Britel07 Green

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This article discusses issues or transactionallawyers in green developmentand possibleconsequences i green conditions are notsatised or green covenants are breached.To paraphrase a amous rog, it isnt (always)easy being green.

The Green Requirement

The rst question, o course, is what thespecic green requirement is. This issue is thesame in virtually every agreementarchitectagreement, construction contract, lease, loanagreement, government grant, management

contract, tax-credit agreement, joint venture,etc. How does the agreement dene the greenrequirements? What are the expectations othe parties?

Until recently, green requirements incontracts have been simplistic. Typically,there has been reerence to a LEED standard(see below), with a statement that a party orthe project must achieve that LEED standard.While all players are becoming moresophisticated and giving more thought tothe specicity o green criteria, this remainsan area in its inancy.

Also, green no longer means just LEED.Apart rom new green standards emerging inlaws and regulations, there are now two main

rating systems in the U.S., LEED and GreenGlobes. Others can be expected. (The rstenvironmental rating system was created inthe U.K in 1990BREEAM, the BuildingResearch Establishment EnvironmentalAssessment Method.2)

The Rating Systems

LEED (Leadership in Energy andEnvironmental Design), a rating systemdeveloped by the U.S. Green BuildingCouncil (USGBC), provides a six-categoryrating system or building perormance andsustainability, with our levels o targetcriteriaCertied, Silver, Gold or Platinum

P S. B is a member o LeBoeu,

Lamb, Greene & MacRae, where he chairs the

real estate group. S G. Kp is

an associate o that frm (admission pending in

New York).

Monday, June 11, 2007

TRends In Real esTaTe

and TITle InsuRance

TRends In Real esTaTe

and TITle InsuRance

What Does

Green Mean?

Commercial agreements oten confict.

By Peter S. Britell

and Smita G. KorraPati

THE FORCES OF GREEN are revo-

lutionizing design and construction.

Governments impose green (envi-

ronmentally sae) criteria on capital projects

that they sponsor or fnance.1 Developers, lend-

ers and tenants require new projects to meet

green standards o design, construction and

operation. Green is good. Yet there has been

little ocus on what green means in commercial

agreementsand what happens i a contractingparty deaults in being green.


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LEED, rst introduced in 1998, is currentlythe most widely-used system.3

The second U.S. rating system is GreenGlobes, brought to the U.S. in 2005 bythe Green Building Initiative, a non-protcreated to promote green building approaches(GBI).4 Users can gain one to our globes

or levels o certication with ratings in sevencategories, based on a 1,000 point scale.Green Globes is growing in popularity.

Besides LEED and Green Globes,government agencies are adding alternative orgeneric standards and/or are adopting LEEDor Green Globes with modications (suchas, e.g., standards or vehicular emissions,pedestrian movement, access to transit, etc.).5

For a history o green rating systems and acomparison o LEED and Green Globes, seeTimothy M. Smith, Green Building RatingSystems,6 an excellent crib sheet on green

standards.Neither USGBC nor GBI are governmental

agencies. Rather, both LEED and GreenGlobes oer reerence standards thatbecome applicable either by contract or bygovernmental specication.

This article does not compare greenrating systems. The key points or lawyersare that green ratings systems: (1) are onlya ew years old and evolving; and (2) willimpact virtually every aspect o real estatedevelopment, investment and use. Indeed,green standards will likely have the same

impact as the early developing buildingcodes.7 This article considers some o manygreen contract issues that may arise.

Initial Practice NoteApart rom knowing which green standard

applies, it is important to get the rightreerence date or version.

Because green rating systems may changerapidly, incorporation o LEED, Green Globesor another standard by private lawyers incommercial agreementsor by governmentlawyers in rules and regulations should keyto a reerence date or version, e.g., the then-current version o LEED or Green Globes.(For instance, New York City Local Law 86reerences LEED Silver version 2.2 or manyo its requirements.8)

Failure to speciy a reerence date orversion can result in ambiguity or, worse,application o a changing green standard toa project already in construction.

