigm that pits economic growth against environmental stewardship. Second, he implored forum attendees to have a “bias toward action”, and cited as an example former President Clinton who, according to Fedrizzi, was relentless in his drive for results over commitments at last month’s annual meeting of the Clinton Global Initiative.  Fedrizzi’s sentiments were echoed and expanded upon by Bracken Hendricks, Senior Fellow at the Center for American Progress, a Washington think tank which co-sponsored of the forum.  The opening session also featured presentations by Michael Thompson, Councillor of the City of Toronto, Ken Neumann, National Director of the United Steelworkers Canada, Robert Peck, Commissioner of the Public Buildings Service of the U.S. General Services Administration, and Dan Esty, Connecticut’s Commissioner of Energy and Environmental Protection and author of the book Green to Gold. Peck made an interesting observation about the “green jobs” label itself, and predicted that within five or six years the label will become less and less relevant as familiarity with sustainability and green building concepts become necessary core competencies across the entire real estate and construction  industries.  Esty highlighted Connecticut’s approach to financial support for development of sustainability technologies and green building, an approach that does not pick winners or losers, but creates opportunity for as many ideas as possible.  According to Esty, markets, not governments, are much better equipped for the task of determining winners.  To implement this approach, Connecticut recently launched the nation’s first Green Bank, which has been hailed as a true innovation in the sphere of public-private financial cooperation to support the development of green technologies and industries. Esty also laid down his own challenge to industry: focus on the problem to be solved, and don’t presuppose that existing solutions are the only answer. People want cold beer and hot showers – not fridges and hot water heaters. Now there’s a man with his priorities in order!

Following the opening session, there were several breakouts.  The first one that I attended was entitled “Moving Investment Capital – Commercial Real Estate Finance and the Green Economy”.  This terrific panel which was moderated by Ashok Gupta of the Natural Resources Defense Council, included Duane Desiderio, VP and Counsel of the Real Estate Roundtable, Bob Hinkle of Metrus Energy, Claire Broido Johnson, GM of Serious Energy Capital, and Maria Vargas, Deputy Director of the U.S. Department of Energy’s Office of Systems, Analyses and Planning.  Desiderio led off the panel with a discussion of current Roundtable initiatives to improve government support for green building by, among other things, expanding the availability of the current 179(d) tax deduction to include existing buildings, and by urging changes to the current DOE loan guarantee program (yes, the same one involved in the Solyndra debacle) to emphasize retrofits, not just new technologies.  Next, Johnson and Hinkle each described new models for financing energy efficiency improvements offered by their companies.  While the models have some similarities, they are both innovative entrants to the market previously monopolized by Energy Service Companies (ESCOs).  Both emphasized flexible, deal by deal underwriting which is “supplier agnostic”, distinct advantages to the ESCO model.  The goal of these product offerings is to solve the internal hurdles faced by key decision makers inside of any enterprise (most notably, capital commitments), and drive broader market penetration for these types of deals.  Finally, Director Vargas described DOE’s Better Buildings Challenge, and articulated the Department’s ambitious goal of improving energy efficiency in commercial buildings by 20% by the year 2020, generating over $40 billion in annual energy cost savings. During the Q+A, yours truly posed a question about driving energy efficiency retrofits into the mid and lower ends of the commercial real estate market.  All of the panelists expressed some dismay at the pace of progress in these market sectors, and mentioned some of the structural barriers with which we are all familiar, including non-aligned lease arrangements, an appraisal community ill-equipped to handle green building
valuation, and general market ignorance, malaise or both. However, there was clear recognition that these all are solvable problems, and that persistent outreach and education from the green building community will be key to eventual success in these market sectors.

