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LEED as an Emerging National Standard
What Is LEED?
Introduction
For better or worse, labels mean something. Depending on their use, they either provide meaningful information upon which a person can act or they attempt to invoke an image that may not be completely accurate. An example of the latter would be "light" cigarettes, certainly a misnomer intended to convey to the consumer that those cigarettes are something that they are not, i.e., healthier for you than other cigarettes. The same can be said for labels used to denote a product or process as "green" or environmentally friendly. "Greenwashing" is the word that describes an attempt by someone to persuade consumers that their products or processes are "green". Sometimes those claims hold up. Other times they do not.
In the realm of building construction, revitalization and operation and maintenance, techniques, some old and some new, are recognized to provide environmental benefits in the form of reduced energy and resource use, enhanced use of recycled materials, improved indoor air quality, reduction in negative environmental effects, like stormwater runoff or "heat island" effects, and creation of spaces in which people can work comfortably. These techniques can be used in tandem or independently, depending on the goal of the designer or construction company. However, how does a potential purchaser or builder know whether what it is getting provides the benefits it has paid for?
In 1993, advocates for designing and building buildings that are more environmentally sustainable worked together to see what they could do to promote green building. They saw the construction industry as the largest industry in the world. They also recognized that as a whole, buildings use more resources than any other human endeavor. From that seed, they created the United States Green Building Council (USGBC). In the fifteen years since the forming of the USGBC, 79 local chapters have organized encompassing 18,000 organizational members and thousands more who volunteer to promote USGBC's vision. Its mission statement is as follows:
The U.S. Green Building Council's core purpose is to transform the way buildings and communities are designed, built and operated, enabling an environmentally and socially responsible, healthy, and prosperous environment that improves the quality of life.
The effort has expanded worldwide with the development of the World Green Building Council (WGBC), which has 13 fully developed councils and 38 more in the organizing stage. As the USGBC began growing, one issue remained central to the development of sustainable design: how to demonstrate that in fact sustainability was being implemented. USGBC then began considering a green building rating system that could provide a barometer of how "green" a particular building was in relation to others. England had established the Building Research Establishment Environmental Assessment Method (BREEAM), which seemed like a good starting point. But the vision of the USGBC went beyond that approach, which led to the establishment of the LEED rating system. There are other rating systems available, but a July 2006 Department of Energy report identified the LEED system as the most appropriate and credible green building rating system.
LEED is a Rating System and a Guide
"LEED" stands for "Leadership in Energy and Environmental Design". LEED is a system that takes into account a variety of aspects related to increased efficiency and design. It provides a checklist that is used to measure the extent to which a structure is environmentally friendly and efficient. The factors that are considered in developing the rating for any particular building include site planning, waste management, water management, energy management, material use, indoor environment, and innovation and design process.
LEED has built into it some flexibility. There are some required elements, but a developer has the ability to decide how best to obtain the necessary points to achieve the LEED certification it desires. In the newer version of LEED, the USGBC has placed more importance on some aspects of green building design, like efficient energy use, than others. But, on the whole, the type of LEED building one builds will depend on the needs of the developer and the particular location in which it is being built.
Six aspects of efficiency and design form the basis of LEED certification. They are sustainable sites, water efficiency, energy and atmosphere, materials and resources, indoor environmental quality, and innovation design and process. Each of these elements are scored separately, but they work together to make a building more efficient and environmentally sustainable. The sustainable sites requirements focus on the effects of the construction process and the ultimate existence of building in the environment. For example, the developer can meet this requirement by redeveloping a brownfield, siting the facility in an economically distressed or underserved area, reducing heat island effects, reducing or eliminating stormwater runoff, reducing light pollution, and providing access to public transportation. This requirement highlights the need for comprehensive planning during the design phase of the project and maybe even before land procurement. Water efficiency is also something that is built into the project and should be considered from the beginning. It includes the use of innovative water technologies. It also considers the reduction of outdoor water use in the form of using water efficient landscaping, controlled irrigation and watering, and the use of native plants.
The major focus on green building is the reduction of energy use. However, increased comfort for those working or using the buildings should not be sacrificed. The energy and atmosphere requirements work to achieve these twin goals through minimizing and optimizing energy performance in the building's mechanical and electrical systems. Reductions in carbon energy use can take the form of the use of green energy technologies. The key though is to be able to confirm the proposed energy savings and optimization goals through verification, not just modeling. The materials and resources LEED requirements pertain to reuse of recycled materials and reducing the environmental effects of the materials used in actual construction. This begins with construction waste and demolition material management in an effort to recycle as much of it as possible and eliminating the need to landfill these materials. In actual construction, developers should use as much recycled product as possible, attempt to obtain regionally manufactured products to reduce travel distances and even use wood certified to come from responsibly and sustainably managed forests. The USGBC also requires that the comfort and well-being of workers, visitors and ultimate users of buildings be considered. This includes making sure that there is enough light (natural preferred) and that the environment is comfortable with respect to temperature. Indoor pollution, from mold, to tobacco smoke, to chemical emissions must be controlled or eliminated in the design of the building. This requirement applies also to the construction phase of the building.
