FEATURE ARTICLE, JULY 2009

Trends in Building Construction

Green Leasing: A Legal Balancing Act

Going green. We as a society have been hearing and reading this phrase with increasing frequency over the last number of years.  It has evolved from a theory to a fashionable trend to where we are today, which is to say that green is the new way of doing business. It is hard to ignore the benefits of trying to minimize adverse environmental conditions by utilizing recycled or recyclable materials, incorporating renewable and energy efficient power generation systems, using water resources more efficiently and producing less waste. When coupled with a healthier indoor work environment created through effectively controlling outdoor air ventilation systems and using alternative paints, finishes, adhesives, furniture and carpets that have a less negative effect on air quality, it is easy to understand why the thinking in the real estate and development community has permanently changed.

However, while the goals are laudable, incorporating them into a commercial lease requires a level of cooperation between landlord and tenant to make them a reality.  A shared sense of purpose must be balanced with a shared economic responsibility to ensure that both parties reap the rewards of their collective efforts. While the landlord seeks to recoup its investment in sustainable practices through higher rents or lower operating costs, the tenant also endeavors to realize at least part of the tangible financial rewards in addition to the benefits of a healthier working environment.

The first step in negotiating a lease that emphasizes sustainability is for the landlord to create an environmental management plan (EMP) to clearly outline the landlord’s goals and how to achieve them, including provisions for monitoring compliance. The EMP should identify the applicable requirements of governmental agencies on the local and state levels, such as building codes and zoning laws, which in certain locales are first being developed.  Next, the landlord must determine whether it will choose to meet only those minimum standards or whether it desires to implement the more stringent requirements legislated in many states to qualify for green tax credits.  Finally, the landlord must determine whether its goals include deriving the marketing benefits associated with certification under programs like the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED®) rating system or the Green Building Initiative’s Green Globes™ program. If certifications will not be sought, the EMP must nonetheless provide benchmarks and clearly articulated sustainability goals. Regardless of the initial goals, and particularly with long term leases (which themselves support sustainability), the landlord should retain flexibility in the lease language to enable it to modify requirements as its sustainability program develops or as third-party assessment programs change.

While goals for new construction can be reached before a single tenant occupies its space, retrofitting an existing building or implementing new sustainability measures in an occupied building presents different challenges for the landlord. While guidance can be found in programs like LEED® for Existing Buildings: Operations & Maintenance (LEED®-EB) or Green Globes™ for Continual Improvement of Existing Buildings (Green Globes™-CIEB), waiting to phase in sustainability measures as leases come up for renewal or tenants change can prolong the process.  Landlords should consider whether provisions in existing leases give them the right to implement green policies through an amendment to building rules or to pass along desired system upgrades through shared operating expenses and capital costs.

Once the landlord’s program has been established, it should be clearly incorporated throughout the lease and specifically referenced whenever identifying the tenant’s obligations in order to ensure compliance. This can be achieved by inclusion of a new lease provision or a rider that articulates the landlord’s goals, be it maintenance of an existing certification or the quest for future LEED® or Green Globes™ certification. If the goal is simply implementation of cost-saving and environmentally friendly practices, those specific goals should also be articulated, such as improved air quality, systems upgrades to achieve increased energy or water efficiency, recycling programs or restrictions on the use of chemicals.  Landlords should provide clear system benchmarks to enable prospective tenants to determine whether their practices will enable them to achieve these goals. Lease language can also identify specific measures for meeting those goals, such as the use of Energy Star® approved equipment, energy efficient light bulbs, lighting controls, and providing appropriate receptacles to implement recycling or other waste management programs.

Language should also be added to standard clauses such as “permitted uses” provisions to contain a representation that the tenant’s use will conform to the certifications the landlord has or will obtain or to the landlord’s sustainability program. Assignment clauses should similarly provide that the landlord can withhold its consent to any proposed assignee/sublessee if that party’s proposed uses would run afoul of these same certifications or goals.

Two of the more important areas affected by the inclusion of sustainability clauses involve utility consumption and tenant alteration requirements.  It is not uncommon for landlords to place restrictions on electricity and water consumption or waste removal, where a tenant who exceeds those restrictions is required to pay a premium for any excess use. However, the need to achieve — and then maintain — lower consumption levels so as to obtain the required points for third-party ratings systems or to continue to receive tax benefits transforms such measurements into mandates that will require a tenant to modify its operations if those restrictions are exceeded. Electricity sub-metering, favored by LEED® for Commercial Interiors, enables the tenant to receive the direct benefit of implementing energy-saving measures such as new fixtures, motion sensors and incandescent bulbs.  It also eliminates the inequity of an energy conscious tenant disproportionately sharing in the expenses generated by non-compliant or high energy users.

