An Overview of Issues in Designing and Building Green

An Overview of Issues in Designing and Building Green

The material provided herein is for informational purposes only and is not intended as legal advice or

counsel.

Overview of Statutory, Regulatory, and Policy Factors

Driving Green Building

Edward A. Hogan

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Federal

• Energy Independence and Security Act of 2007 (became law Dec. 2007)

Goal of zero net energy commercial buildings for:– any commercial building newly constructed in the U.S. by

2030– 50% of commercial building stock of the U.S. by 2040– all commercial buildings in the U.S. by 2050

Establishes Office of Commercial High-Performance Green Buildings at USDOE

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Federal

• American Clean Energy Leadership Act (S.1462) (reported out of Committee June 17, 2009) – Establish improvement targets for national model

building energy efficiency codes (energy savings of 30% in codes released during and after 2010 and 50% during and after 2016)

– Establish path to achieving zero net energy or “carbon neutral” buildings

– Authorizes creation of model energy performance labels for commercial buildings to provide comparative information on building energy use

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Federal • American Clean Energy and Security Act of

2009 - “Waxman-Markey Bill” (H.R. 2454, approvedJune 26, 2009)

• Clean Energy Jobs and American Power Act - “Kerry-Boxer Bill” (introduced Sept. 30, 2009)– both propose to reduce greenhouse gas emissions

up to 17% below 2005 levels by 2020, 42% by 2030, and up to 83% below 2005 levels by 2050

– both propose national energy efficiency building codes

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Federal

• USDOE & USEPA National Action Plan for Energy Efficiency– Public-private initiative to improve overall

energy efficiency, including in buildings

• USDOE Zero-Net Energy Commercial Building Initiative– Promotes development of marketable zero-

net energy commercial buildings

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State

• Global Warming Response Act (July 2007)– target greenhouse gas emission reductions

to 1990 levels by 2020 and 80% less than 2006 levels by 2050

– improving energy efficiency of buildings is essential to meeting targeted emission reductions

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State

• Legislation – A host of legislation proposed and/or

adopted to facilitate green building

• NJ Energy Master Plan– Promotes improving building code energy

efficiency standards– Develop strategies to achieve zero net

carbon emitting buildings

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NGO Initiatives & Policy

• US Green Building Council – LEED rating system• ASHRAE – improve commercial building energy codes

30% by 2010• Architecture 2030 - “The 2030 Challenge” to make all

new buildings/renovations 50% more energy efficient now and carbon neutral by 2030

• Business Environmental Leadership Council; US Climate Action Partnership – corporate driven efforts to improve energy efficiency, including in buildings

• Clinton Climate Initiative Energy Efficiency Building Retrofit Program

Overview of Energy Demand/Supply/Cost Factors

Driving Green Building

Christopher Stevenson

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Energy Demand/Supply/Cost

• A shift towards energy conservation, efficiency, and alternatives, of which green buildings are an integral component, is being driven by the confluence of:- increasing demand for energy- declining reserves of non-renewable

energy resources- rising energy costs - sustainability concerns

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• Energy demand factors– Global population rise (projected 37% increase

before peaking in approx. 2050; 6.7B presently to 9.2B)

– Global economic growth (newly developing and thriving world economies significantly increasing oil and energy consumption, adding to the developed world’s high demand for energy)

– Increasing population, economic growth, and standards of living will result in increased energy consumption, reduced nonrenewable energy reserves, and increased energy prices

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• Energy supply factors– Conventional oil reserves are declining

each year; most of the easily-recoverable oil has already been pumped;

– Unconventional oil sources (tar sands, shale oil), although significant, are difficult to exploit because production is intensive in terms of energy and water use and carbon release

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• Energy supply factors (cont.)– Coal - significant reserves, but significant CO2

concerns in light of carbon reduction goals; “clean” coal technology and carbon sequestration not yet fully developed or certain

– Gas – domestic reserves limited; importing poses LNG siting and transport issues

– Nuclear power – future expansion uncertain in terms of scope and time

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• Energy supply factors (cont.)– Other energy technologies are not yet fully

developed and/or cannot provide adequate substitute power

– “Peak” oil and gas• Charles T. Maxwell, “dean of the energy analysts”, calls

for peak oil by 2012-2015 and irreversible decline in supply after 2020

• International Energy Agency projects peak oil in 2020

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• Energy supply factors (cont.)– US Energy Information Admin. projects US gas

production peak in 2022

• Energy cost factors– July 2008 shock – oil hits $147/barrel– Maxwell has projected $300/barrel oil in 2020

