April 7, 2010
By Jerry Katz and Ryan Nowicki
The growing green movement requires legal counsel that is well versed in sustainable building projects.
On Earth Day 2008 (April 22), Los Angeles became the largest city in the nation to require new real estate developments to “go green.” No longer just an option to large developers, Los Angeles now requires projects larger than 50,000 square feet to comply with the Leadership in Energy and Environmental Design (LEED) standards issued by the U.S. Green Building Council (USGBC).
With increasing concerns regarding climate change, global warming and carbon footprints, going green has fast become a trend in the United States. A variety of green building assessment programs, including Green Globes, Energy Star and LEED, have been developed recently to standardize sustainable design principles for more buildings. LEED is arguably the most prominent for mid- and large-scale projects.
New legal issues are undoubtedly present with respect to every aspect of a LEED project, and legal counsel that is well versed in the many areas of green building is an integral component to any LEED project team.
To those unfamiliar with building green, the incorporation of LEED standards into a real estate development project can appear at the outset to be confusing, disruptive and expensive to developers. However, the economic and environmental benefits from building green, including energy cost savings, governmental incentives, insurance discounts, preferred financing and marketing advantages, outweigh any perceived burdens.
New Legal Issues
Who is economically liable to tenants, buyers and lenders if a project does not achieve its represented level of LEED certification? Who is responsible for ensuring that contractors and subcontractors are following the proper procedures for obtaining LEED points? These questions are not uncommon in green building and represent only a sample of the many new legal issues to consider when undertaking a green building project.
In any green building project, legal counsel can act as the developer’s key representative in overseeing and coordinating the other members of the project team who are performing their specialized roles and responsibilities. In addition, legal counsel can mitigate the risk associated with certification under green building program standards, as well as provide the necessary guidance to ensure that the owner obtains all of the governmental incentives and tax benefits available for building green. The legal team can also provide that extra-needed level of management oversight and assist with the likely voluminous documentation requirements of any green building program.
Aside from overseeing and coordinating a project team, legal counsel must also carefully draft contracts to include representations, warranties, damage provisions, and adherence to policies and procedures aimed at achieving LEED certification. This practice helps to increase the probability that a development project will ultimately achieve its projected LEED certification status.
For example, lenders may provide favorable financing for projects that achieve a certain level of LEED certification. Legal documents must be drafted carefully to not only protect the special interests of the lenders, but also to protect the liability of the developer should the project fail to achieve its represented green rating level. LEED objectives should be carefully incorporated into all of the various documents that are necessary to obtain LEED certification and that are integral to the viability of the project.
State & Local Hurdles & Help
In addition to coordinating the roles of key players on a LEED project team, legal counsel can help clients navigate through the maze of state and local regulations for green building construction
For example, as of September 5, 2008, at least 26 cities in California have enacted mandatory green building ordinances, all of which differ in one respect or another. Los Angeles’ new ordinance mandates that new non-residential buildings achieve the base-level of LEED certification if they exceed 50,000 square feet, while Pasadena’s ordinance mandates that similar buildings achieve at least LEED Silver certification. While Palo Alto and Calabasas are similar in requiring LEED Silver certification for nonresidential buildings exceeding 5,000 square feet, Long Beach takes a different approach by requiring the base-level of LEED certification for nonresidential buildings with more than 50 units.
To complicate matters further, the USGBC’s LEED program is not the only green building rating system that state and local governments mandate be used in constructing green buildings. For example, the California cities of Santa Cruz, Palo Alto and Chula Vista require that residential developers utilize the “Green Points” rating system promoted by Build It Green, a Berkeley, California-based nonprofit organization, while Sonoma County and the City of West Hollywood have developed their own green building point systems.
Once legal counsel has navigated through the maze of state and local regulations, it can also bring value by obtaining greater certainty that developers will enjoy governmental incentives connected with building green, such as favorable tax credits, deductions and refunds. This can be of the utmost importance for developers who rely on these financial incentives for their projects’ economic viability.
For example, a Nevada law enacted in 2005 permitted developers to obtain partial refunds of Nevada sales and use taxes paid on construction materials once their construction projects were LEED-certified upon completion. Once this law was enacted, some major developers along the Las Vegas Strip sought legal counsel to obtain written confirmation from the State of Nevada that their projects were eligible for this incentive. Citing anticipated budget shortfalls because of the program’s popularity, the Nevada legislature later revoked the incentive prior to anyone actually receiving a refund and determined that the only projects that remained eligible for refund were those that had received a confirmation letter from the state. Several developers who were not adequately represented by legal counsel failed to request a confirmation letter from the state and thus were ineligible to receive this significant benefit.
It is important for real estate developers to understand the importance, and regulatory requirements, of building to LEED standards. In planning any green building project, developers typically integrate the services of legal counsel and other green building professionals, as well as the architectural and engineering design teams, in order to maximize the economic, governmental and environmental benefits. With careful consideration, planning and guidance from competent legal counsel, LEED certification can prove to be highly beneficial to developers, investors and building occupants — not to mention Mother Nature as well.
Jerry Katz & Ryan Nowicki are attorneys in the Los Angeles office of Glaser Weil Fink Jacobs Howard & Shapiro LLP.
Published as a cover story in the June 2009 edition of Western Real Estate Business.