The final breakout session I attended, entitled Understanding the Performance of the Green Building Economy, featured an equally impressive panel moderated by Chris Pyke of the USGBC, including Jonathan Flaherty of Tishman Speyer, Timothy Howell, Vice President of Sustainability for Ecological, Mike Zatz, Manager of USEPA’s Energy Star Portfolio Manager, and Bill Sisson, Director of Sustainability at United Technologies Research Center.  The focus of the panel was benchmarking of energy performance and transparency and disclosure of performance data, an issue I addressed in an earlier blog post in the context of the ASTM’s recently promulgated standard on building energy performance assessments. The discussion was lively and informative, and addressed many of the challenges posed by New York City’s ordinance that mandates disclosure of energy performance data for commercial buildings containing at least 50,000 gross square feet. Leasing was again discussed as a primary topic of concern, especially in the context of multi-tenant facilities.  But all panelists agreed that the pent up demand for energy efficiency modeling, benchmarking and improvement is both real and large, and will be the source of a great many new jobs.  As one of the panelists noted, if you have a child going off to college and thinking about engineering, this is a great career opportunity.

Although I learned much, my biggest takeaway from the green jobs forum is that the participants in the green building movement are not concerned solely with creating the next architectural wonder or “net zero” carbon emission buildings.  No, there are many smart and devoted people who care deeply about the employment and other challenges that we now face as a nation, and who are working diligently to unleash the full economic power of green building to help us face those challenges.  Soldier on, good people!

The first of these is the launch on May 31 of an energy efficiency improvement initiative coined “Green Refinance Plus”.  The program, jointly administered by FHA and Fannie Mae, aims to make available additional financing proceeds to owners of older multi-family affordable housing properties to support the installation of green systems and appliances.  The goal of the program is to reduce both energy use and greenhouse gas emissions and generate contemporaneous savings on utility bills. According to Fannie Mae’s press release:

Green Refinance Plus is intended to refinance the expiring mortgages of low income housing tax credit and other affordable projects and to lower annual operating costs by reducing energy consumption. Fannie Mae and HUD anticipate approximately $100 million in initial refinance volume with an average loan amount of $3.5 to $5 million. FHA will insure up to an additional four-to-five percent of the loan amount, or an average of approximately $150,000 to $250,000 per loan, to provide additional loan funds to pay for property improvements that save energy and water costs for owners and tenants, such as energy efficient windows and ENERGY STAR appliances, as well as other needed property renovations.

While admittedly a modest investment tailored to a relatively narrow market need, the program is noteworthy in that it there is some implicit value associated with energy efficiency improvements that justifies higher loan amounts.

It is precisely the difficulty associated with objectively quantifying the added market value of green building improvements that is the subject of the second development: the announcement in mid-June of a Memorandum of Understanding between the Appraisal Foundation (the Congressionally sanctioned source of appraisal qualifications and standards) and the Department of Energy, Office of Energy Efficiency and Renewable Energy (EERE) to collaborate on green building and energy efficiency valuation issues.  Although the MOU fails to specify any particular deliverables or associated timeframes, it does commit both parties to leverage their complementary program strengths to create additional guidance under the Uniform Standards of Professional Appraisal Practice to address energy performance and green valuation.  In the statement of “Collaborative Objectives”, EERE affirms its intent to:

• Develop one or more databases that aggregate and provide the appraisal community with a set of building performance data for particular building types and upgrades;
• Identify Federal government energy and green building-related policies and programs, including those related to leasing requirements for Federal buildings, and transparently make available additional information about applicable programs;
• Develop an educational course curriculum for appraisers on valuing energy performance and sustainability in buildings based, at least in part, on guidance issued by the Appraisal Practices Board which can be approved through the Appraiser Qualifications Board Course Approval Program, and
• Serve as a subject matter expert for the Appraisal Practices Board on issues relating to energy performance and green buildings.

For its part, the Appraisal Institute affirms its intent to:

• Engage its Appraisal Standards Board, Appraisal Practices Board and Appraisal Quality Board towards developing additional guidance to show how to apply existing appraisal standards and recognized valuation methods and techniques to energy performance and green appraisals;
• Educate and engage the Appraisal Foundation Advisory Council on energy efficiency and green buildings and their valuation, and make a complimentary video available on its website for all appraisers; and
• Provide valuation expertise to the EERE’s Building Technologies Program to assist in the development of the green building data project.