Many Are the WaysHow many ways can your project be

green?Since there are yet ew cases or rulings,

we rame this discussion with a hypothetical

project:The Cotswolds

Developer X has acquired hal a cityblock in Metropolis and applied or zoningapprovals (changes in set-backs and heightlimits) to construct a 36 story mixed-use building (The Cotswolds) with the

ollowing components:Floors 1-2: a 15,000 sq. t. non-proit

400 seat theater and a 15,000 sq. t. retailstore;

Floors 3-9: oces (30,000 sq. t. per foor);and

Floors 10-36: 150 apartments.The Cotswolds will be a our-unit

condominiume.g., theater, retail, ocesand residential. The residential unit will bea sub-condominium, with each apartment aseparate unit in the residential unit.

Developer X has contracted to sell the

theater unit to Small Theater Company,which is obtaining unding: 50 percentthrough a capital grant rom the City oMetropolis; 20 percent rom Good IntentionsFoundation; and 30 percent rom privatedonations. Small Theater Company has acommitment or bridge unding (securedby its grant/donation commitments) orits t-out rom the not-or-prot group oXYZ Bank.

Developer X is negotiating to lease (a) theentire 210,000 sq. t. oce unit to BritishGreen Earth Fuels, a U.K. energy companyand (b) the retail unit to With-It Apparel,a trendy national clothing chain.

Developer X expects to sign agreementswith Famous British Architect and NoProblems Construction Company. FamousBritish Architect will engage Local Designer,LLP as its local associate architect.

Developer X has a commitment orconstruction unding rom ABC Global Bankequal to 85 percent o construction costs andan equity commitment o 15 percent romSmart Money Hedge Fund LLC.

Developer X will seek green building tax

credits available under state law.9

How Many Standards?

The ollowing green standards apply toThe Cotswolds (please reer to the ootnotesor examples o similar green requirementsalready in existence):

Zoning

Metropolis oers zoning incentives keyedto LEED Silver. These are administered by theMetropolis City Planning Commission.10

Building Code

Metropolis requires LEED Certied orissuance o a temporary and permanentcerticate o occupancy. This requirementis administered by the Metropolis BuildingsDept.11

Tax Credits

The Cotswolds is eligible or state greenbuilding incentive tax credits keyed to GreenGlobes (two globes required).12 Developer

X believes, also, that Congress will add agreen bonus to the ederal housing tax creditprogram (keyed to LEED Certied) and wantsto be ready to apply.

Tenants

British Green Earth Fuels (the oicetenant), an early supporter o BREEAM inthe U.K., insists that landlords o buildings inwhich it is a major tenant attain a BREEAMgood score.13 This is its rst major U.S.lease. With-It Apparel, the retail tenant,while supporting green in its publicityresists any green requirements in its storeleases, believing that green costs more.14

Theater Financing

The Good Intentions Foundation, asupporter o GBI, requires our Green Globesin all grants or new development, includingits grant to Small Theater Company. SmallTheater Companys Metropolis grant will beadministered by the Metropolis Departmento Cultural Aairs, which requires LEEDCertied rom its grantees.15 XYZ Banks not-or-prot group, which is bridge-unding thetheater construction, requires LEED Goldrom its borrowers.

Construction Lender

ABC Global Bank, the project constructionlender, requires borrowers to comply eitherwith LEED Silver or the rating systemrequired by applicable building code orzoning,16whichever is more stringent.

Architects; Construction Company

Famous British Architect is experiencedwith BREEAM but not LEED or GreenGlobes; Local Designers LLP has never donea LEED or Green Globes project.

No Problems Const ruction Companyhas just hired a LEED expert or its pre-construction services studioto develop

a green handbook or site logistics,

New York Law JourNaL moNdaY, JuNe 11, 2007

xxxxxxxxxxxxxx

If green requirements are in a

covenant, rather than beinga condition, failure to complymay result in the termination

of lease, accelerationof debt, foreclosure

of mortgage, or damages.xxxxxxxxxxxxxx


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transportation ecology, use o temporarywater and utilities, waste disposal, and otherLEED means and methods issues.

Equity

Smart Money Hedge Fund LLC has nointerest in green (at least environmentally)

but holds a completion guaranty orthis project secured by Developer XsConnecticut arm.