Provisions relating to tenant alterations, an area where landlords already have the ability to exercise a great deal of control, are ripe for revision to ensure compliance with sustainability goals.  While tenants often rebuff landlords’ efforts to dictate too many details of their initial fit-out or subsequent alterations, such restrictions can be critical to achieving the EMP’s sustainability goals, particularly where third-party ratings are sought. It is often advisable for the landlord to engage its own design professional to create uniform guidelines that will ensure compliance with sustainability certifications and goals. Depending on the nature and scope of the alteration, the tenant can be required to have its plans reviewed by a Green Globe™ or LEED® Accredited Professional and after construction, certified for compliance with the landlord’s sustainability goals. Alternatively, the landlord can obtain that review and include the cost as part of the tenant’s alteration allowance. If warranted by the size of the leased space or the particular use contemplated by the tenant, the landlord can also mandate that energy consuming systems such as heating, ventilating and air conditioning (HVAC) and lighting controls be independently commissioned. 

By establishing uniform guidelines, the landlord can also maintain acceptable levels of indoor air quality (IAQ) both during and after construction.  Mandating the use of properly-applied paints and finishes with low or no volatile organic compounds (VOC) as well as composite panels, fabrics and adhesives that do not contain urea-formaldehyde are just some of the ways to maintain acceptable IAQ levels. Alteration requirements can also mandate the use of low-flow faucets and toilets and commercial kitchen equipment that has, for example, been certified by the U.S. EPA Water Sense® program. Similarly, design requirements for lighting can require use of Energy Star® rated equipment, daylight responsive controls, and the maintenance of lighting power density at or below guidelines such as that allowed by ASHRAE/IESNA Standard 90.1-2004. In all instances, specified design elements should always remain subject to approval by the landlord’s architect or engineer.

While sustainability provisions often make a lease more complex, it is important to remember that the goal is to try to foster a spirit of cooperation between the parties and shared pride in the results. Therefore, a landlord should consider including a separate dispute resolution procedure for lease provisions related to sustainability practices and compliance rather than allowing any breach of such a provision to trigger a material default under the lease.  However, such an alternative dispute resolution procedure may need to be drafted to carve out an exception where the tenant’s non-compliance threatens to jeopardize the unit or building’s certification or tax credits. Under such circumstances, immediate injunctive relief may be a landlord’s only reasonable means for protecting its investment.

These are just some of the customary lease provisions that will require a makeover to adapt to the changing times. Specific terms will vary based upon factors such as the length of the lease term, square footage, number of tenants in the building, and whether the space is in a new or existing building. The key is to remember that, as with all contractual obligations, clearly stated obligations minimize future disputes and costly litigation. Sustainability provisions in particular require careful drafting given the relative absence of legal precedent interpreting these lease obligations.  Investment in a thorough EMP with clearly stated goals that can be referenced throughout the lease should enable both parties to reap the rewards of a cleaner and healthier work environment. Because we are not just going green — we are there.

Lori Samet Schwartz, Esq. partner in the New York City office of Zetlin & De Chiara LLP, specializing in the practice of construction law.

The Risks of Building Green

The first green lawsuit associated with lost tax incentives was filed in Maryland, and subsequently settle out of court in 2007. Insurance providers are rolling out specific programs to cover green real estate projects including coverage for failed green products, unrealized tax credits, cost premiums to rebuild green after a loss event, and adverse publicity for green projects. 

Over the past few years we’ve all heard about the benefits of building green, but with new regulation and financial incentives driving green buildings, it’s important for owners to understand the risks of building green.

Recent Regulation

Many communities across the country are mandating green buildings in the permitting process or implementing financial incentives for green buildings. Regardless of whether these programs are permitting or incentive-based, we are seeing a paradigm shift within sustainable design from a voluntary effort to a regulatory/incentive driven process.

One of the communities that is pushing for a financial incentive program is Portland, Oregon. The city is proposing a feebates program for new real estate projects. The feebates model requires developers of conventional buildings to contribute money to a fund, while developers of green buildings are allowed to withdraw money from the same fund. The amount of money available for withdrawal is dependent on the level of green building achieved by the developer. 

Closer to home, the Massachusetts Department of Public Heath (DPH) recently enacted regulation requiring new healthcare facilities to build green. The program is similar to Article 80 in the City of Boston, which requires large projects to meet LEED Silver standards.

Through both permitting and financial incentives, the stakes associated with green design are increasing, and owners and developers will need to be more aware of the risks associated with building green.