The significance of a developing platform to foster consensus on green building valuation issues should not be underestimated.  In the course of a recent conversation with a community banker, he related to me a situation in which an appraiser reduced the value of a commercial property that had a geothermal HVAC system because the technology was unfamiliar to the majority of market participants, and would therefore act as a “drag” on a potential sale. Huh?  Additionally, in the wake of the recent real estate market meltdown, appraiser independence has been reinforced, leaving lenders little or no flexibility to make underwriting decisions based upon the real economic benefits (in terms of both reduced operating costs and higher terminal values) of green building features not considered by the appraiser. Because the appraisal community acts very much as gatekeeper on this issue, the speed with which new practices and standards are developed and implemented could have an immediate positive impact.

Finally, on July 14, the Senate Committee on Energy and Natural Resources reported out Senate Bill 1000 (Bill), the Energy Savings and Industrial Competitiveness Act of 2011.   Sponsored by Senator Jeanne Shaheen (D–NH), the Bill includes a proposed amendment to the Energy Policy Act that would make available credit guarantees associated with the “installation of efficiency or renewable energy measures (including metering) in a building (or in multiple buildings on a given property) that are expected to increase the energy efficiency of the building (including fixtures).”  Responsibility for developing underwriting guidelines and associated requirements is delegated to the Secretary of Energy.  In addition to that program, the Bill mandates establishment of a “revolving loan program under which loans are provided to commercial and industrial manufacturers to implement commercially available technologies or processes that significantly reduce systems energy intensity, including the use of energy-intensive feedstocks, and improve the industrial competitiveness of the United States.”  This latter initiative would entail provision of “cost-matched” federal funds to lenders for projects that are co-funded by at least one state government agency and a private lender.

As I conclude this post, our nation sits at the precipice of a potential default on its financial obligations, unemployment remains persistently high, and progressive thinking appears to be on life support.  But if you haven’t figured it out by now, I’m a chronic optimist.  It may be my greatest character flaw, but I tell myself that one day we will look back on this period as but one more crucible in which our mettle was tested and we emerged stronger, better and smarter.  Progress continues to be incremental.  But progress is progress.  Continued investment of our time, talent and treasure to expand access to funding for green building and energy efficiency projects will pay significant dividends for future generations.

In his statement announcing the withdrawal, Governor Chris Christie conceded that “it’s time to defer to the experts” on the issue of human contribution to global
warming (a welcome departure from his previous statement which seemed to question the validity of the scientific community’s consensus on this point).  He nonetheless concluded that RGGI was “ineffective” in reducing greenhouse gas emissions and is “unlikely to be [effective] in the future.”  The metric he cited in support of this conclusion is the relatively low price of carbon allowances auctioned through RGGI ($2.00 per ton, in contrast to the projected price of $20-$30 per ton when New Jersey initiated its participation in the program). Because of this, “RGGI does nothing more than tax electricity, tax our citizens, tax our businesses, with no discernable or measurable impact upon our environment.”  While there is lingering debate about the causes of the low price (most often attributed to the slow economy and the increased reliance on natural gas) and the relative benefits of participation in RGGI, it is worth noting that even with the crash in carbon allowance prices (at the most recent auction only 30% of available allowances were actually purchased, all at the reserve price of $1.89 per ton), as of this past February, the RGGI participating states have raised over $885 million to fund other strategic energy programs.

One of the additional benefits initially touted for participation in RGGI was the availability of “offsets” through which regulated power plants could meet up to 3.3% of their total compliance obligations “outside of the energy sector”.  There are six categories of potentially qualifying offset projects, one of which is
“energy efficiency” i.e. the “reduction or avoidance of CO₂ emissions from natural gas, oil or propane end-use combustion due to end-use energy efficiency in the building sector” .  When Maryland joined RGGI, Stuart Kaplow was enthusiastic about the potential benefits of this offset category to the green building sector, but correctly cautioned that “the efficacy of green building as an offset will depend heavily on yet to be issued state regulations.”  In fact, it does not appear that a single RGGI participating state has developed implementing regulations to support this (or any other) category of CO₂ offset.  I can only assume that the primary reason for this is that the overabundance of allowances at (relatively) low cost creates no real economic incentive to pursue offsets as an alternate compliance path.  In other carbon trading markets in which green building offsets are recognized and utilized, there is the additional challenge of verification.  As Shari Shapiro aptly noted more than a year ago, “[n]othing will erode the credibility of a cap-and-trade system faster than discovering that the carbon offsets at the base of the market are fraudulent.”