Issues for Counsel

What are the green legal issues and greentransactional problems in this project or: (a)counsel or Developer X? (b) counsel or theother parties? What advice would you giveyour clients to deal with these issues andsolve these problems? [Take three hours tocomplete your Blue Book!]

Following is a very brie overview:Certain issues are the same or Developer

Xs counsel and counsel or the other parties.But Developer X has project-wide issues thatcounsel or the other parties will not have.

Counsel or Developer X must dealwith diering green standards in (a)negotiating agreements with each party inthe transaction; (b) structuring the projectso that it obtains the zoning permits, taxcredits and certicate(s) o occupancy; and(c) attempting to insulate Developer Xand the other parties rom consequences o

project-wide non-compliance.Counsel or all parties must (a) articulate

the correct green rating standard in theirclients agreements, (b) dene clearly theirclients obligations with respect to thatgreen rating standard (and be precise as towhich elements o their clients project aresubject to the green requirement); and (c)consider the consequences to their clientso ailure o a green condition or deault in agreen covenant.

Strategy for Developer X

One obvious goal or Developer X is tolimit the number o dierent green ratingsystems applicable to the projecti.e.,

(a) minimize inconsistent requirements orinterpretations that could impact unding,issuance o certicates o occupancy, or otherproject milestones;

(b) reduce potential or disputes;(c) minimize extra design costse.g., a

specialty consultant or each rating system;and

(d) avoid extra legal ees (and othertransaction costs) to negotiate dierent green

standards with dierent parties.

For example, i each element o the projecthas a dierent green standard (e.g., BritishGreen Earth Fuels requiring a BREEAM scoreo good and XYZ Bank requiring LEEDGold), Developer X might try to negotiate asingle standardperhaps LEED Silverthat

would be most stringent or a majority othe parties. (This raises, o course, the much-debated issue o whether green standards aremore expensive.17)

Developer X should also review the greenrequirements o each government agency andits rules or determining compliance. I anagency has adopted a LEED standard, is theagency bound by the USGBC determinationo LEED compliance?

Failure of a Condition

I Developer X ails to meet the conditiono obtaining a green standard, the projectmay lose unding, nancing or tax credits, ormay ail to obtain a certicate o occupancy.18The building may lose a major tenant (ia condition to lease commencement is notsatised). The unit purchaser(s) (e.g., SmallTheater Company) may not be able to closetitle (or be excused rom closing title).

Consequences of Default

I green requirements are in a covenant,ailure to comply may result in the termination

o lease, acceleration o debt, oreclosure omortgage,19 or damages. Developer X mightoreit government approvals, entitlementor tax credits.

Due to a deault, there may be arequirement to repay a grant or a loan. Asto damages, there is always, o course, theusual issue o direct versus consequentialdamagesperhaps more ocused here becausethe completed project will either pass or ailthe green test.

Concept of Materiality

In evaluating whether a contractualcondition has been satised, or covenantbreached, courts oten consider materiality.The key issue is how materiali.e.,essential to the transactionthe particularrequirement is.

Courts have addressed similar issues ormany years, or example, in the context oa requirement to comply with laws.20 Withreerence to green standards, the issue islikely to be how material (a) the greenrequirement is in the particular context or (b)the ailure or breach o the green requirement

is in the particular context.

Critical Issue: All or Nothing

There is also an all-or-nothing aspect ogreen ratings that is important to consider.

For example, construction must becomplete beore the LEED rating is issued21

(and also beore issuance o a certicate ooccupancy, certication o tax credits, etc.).How does a developer or contractor spot,and x, problems in mid-construction?

While this is not really dierent rombuilding to code, most building coderequirements are well known to architectsand engineers. Green rating requirements arebrand new to many design proessionals.

Accordingly, counsel may wish to suggest(a) monthly review o the work by a qualiedgreen consultant; and (b) some type ointerim mechanism or resolving disputes and

achieving certainty as the work progresses.A project team can make progress checks

and reviews to ensure conormity with greenrequirements. (The American Institute oArchitects has available a orm o LEEDCertication addressing this point.22)

Also, in the LEED certication processa project team may request clariicationon unclear credits in the orm o a CreditInterpretation Request beore submittingany documentation.23 However, there is noguarantee until ater completion that theproject will obtain its targeted certication;only ater construction is completed and thenal application is reviewed will the projectteam learn its certication.