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• Energy cost factors (cont.)– NJ Energy Master Plan– Projects energy expenditures in NJ will almost

double between 2005 and 2020– Describes as “unacceptable” the “economic,

reliability, and environmental consequences of the ‘business as usual’” approach to energy

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• Thus a critical need for energy conservation, efficiency, and alternatives, such as green buildings provide

• Maxwell’s solution: “…deep conservation while heavily investing in alternative energy…”

• NJ Energy Master Plan solution: Energy conservation, efficiency, and alternatives

• Buildings account for almost 40% of US primary energy use (and carbon emissions) and thus a shift to green buildings, with the goal of zero-net energy, is essential to achieving an affordable and viable energy future

Green Building Toolkit

Michael Kerwin

LEED Overview

William Amann

Financing Green Buildings

William Lashbrook

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Green Finance – A Legal Perspective

Jesse P. Nash

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I. Understanding the Bank’s Perspective

• The Construction Lender’s Mindset: generally conservative, non-entrepreneurial, relatively slow to embrace new and untested concepts and innovation.– Green Building poses interesting underwriting challenges for

construction lenders, including:• Lack of track record for Green Buildings• Obsolescence in building materials and methods• Uncertainty inherent in third-party certification process• Capital market upheaval• Market uncertainty generally

– National Consensus Green Building Investment Underwriting Standards: Acknowledges that real estate assets achieving ENERGY STAR, LEED and/or Climate Neutral certification can have superior relative financial value and risk profiles which should have an impact on underwriting decisions.

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I. Understanding the Bank’s Perspective

• The bank will know far less than the construction loan applicant about Green Building generally and the relevant project specifically. Be ready to sell it.

• No lender wants to be the first. – Consider working with lenders with a Green Building track

record. – Retain a design and construction team with relevant

experience, and feature this experience in discussions with the lender.

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II. Deal Points – Lender Issues/Borrower Responses

• Lease Economics: – Higher construction costs must generate higher

rents. Be ready with economic justification for your project.

• Project branding.• Lower energy costs = higher rent. • Employee retention/productivity increases.

– Market Analysis:• Be ready to present relevant market data and a favorable

comparison of the proposed project with competing buildings.

• Be ready with a marketing plan that optimizes attraction of Green Projects.

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• Lease Deal Points:– What is the precise nature of the builder’s

commitment regarding Green aspects of lease? • Negotiate for softer “intent to achieve” language.

Present a view of third-party certification process as collaborative.

• Negotiate reduced rent or rent abatement as opposed to termination right.

• Consider whether escrows will be necessary to mitigate lender’s risk of borrower’s lease default.

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• The Takeout: Availability of institutional money to repay temporary construction loan. – Attraction project will have to takeout financing will

be a major factor in the underwriting decision.– Takeout commitment improbable at initial stages. – Takeout will hinge on lease economics. – Consider impact of on-going compliance

obligations/recertification.

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• The Building Process: – Lenders may examine the green building experience of

the architect, contractor and subcontractor, and make approval of such professionals a condition of financing.

– Relative responsibilities of parties involved in construction must be clearly detailed.

– Be ready to suggest methods for harmonizing loan disbursements with third-party certification milestones.

• Governmental Incentives? – Tax benefits? – Expedited approval process? – Density bonuses?

Funding and Tax Incentives for Green Building

William Amann

Tax Aspects of Building Green

Melinda Fellner Bramwit

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Current Economic Climate

Bush and Obama Administration Efforts in 2008 and 2009

Legislation- enacted and pending

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Federal Incentives

• Deduction for Energy Efficient Commercial Buildings- Section 179(D) of the Internal Revenue Code of 1986, as amended (the “Code”)

• Parallel for homeowners- Section 25C deduction- Energy Star

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Federal Incentives

• Credit for producing electricity with renewable sources – Section 45 of the Code- the production tax credit

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Federal Incentives

• Credit for investment in alternative energy property- Section 46 and Section 48 of the Code

• Temporary election

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Federal Incentives

• Credit for investment in qualifying advanced energy projects- Section 48C of the Code

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Federal Incentives

• Carbon dioxide sequestation credit- Section 45Q of the Code

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Federal Incentives

• Clean renewable energy bonds

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Federal Incentives

• Small wind investment tax credit

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New Jersey Incentives

• Tax exemption for increase in value attributable to renewable energy systems

• Assembly Bill A2070 – The green building tax credit

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More to come

• Renewable energy 401 (k) Tax Credit

• American Recovery and Investment Act enacted in February 2009 funding for research

Potential Areas of Legal Exposure From “Going Green”

Charles W. Miller III

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Potential Areas of Legal Exposure

1. Underperformance- lawsuits based on failure to reach LEED certification target or subsequent de-certification.

Example- Shaw Development v. Southern Builders lawsuit

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Shaw Development v. Southern Builders

Liability:

Project Manual language-

“Project is designed to comply with a Silver Certification level according to the U.S.G.B.C.’s LEED Rating System…”

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Shaw Development v. Southern Builders

Damages:

$635,000 tax savings

PLUS Loss of sales and diminution in value of building?