Of the many perceptions about green building, “increased cost” is perhaps the most pervasive. While those of us conversant in the jargon can quickly launch into a discussion of “life-cycle cost assessment” and “triple bottom line” benefits, the reality is that, for much of the real estate market, “green building” are bad words.  Accessible funding mechanisms to defray increased up-front costs (real or imagined) are necessary to continue to drive the green building movement into new market sectors.  Government funding constraints will continue to inhibit even the most laudable of sustainability goals.  Carbon offsets, however, offer a potential market-based funding mechanism that, if properly implemented, could generate millions to fund green construction. Verification will continue to be challenging, but throughout the sustainability industry new processes, standards and tools are developed on an almost daily basis that can provide a sound framework for audit and verification.

The very existence of a carbon offset market relies upon mandatory carbon emission caps.  While RGGI may not be right for New Jersey, there must be some recognition by our policymakers that it will take money to move us to a renewable energy future.  The current political and fiscal climate seems to facilitate a great deal of foot-dragging, even in the face of ever more convincing scientific evidence that the longer we persist in our energy profligacy, the more challenged the world’s resources will become for future generations.  It’s time to be creative in our approach, and to take advantage of the tools at our disposal.  Are carbon offsets a missed opportunity for green building?  You be the judge.

(1) define a commercially useful practice for collecting, compiling, and analyzing building energy performance information associated with a building involved in a commercial real estate transaction; (2) facilitate consistency in the collection, compilation, analysis, and reporting of building energy performance information as may be required under building labeling, disclosure, or mandatory auditing regulations; (3) supplement as needed a property condition assessment conducted in accordance with Guide E2018 or an environmental site assessment conducted in accordance with Practice E1527; (4) provide that the process for building energy performance data collection, compilation, analysis, and reporting is consistent, transparent, practical and reasonable; and (5) provide an industry standard for the conduct of a BEPA [building energy performance assessment] on a building involved in a commercial real estate transaction, subject to existing statutes and regulations which may differ in terms of scope and practice.

The Standard references and in some respects parallels the Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process (E1527), the ASTM’s effort to standardize the practices and procedures that satisfy the “all appropriate inquiry” element of CERCLA’s innocent landowner defense.  Having witnessed the evolution of environmental due diligence from the mid-1980s through the present, and the concomitant expansion in breadth and depth of contract representations, warranties and indemnities specifically addressed to environmental concerns, I cannot help but wonder when green building and energy efficiency issues will find their way into standard “due diligence” checklists and definitive agreements for corporate mergers and acquisitions transactions. Not long, I suspect.

The Standard, together with a variety of other benchmarking tools now (or soon to be) available to the market, have progressed us towards objectively measurable criteria, which in turn facilitates creation of legally enforceable obligations.  Among the additional due diligence practices and external factors referenced in Section 13.1 of the Standard are a number of ASHRAE protocols, the Capital Markets Partnership Green Building Investment Underwriting Standard, Green Value Score, EPA Energy Star Building Labeling Assessment – Statement of Energy Performance, Green Globe’s Continual Improvement Assessment for Existing Buildings, and USGBC’s LEED for Existing Buildings: Operations and Maintenance (sometimes referred to as LEED EBOM).  Additionally, the International Standards Organization is expected to publish ISO 50001 Energy Management Standard in the third quarter of this year.  While this standard will be geared towards energy management rather than measurement of energy use, the availability of an ISO benchmark signals the urgency with which the market is developing and adopting new tools to assist in the accurate measurement of the environmental impacts associated with the built environment.