Needless to say, the liability o architectsand engineers in this area will require reviewo (and likely changes to) proessional liabilityinsurance coverage by design proessionalsand their insurers and clients.24

Given the possible uncertainties, counselor Developer X should negotiate or cureprovisions under which Developer X is giventime and the right to correct problemsbeore the requisite LEED or governmentaling. Counsel should also review grace and

appeal periods in government green rulesand regulations.

LEED Appeals

I a project does not obtain its LEEDtargeted points, the developer/owner canappeal the certication process under theUSGBC review process. However, thedecision o USGBC is nal within its rulesas to LEED certication, and by registeringa project with LEED a project team is boundby the certication process o USGBC.25

I issues arise with a projects LEED



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certication beore the nal appeal underthe USGBC certication process, apparentlythe developer can attempt to x the problemby restructuring or reworking. However, delaymay prove costly or atal in the contexto particular agreements or governmentprograms.26 (Counsel should seek claricationon the LEED appeal process.)

Delegation Issue

As noted, the LEED rating system has beenincorporated by government agencies in lawsand regulations.27

To the extent that such local lawssimply reer to the LEED determination, ormake the USGBC certiication conclusive(expressly or impliedly), there may be anissue o the legality o the delegation oauthority by the respective agency to

USGBC (with whom the agency mayhave no contractual or other relationship).While this problem might be cured inseveral ways (perhaps, or example, byhaving a right o judicial or administrativeappeal rom USGBCs determination),thought should be given to this questionin uture legislation and regulation.28

Other Matters

This article has ocused on green issuesin new development. However, green legalproblems may arise in numerous other

situations.For example, government agencies will

typically have transitional rules or theapplication o new requirements to projectsor which design is already complete orwhich are already in construction (see, e.g.,

NYC Local Law 86)or when new greenrequirements require retro-tting o existingbuildings.29 (Note that LEED currently hasseparate requirements, LEED-EB or ExistingBuildings.30)

New use and operat ing requirementsmay also become applicable to existing

buildings. Since leases, mortgages, propertymanagement contracts and service contractsusually require compliance with applicablelaw, who will bear the risk/cost o compliancewith new requirements under existingagreements? The tenant? The landlord?The property manager? Answering thisquestion will likely require dusting o oexisting documents.

Conclusion

Time is now up or handing in your examBlue Books.

As the oregoing merely hints, there are

numerous green issues that a transactionallawyer will need to consider in advising clientsin the development, nancing, construction,use and operation o real estate. Indeed, greenrequirements will soon be ubiquitous in realestate transactions.

To oer only a ew basic rules, we suggestthat counsel:

(a) understand the dierent green ratingstandards (and reerence dates) under thelaws, regulations and contract requirementsapplicable to your transaction (and be preciseas to which elements o your clients projectare subject to each green requirement);

(b) be amiliar early on with the appealprocess (i any) or the required greenrating system;

(c) try to minimize and rationalizethe number o dierent green standardsapplicable to the project (to the extent

that you can achieve this result by voluntaryagreement); and

(d) provide or interim progress checks byqualied green consultants to ensure on-goingcompliance and avoid undesirable surpriseater construction.

1. See, e.g., Local Law o the City o New York or theYear 2005 No. 86, which requires a majority o New YorkCitys capital projects, including private projects receivingcity unds, to comply with green building standards keyedto LEED Certied or LEED Silver, depending on occupancygroup (hereinater Local Law 86).

2. http://www.breeam.org/page.jsp?id=13; http://www.englishpartnerships.co.uk/print.aspx?pointerid=10007KMwYBTWAPUH7LCgLbwqXQ6lzb.

3. GSA Says LEED Most Credible Green BuildingRating System, Inside Green Business, Sept. 27, 2006.

4. Green Globes evolved rom a Canadian eco-ratingprogram called Green Lea which was based on BREEAM.History o the Green Globes System, at http://www.thegbi.org/greenglobes/history.asp.

5. See, e.g., LMDC/PANYNJ Sustainable DesignGuidelines or the World Trade Center, available at http://www.renewnyc.com/content/pds/Memorial_Sustainable_Design_Guidelines.pd.