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2. Delayed performance

3. Advocacy-based claims vs. design professional

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• Advocate LEED certification too strongly

• Fail to advocate LEED certification

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Fail to advocate LEED certification

Architect Canon of Ethics

6.1- “be environmentally responsible and advocate sustainable building and site design”

6.2- “advocate the design, construction, and operation of sustainable buildings and communities”

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AIA B201 Owner-Architect Agreement3.2.3 Architect shall…discuss with the Owner

alternative approaches to design and construction…including the feasibility of incorporating responsible design approaches

3.2.5.1 Architect shall consider environmentally responsible design alternatives, such as material choices and building orientation

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National Society of Professional Engineers’ Code of Ethics

Professional Obligations, III.2.d: “[e]ngineers are encouraged to adhere to the principles of sustainable development in order to protect the environment for future generations.

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2. Delayed performance


4. Greenwashing - lawsuits based on deceptive marketing

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AIA Contract Documents Legal Issues in Designing

and Building GreenOctober 2009

Frank T. Araps

Frank T. Araps, Esq. © 200954

I. Project Delivery and Contract Development - Standard AIA Contracts for Construction




Contract FormsStandard Form Construction Documents

– AIA Standard Forms– ConsensusDOCS – 2007– Engineers Joint Contract Documents Committee (EJDC)

published for 30 years by Engineers– Associated General Contractors of America (AGC)

“Standard Form of Agreement and General Conditions Between Owner and Contractor (Where the Price is a Lump Sum)” No. 200

– Design-Build Institute of America (DBIA) “Standard Form of General Conditions of Contract Between Owner and Design-Builder” No. 535



Contract Forms

AIA Documents– Most used standard form of documents for the

last 100 years– Revised 1987, 1997, and 2007



Contract FormsFrequently used AIA contract forms:

• A series – Owner Contractor.• A101-2007 Standard Form of Agreement Between Owner

and Contractor Where the Basis of Payment is a Stipulated Sum.

• A201-2007 General Conditions of the Contract for Construction.

• AIA B100 Series Owner Architect Design Contracts Integrate with A100 Series Contracts.

• A401 Subcontract Forms, and G-series Project Administration Forms.



Conventional (A201) Design-Bid-Build

Key Attributes:• For use when the owner’s project is divided into separate contracts for

design (architect) and construction (contractor)• Suitable for conventional project delivery (design-bid-build)• Owner retains Architect• Architect and consultants prepare drawings and specifications• Architect assists Owner in obtaining bids/proposals and then Owner

awards contract(s) for construction• Contractor(s) and Surety(ies) obligate to owner for bid, performance

and payment bonds• Contractor and Subcontractors build the work


Conventional (A201) Design-Bid-BuildConventional (A201) Design-Bid-BuildContract Relationship Diagram:


Construction Manager as Adviser (CMa)

Key Attributes:• Owner retains an Architect and a Construction Manager

who acts as an independent adviser to the owner• Prime contractor(s) responsible for construction, labor

and materials• Construction Manager gives owner construction

management advice through design and construction phases. Increases expertise in managing a project from start to finish


Construction Manager as Adviser (CMa)Construction Manager as Adviser (2009-CMa)Contract Relationship Diagram:


Construction Manager as Constructor (CMc)

Key Attributes:• Single party (Construction Manager) provides construction

management services in pre-construction phase AND then completes construction (constructor)

• Gives Construction Manager (constructor) responsibility and control over construction work via direct contracts with sub-contractors

• Construction phase services paid on the basis of the cost of work plus a fee either with (A133) or without (A134) a Guaranteed Maximum Price


Construction Manager as Constructor (CMc)

Construction Manager as Constructor (2009-CMc)Contract Relationship Diagram:


II. Project Delivery and Contract Development –

AIA’s Green References and Documents



GREEN BUILDING v.LEED Certified

• GREEN BUILDING is a subjective, vague, and undefined term.

• How does an owner know if its building is, in fact, GREEN?

• LEED certified is an objective standard upon which to measure how green a building is.