Green Cost Premiums

The risk that receives the most attention in building green is the undefined cost premiums. Numerous studies have been devoted to quantifying the cost impacts of building green, most of which focus on Leadership in Energy and Environmental Design (LEED) certified project. The case studies performed by Leggat McCall Properties indicate the lowest level of LEED certifications typically adds 1 percent of the total construction cost to a commercial project in the greater Boston area. The cost premiums nearly double for each subsequent achievement threshold: 2 percent for Silver, 4 percent for Gold, and 8 percent for Platinum.

These estimated percentages may change slightly this year as the LEED system undergoes an upgrade to LEED 2009. LEED 2009 places more emphasis on energy performance and selection of urban sites close to mass transit.  The new emphasis on urban sites may result in larger LEED cost premiums for suburban projects. Urban developments will likely continue to see cost premiums similar to the current rating system. 

The best way to minimize green cost premiums is to make the decisions to go green early in the project design. Green premiums are dependent on the type of project but one observation is consistent: green is cheaper when integrated early in the design process.

New Green Companies and Products

In order to meet the demand for green buildings, numerous startups have flooded the market offering materials and technologies tailored to green buildings. Many of these new green products have little or no track record, posing increased risk for owners. Construction trades may be unfamiliar with how to correctly install the product, or it may be unclear how this product will interact with other construction materials. If the products fail down the road, there is a risk that the new startup will no longer be in business to stand behind their guarantee. Additionally, the maintenance personal may not be able to correctly maintain or operate the unfamiliar products.

Owners should engage experienced design and construction management teams and encourage the teams to perform due diligence when using new companies and products.

Adverse Green Publicity

The ability to achieve a successful green building places responsibility on multiple parties including the designer, the contractor, the subcontractors, the material suppliers, and often third party reviewers, such as LEED.  Due to the diversification of responsibilities, ownership should be careful about committing externally to a specific level of green building.

If any of the abovementioned players drops the ball, and the specific level of green building is not obtained, there is the potential for adverse publicity.  Whether statements were made to potential buyers, or local community organizations the failure to live up to these green expectations can impact the success of the project.  Before stating green achievement goals, owners should consult with their design teams to understand the implications, and whenever possible, permits and sales should not be contingent on a specific green threshold.

There are risks associated with building green, but these risks can be mitigated by consulting with experienced professional early in the project conception to understand the cost premiums, and by integrating green early in the design phase.  Consultants should be encouraged to perform in-depth due-diligence on new products and technologies, and owners/developers should avoid structuring any permits or sales on specific green achievement levels.

— Levi Reilly, PE, LEED AP, is a project manager at Leggat McCall Properties in Boston.

New Meadowlands Stadium Sets Green Standard Upon completion, the New York Giants and New York Jets New Meadowlands Stadium in Meadowlands, New Jersey, will be one of the greenest ever constructed. However, it is not just about green construction. See page 18 for more. The owners of the New York Jets and the Giants have set out to construct the greenest stadium in the U.S. New York Jets owner Woody Johnson, New York Giants co-owner John Mara and New Meadowlands CEO Mark Lamping recently signed a memorandum of understanding with the EPA which detailed the significant steps the group is taking to make this mandate a reality. From day one of  the planning stages for the stadium, the developers were focused on making the stadium the greenest in the country. The group set out to integrate policies for environmental stewardship into everything they did and every decision they made. This included not only design and construction, but from an operating standpoint as well. In addition, the developers will work with corporate  sponsors to develop green initiatives. Overall, the group wants to demonstrate that they believe in New Jersey, that they take corporate responsibility seriously, and bottom line, this type of environmental stewardship drives results. According to a representative of the New Meadowlands Stadium, the effort just made good sense since the owners and players all live and work in Northern New Jersey. In order to achieve this feat, the group set out to achieve benchmarks in primarily four areas — water conservation, energy conservation, recycling and green construction. For example, the developers have set out to achieve a 25 percent reduction in water usage compared to the existing stadium and reduce energy usage by 30 percent on a square footage basis compared to the existing stadium.  In the area of recycling, the developers set the goal of not only recycling construction debris, but during the operation stage of the new stadium, the developers want to recycle 25 percent of the waste that is created by fans. In terms of recycling construction debris, thus far, records show that the developers have recycled more than 80 percent of their construction debris per month since they began construction in May 2007.  In terms of green construction practices, the developers have already achieved many of their goals, which include buying local products and using local construction workers. According to company representatives, more than $780 million in construction contracts have been issued to local firms and 100 percent of the workforce is local. Once the New Meadowlands Stadium is complete next year, it will certainly set a new standard for others to follow in the industry not just because of the sustainability of the stadium itself, but the comprehensive policy that has been developed in terms of establishing green operations as well.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.