The rapid evolution in market forces in this arena was not, however, the sole driver for the Standard.  A meaningful number of municipal and state authorities, most notably the Cities of San Francisco, New York and the District of Columbia, have adopted mandatory disclosure requirements related to building energy performance.  The illustrative list appended to the Standard as Table X1.1 identifies twenty-six separate state laws or municipal ordinances governing record-keeping and disclosure for various sub-sets of commercial properties.  New York’s ordinance also mandates that large commercial buildings undergo energy audits and retro-commissioning on a 10-year cycle. In fact, the deadline for owners of large building in New York City to submit the first wave of benchmarking data from covered buildings was May 1, 2011.

To address the obvious “where do I start?” question, at least one software provider has developed an on-line tool that facilitates the data collection and analysis required under the Standard.  Sustainable Real Estate Solutions’ assessment and benchmarking module is designed to meet the requirements of the Standard, and also incoporates other industry protocols, most notably Energy Star and LEED.  Based on the product demo I saw earlier this week, it lives up to its billing. In particular, the tool provides a seemless interface with EPA’s Energy Star Building Labeling Assessment – Statement of Energy Performance, which is particularly helpful in the context of New York’s ordinances related to its Greener, Greater Buildings Plan, as well as the LEED EBOM credit for optimizing energy efficiency, for which 15 points are potentially available.

What does this all mean for M&A, environmental and real estate practitioners?  Here are some initial observations:

• First, we should add Facility Energy Performance and Disclosure as a due diligence item for all business and real estate transactions. A check of local law for potential disclosure or other compliance obligations (e.g. reporting of building energy performance) is a must.  In this regard, care must be taken to distinguish absolute legal requirements from aspirational standards, as much of the legislative activity in this arena is of the “carrot” and not the “stick” variety.
• Second, assuming there are no independent legal requirements that must be satisfied, we must discuss with our clients the advisabilty and extent of the desired due diligence.  For publicly reporting companies, issues of carbon footprint reporting and corporate sustainability policies may prove a
  stronger catalyst for comprehensive due diligence.
• Following the due diligence discussion, we should facilitate our clients’ evaluation of the proper context of these issues within the overall “deal dynamic”.  Is there a minimum performance standard (on either a single facility or aggregate basis) which, if not met, would give rise to a right of termination, or a claim for damages or indemnity?  Or is the intent simply a disclosure exercise that may or may not potentially impact deal pricing?
• Fourth, we of course must draft to accomplish the deal objective.  Green lease forms as well as construction contracts for green projects may provide a useful starting point for this exercise, but the legal context of these agreements may not necessarily translate well to mergers and acquisitions practice.  Alas, we brave pioneers may have to tackle this one without the aid of a form book.
• Finally, we must facilitate understanding. Not only must we surmount our own learning curve, we must teach others.  Having practiced environmental law in the transactional setting for most of my career, I have grown accustomed to this aspect of the job.  This is just one more area where we, as practitioners, must adopt a legal framework to address a new market reality.

There is no doubt that the green wave has crested.  Learning to address building energy performance in acqusition transactions is but one of many new legal challenges which await us in the brave new world of sustainability.  As they say, just another day at the office.

Notice that I said “owners and tenants”, not “owners or tenants”.  Leased buildings that already are occupied present significant challenges to parties wishing to pursue LEED EBOM.  Because the EBOM standard can be achieved only for an entire building, occupants of at least ninety percent (90%) of the total square footage must agree to be part of the certification process.  For owner-occupied and single tenant buildings, this is not a major hurdle, but for multi-tenant facilities, the challenges can be substantial, especially if the existing leases do not provide a process allocating costs and benefits associated with “greening” the premises.

The old “triple net” paradigm under which building owners absorb up-front capital costs and tenants pay ongoing operating costs does not square with the lifecycle cost assessment paradigm employed under LEED.  This could leave a landlord in the position of making substantial capital investments (for example, in a more energy efficient HVAC system) that reduces the tenant’s operating costs yet does not allow the landord to share in that benefit.  These are not simple issues to negotiate mid-way through the term of a lease.