GREEN and LEED BUILDING Terms AIA Doc. B101 – 2007

Standard Form Agreement Between Owner and Architect

• Architect responsible for discussing feasibility of incorporating environmentally responsible design approach only. Sec. 3.2.3 and 3.2.5.1.

• Owner may contract for other or additional environmentally responsible design services from Architect as Additional Services. Sec. 4.1.

• Implies that extensive environmentally responsible design services and design services leading to LEED Certification (AIA Doc. B214 – 2007) are not the same. Sec. 4.1.23 and 4.1.24.



Standard Form Agreement Between Owner and Architect for

a Large or Complex Project

• No references to environmentally responsible design or LEED certification



Standard Form of Architect’s Services:Design and Construction Contract Administration

• No references to environmentally responsible design or LEED certification

• Incorporate Supplementary Conditions (AIA Doc. A503 – 2007)



Standard Form of Architect’s Services:LEED Certification

• Establishes duties and responsibilities of architect when owner seeks LEED certification

• Architect’s services include: preparing LEED certification plan, monitoring LEED certification process, providing LEED specifications for inclusion in contract documents, etc.

• Scope document only and not intended to be used as a stand-alone owner/architect agreement


Principles for Building Green

• Do Not Rely on AIA Documents in Unmodified Form

• Clearly Identify and Allocate Duties and Responsibilities

• Coordinate GREEN Provisions in All Contracts

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Increased Exposures Surrounding “Green” Design & Build

How will your insurance policy respond?

Robin Campbell

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What is insurance?

• Transfer of risk to a third party for a premium• Liability coverage includes property damage or

bodily injury to a third party• Professional liability provides coverage for failure

to provide professional services• Liability coverage can include coverage for

defense costs• First party coverage, or property coverage, pays

the policyholder for damages to their property

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Public awareness to go “green”

• Increased pressure for developers with rising costs and scarcity of natural resources to find energy conserving solutions

• Grants and incentives from the government to go “green”

• LEED certification• Increased exposure associated with

design/build professionals promising LEED certification

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How does “green building” affect property costs?

• Replacement cost valuation vs. “Green” valuation

• Increased cost of purchasing eco-friendly materials

• Soft costs involved with recertification of LEED buildings

• Increased costs of construction to rebuild “green” per local ordinance

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How are insurance policies responding?

• Insurance carrier specific endorsements– “Green” coverage enhancements– Incentives to replace damaged equipment with

“green” or eco-friendly equipment– Carrier-specific– Insurance Agents should ask the question to find if

coverage is available

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Enhanced Coverage for Property Owners

• Soft Costs coverage– LEED Accredited Green Design Professionals– Recertification or Certification– Testing of Building Systems

• Increased Period of Restoration• Excess Ordinance or Law Coverage

– Increased Cost of Construction

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STILL, ADEQUATE INSURANCE COVERAGE FOR “GREEN” PROPERTY

COSTS ARE TOUGH TO ESTIMATE

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Example: Construction of “Green House” on Long Beach Island

• 3000 Square Feet• Conventional replacement cost value

$1,000,000• “Green Value” estimate between $3 Million• Blanket Builders Risk Insurance• Additional documentation may be necessary

to prove additional costs

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Green Exposures: Professional Liability

An increased exposure is involved with marketed sustainability services.

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Specifics of Professional Liability

• Definition of Professional Services– Does it encompass sustainability and green

services?

• Exclusions– Professional Liability excludes guarantees &

warranties

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Design Professionals Defined

• Architects and Engineers• Land Surveyor• Landscape Architect• Construction Manager• Scientist• Technical Consultant• LEED certification consultant?• Green Building facilitators?

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LEED certification

• Significant financial exposure for failure to achieve a specific certification

• Risks facing firms and individuals accredited as specialists in LEED programs can intensify

• How will your policy respond to a claim involving the failure to design a LEED certified building?

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Specific Inquiries of Coverage

• Definition of professional services: do they include LEED Certified services”

• Increased exposure with responsibility to provide energy efficient buildings

• Policy wording should be examined • What are the definitions?• What are the exclusions?

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Certificates of Insurance

• Requiring Certificates of Insurance evidencing limits of insurance. Is it enough?

• Request specific policy endorsements and exclusions of your subcontractors’ insurance.

• Review these documents with your insurance agent for possible gaps in coverage.

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Summary

• Increased Exposure with “Green” Buildings• Some property coverage is starting to respond• Important to examine policy wording,

professional services definition, and exclusions• Bottom Line: This is a new area with limited

claims activity. • Communication with your Insurance Agent is

important to avoid the mistake of “after the fact”

A Legislative Perspective

Assemblyman Upendra J. Chivukula, Deputy Speaker

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