6. Smith, Timothy, et al, Green Building RatingSystems: A Comparison o the LEED and Green GlobesSystems in the US (Sept. 2006), at http://pmdi.cans.umn.edu/Projects/greenbuildingratings/GG_LEED_10_06.pd.

7. David Hattis & David Listokin, Building Codes andHousing (April 2004), available at http://www.huduser.

org/rbc/pd/Building_Codes.pd.8. Local Law 86, supra note 1.9. See, e.g., New York State Green Building Tax

Credit Legislation, available at http://www.dec.ny.gov/energy/1540.html (hereinater NYS Tax).

10. See, e.g., NJMC District Zoning Regulations19:4-6.6 (March 2006). The New Jersey MeadowlandsCommission administers zoning regulations by providingnancial incentives, such as reund o zoning certicateapplication ees, density incentives such as additionalFAR, or buildings that are at least LEED Certied.

11. See., e.g., Washington DC Green Building Act o2006, available at http://www.dccouncil.washington.dc.us/images/00001/20070116085504.pd.

12. See, e.g., NYS Tax supra note 9, keyed to greenrequirements enumerated in the Tax Credit Programi.e.,does not incorporate LEED or Green Globes.

13. The authors have seen green covenants requiredby tenants in several major leases, a trend that is likelyto continue.

14. See Neil Pierce, Green Sounds Greatbut Is

It Aordable?, The Washington Post Writers Group,

http://www.postwritersgroup.com/archives/peir0706.htm(hereinater Pierce).

15. See, e.g., Local Law 86, supra note 1.16. See, e.g., Text Amendment No. 331, City o Boston

Zoning Commission, available at http://www.cityobostongov/bra/gbt/gbthome.asprequires all projects ove50,000 sq. t to be designed and planned to be LEEDCertied.

17. See Pierce, supra note 14; David Ritchey JohnstonBuilding Green in a Black and White World, Chapte

3 (2000).18. Gaia Napa Valley Hotel waited until recently or

its LEED certication months ater its opening in ordeto receive a tax rebate o up to $1 million, conditionedon the LEED certication. (hereinater Gaia) http://wwwgreenbuildingsnyc.com/?cat=39; In a case set to go to triain August 2007, Shaw Development LLC sued SouthernBuilders, among other things, or ailure to provide thecerticate to le or credit under LEED. Shaw expected toget a $635,000 tax credit as a result o the green building(Developers Sue Builders, Criseld Times, http://wwwnewszap.com/articles/2007/03/05/dm/eastern_shore_o_maryland/crs02.txt) (hereinater Shaw).

19. See, e.g., Rockaway Park v. Hollis Automotive Corp.135 N.Y.S.2d 588 (Sup. Ct. N.Y. Cty. 1954) (re equitablestandards or mortgage oreclosures, especially as pertainto non-monetary deaults.)

20. See, e.g., Lease provisions allowing termination ooreiture or violation o law, 92 A.L.R 3d 967 as updatedA critical issue is materiality.

21. See USGBC: Certication Process, http:/www.usgbc.org/DisplayPage.aspx?CMSPageID=149(hereinater LEED Certication Process).

22. See AIA Standard Form B214-2004, Standard Formo Architects Services: LEED Certication.

23. See LEED Certication Process, supra note 21.24. For a discussion o proessional liability issues, se

Gary Kingery, Proessional Liability, Eco Structure, June2006; AIA Convention on Architect Responsibility, Ma2007; www.greenbuildingsnyc.com.

25. LEED Policy Manual, August 2006, available ahttp://www.usgbc.org/ShowFile.aspx?DocumentID=2039.

26. Gaia supra note 18; Johnston supra note 17.27. See, e.g., Local Law 86, supra note 1.28. For an interesting discussion o the issue o invalid

or unconstitutional delegation, see Gillian E. MetzgerPrivatization as Delegation, 103 COLUM. L. REV. 136(2003).

29. Transorming Existing Buildings: The GreenChallenge, The Royal Institution o CharteredSurveyors, March 2007, http://www.rics.org

transormingexistingbuildings.30. LEED or Existing Buildings, at http://www.usgbc

org/DisplayPage.aspx?CMSPageID=221.

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