If both a landlord or tenant wish to consider a plan for achieving EBOM certification, step one is a careful review of the underlying lease and identification of those provisions that may require adjustment to accommodate an effective EBOM certification process.  These would normally include provisions covering the characterization and allocation of building operating expenses, provision of building services, including utilities and cleaning, tenant alterations and improvements, and building rules and regulations.  There are several useful starting points when considering potential approaches to these issues, including BOMA’s Guide to Writing a Commercial Real Estate Lease, Including Green Lease Language (available for purchase here), REALPac’s Office Green Lease National Standard (available for download here), the Corporate Realty, Design and Management Institute’s  Model Green Lease (available for purchase here), and the USGBC’s Green Office Guide (available for purchase here (under LEED Integration Guides).   While all of these publications have useful and thought-provoking approaches to common green lease issues, they all share in common one key advantage:  a clean slate._

It is the lack of that clean slate that creates perhaps the greatest challenge for landlords and tenants bound by an existing lease contract. Assuming the parties are nonetheless motivated to at least explore the possibilities, I recommend the following:

1. Assess the Triple Bottom Line: What are the economic, environmental and social benefits that are sought?  Are the benefits exclusive to one or the other parties, or are they shared? (For example, would implementation of a lighting control system benefit only the tenant and its employees?  Or would it also constitute a capital investment in building systems that would make the premises more valuable to other prospective tenants, thereby benefiting the landlord as well?)
2. Do the Math: Fundamental concepts of investment and return on investment must support the rationale for the transaction.  In the triple bottom-line context, however, ROI can be measued by more than just economic benefit. If a tenant, as part of its corporate social responsibility program, desires to achieve a net reduction in greenhouse gas emmissions connected to its operations at the premises, perhaps the “value” of that environmental benefit is allocated solely to the tenant. If the capital investment required to realize that benefit involves installation of equipment or systems the useful life of which extends far beyond the lease termination date, the landlord should certainly contribute something, but perhaps the amount isproportiontely less than what a “straight-line” analysis would dictate.
3. Don’t Negotiate for Advantage: If both parties pursue this path from a sincere desire to do the right thing, they should approach negotiations from a win-win paradigm.  Some shift in the allocation of risks, responsibilities and rewards that are established under the parties’ existing lease is inevitable.  Nonetheless, all parties must approach the discussion with a willingness to share in both the downside risks and upside rewards.
4. Be Committed: Do not approach this exercise lightly, or without proper support and buy-in from the corner office.  Prior to initiating discussions, make sure that all stakeholders understand the range of potential outcomes and associated cost implications.  Know where the hard limits are, and be prepared to live within them.

While pursuing LEED EBOM certification for an existing, multi-tenant facility presents a unique set of difficulties, it is by no means impossible.  Like any other business deal, the fundamentals must work. Even if the task proves too daunting (because, for example, one 30% tenant whose lease expires in 24 months is not willing to join the effort), other parties can always take the opporunity to devise a longer-term stragegy to obtain the certification once the present impediments are removed.  This will require some forethought and, like any other action slated for future implementation, is subject to an enhanced “changed circumstances” risk (particularly with respect to changes in the EBOM standard itself).   However, it is the only approach to LEED EBOM certification that is likely to succeed in a leased multi-tenant building.

LEED EBOM is not ideally suited for facilities subject to existing leases, and in particular those with multiple tenants.  In certain situations, pursuing LEED for Commercial Interiors may provide a viable option.  In others, it may be necessary to implement “green” improvements without qualifying for LEED EBOM.  But in all situations, careful assessment of the terms of the existing lease or leases is a necessary pre-requisite to avoid the proverbial “square peg in a round hole” dilemma.

The movement towards green remediation is a welcome development.  But where does it fit into the overall scheme of green building?  Within LEED v3 for New Building Construction and Major Renovation, there is one credit available for brownfields redevelopment, and another for “protecting or restoring habitat” (also a primary goal of green remediation).  Obviously, not every remediation project is a development project, but many are (or someday could be).  So, in addition to the regulatory mandate for green remediation, creation of additional development incentives in the form of available LEED credits for employing or selecting green remediation options could be created.

As a threshold matter, the weighting of site selection credits should be re-evaluated and better aligned with economic reality.  The fact that a brownfield redevelopment earns the same credit weight as installation of a bike rack and changing room is completely inappropriate.  Not only does brownfield redevelopment usually involve substantial economic investment, its long term benefits (at least from my layman’s perspective) far exceed those achieved from accommodating a handful of bike commuters.  At the very least, the base credits available for brownfields redevelopment should be twice the number available for encouraging alternate transportation in the form of bike racks and changing rooms.  On top of that, an additional point could be made available for employing (or having employed) “green remediation” techniques.  While this credit could theoretically be achieved through an innovation in design (ID) credit, or form the basis for an exemplary performance credit or regional priority credit, embedding it into the LEED process as a stand-alone credit category would send a strong message.  There is also precedent for this approach.  In the LEED for Neighborhood Development standard, an additional credit is available under the brownfields redevelopment category for redevelopment of “high priority” brownfields.

The policy makers behind the green remediation movement have borrowed heavily from the green building principles developed by the USGBC and its industry partners, including adoption of the “triple bottom line” approach.  As is often said, imitation is the sincerest form of flattery.  The USGBC, in turn, needs to repay the compliment by making available more substantial rewards for employing green remediation techniques.

Is there a connection between Green Remediation and Green Building?  Sort of.  Can it be stronger?  Absolutely.

Yet in the face of these events, we have and continue to march forward. The Enron scandal ushered in an age of “corporate social responsibility” in which companies have been challenged to re-evaluate the core capitalist principles of shareholder value.  The United States Green Building Council (“USGBC”), which was founded barely 18 years ago, recently released the third itieration of its much-touted “LEED” green building standard.  Investments in “clean” and “green” energy sources (yes, there is a difference) continue to grow even in the face of the international community’s inabilty to develop a clear concensus on greenhouse gas reductions.  And lest anyone doubt the money and momentum behind this movement, according to a recent report in SustainableBusiness.com, 2010 saw a 170% increase over 2009 levels in clean tech patent applications.

I am a lawyer.  I have been a lawyer for more than 25 years.  I love being a lawyer, and I love the law.  But the law and its development are inherently reactive.  The law does not look for problems to solve.  It solves problems after they arise.  As a lawyer, my greatest challenges are most often of the crystal ball variety.  My inability to predict with certainty the exact “fact pattern” (a law school term for an obviously fictional situation filled with “gotchas”) or the legal principles that a judge may choose to apply to that fact pattern, creates an inherent degree of risk with which I am uncomfortable.  (Actually, I hate it.)  I also know from experience that conversing (or debating) with colleagues about a particular issue or concern, even if it does not change my view on a subject, at least makes that view more informed.

Green building, as well as the many other initiatives under the larger umbrella of “sustainability”, presents many new legal issues or challenges, as well as new paradigms through which to view traditional concerns.  A spirited conversation among legal and other professionals about the “right” approach will, I believe, improve our collective understanding, facilitating greater certainty and, in the end, better results for our clients and other stakeholders.  It would be disingenous to suggest that this is an original undertaking on my part.  Pioneers such as Chris Cheatham, Stephen Del Percio, Sheri Shapiro and  Stuart Kaplow, to name but a few, have done yeoman’s work building up awareness and expertise on legal issues and concerns impacting (and impacted by) the explosion in green building. Links to their blogsites and other resources can be found under the “Links and Resources” section on the right.  I hope only to follow their example, and perhaps make some incremental contribution to the collective legal thinking in the green building arena.

I began this post with the question:  Do We Really Have a Choice?  The answer is yes, we do.  We can choose to ignore world events, throwing our hands up in a collective sigh of frustration about our inability to control businesses, governments and natural forces, or we can choose to engage with one another in thoughtful dialog about how the law can and should contribute to a more sustainable world and the quality of our built environment.  I hope you choose the path of engagement. As lawyers, our better angels have always told us that we can make a difference.  It’s time to listen. And with that thought, I officially welcome you to LegallyGreen: a Conversation at the Crossroads of Law and Sustainability!