The final LEED requirement, innovation and design process, provides points for innovative design and exemplary performance. The use of a LEED-Accredited Professional (known as "LEED APs") will also score one point in this category. In sum, through the years the USGBC has determined that the categories lead to sustainable buildings and provide a bottom line benefit to the owners and users of these buildings. With respect to certification, a developer submits to the USGBC documentation that details how LEED rating points are achieved in the specific building. A third-party evaluator determines whether and which points are met in the LEED rating system. The basis of that review certifies the building as being a Certified, Silver, Gold, or Platinum rated building. A Platinum rating is the holy grail of the LEED system, requiring the most points, and very few buildings achieve it.
Once construction is complete, USGBC will conduct a construction phase review. If there were changes to the plan as submitted, those changes will need to be identified and documentation submitted. Once all documentation and verification is submitted along with the certification fee, USGBC will rule on the full application and LEED certification, if appropriate, will be awarded. USGBC has a process in place for appeals of USGBC determinations at either the design phase review or the final review. If the building achieves a "platinum" rating, USGBC will refund the certification fees. As with almost anything, considering LEED ratings and points in the design stage of construction will likely lead to an easier path toward certification. However, once construction is completed, the certification application is scrutinized to determine whether the developer has met the standards. Developers should be aware that this can be an arduous process and will require some expenditure. In light of some criticisms of earlier versions of LEED, the USGBC invokes a collaborative process and has streamlined the certification process.
LEED standards exist for new construction, existing buildings, commercial interiors, core and shell, i.e., the building envelope, and homes. USGBC is developing guidelines for neighborhood development. With respect to new construction, there are specific standards existing or being developed for schools, multiple buildings and campuses, healthcare facilities, retail, and laboratories. A particular building is evaluated as a whole. Using the various standards, buildings are assigned points for achieving certain benchmarks. Points are tallied for each specific criterion.
Where is the USGBC/LEED Going?
The year 2009 began a shift in USGBC's strategy in promoting green building. While the concept of green building and sustainability have taken off in the nine years since the first LEED Reference Guidebook, as a practical matter the change necessary in the face of energy use and global climate change has been incremental. The USGBC sees LEED as a tool, but only one in its arsenal. In order to increase the pace of sustainability, the USGBC will be undertaking major changes in how it does business.
Initially, the drivers for the high-performance, green building market were the founders of the USGBC and people like them who saw this as a matter of social necessity. It did not take long, however, for key policy makers in government and in business to see that there were long term financial and environmental benefits to building green. The federal government and some state governments began mandating minimum LEED certifications for new buildings, significant renovations of existing buildings, and for spaces that they lease. Large corporate builders, like Wal-Mart, Target and Meijer's, began looking at their bottom lines to determine how to reduce operating costs and found that green buildings saved them money in the form of reduced energy and water costs and improved work places for their employees. Tenants are now looking to place themselves in LEED-certified buildings, further pushing the market towards green building. Finally, state and local governments are beginning to look at ways to mandate at least minimum requirements to make new construction more energy efficient and reducing water use and stormwater runoff in the form of code changes, statutes and ordinances.
The USGBC seeks to move beyond individual buildings and focus more on sustainability across all levels of construction. A major focus will be to encourage design with a mind toward reducing the negative effects of what the USGBC calls the "built environment" on global climate change. One way to achieve this quicker pace is to involve government on all levels, as the piecemeal approach of building a sustainable world one LEED building at a time has not moved the society closer to sustainability. As part of this effort, the USGBC will be developing its advocacy capabilities, increasing its role in educating the building trades, identifying with hard data the benefits of green building based on performance of these buildings vis-a-vis more traditional construction, and provide more experts trained in sustainable design and construction to make this technology and green techniques available to a broader population.
Impact of LEED on Public Policy
Dozens of state and local governments and school districts are now providing incentives or requirements for LEED certification. Federal agencies have also implemented programs to encourage LEED certification. These take the form of density bonuses, expedited permitting, fee reductions or waivers, tax breaks, grants, free consultation or technical assistance. Some state programs have added requirements for the construction of LEED -certified buildings in publicly-funded construction. The following describes just a few of them.
Federal Initiatives
In 2007, President Bush signed the Energy Independence and Security Act. Among its provisions includes the requirement to reduce energy use in federal buildings and buildings in which the federal government leases space. Throughout the Executive Branch of the federal government, agencies and departments have put into place energy reduction plans and have incorporated LEED requirements. As of June 2006, the United States Department of Agriculture now requires new construction or major renovations to earn a minimum of LEED Silver under its Sustainable Buildings Implementation Plan. Construction of facilities 2,500 square feet or larger for the United States Forest Service also requires LEED Silver certification. As of February 2008, the Department of Energy requires construction projects costing in excess of $5 million to be LEED Gold certified and that it would give preferences for leasing space to buildings meeting LEED Gold certification. The State Department is committed to building green embassies under the auspices of USGBC LEED. The Environmental Protection Agency requires all new construction and acquisitions in excess of 20,000 square feet to achieve LEED Gold certification. Requirements similar to these are in place for the National Aeronautics and Space Administration, the Smithsonian Institution, the Air Force, Army, and Navy.
State Initiatives
Governor Granholm issued Executive Directive 2005-4, which became effective on April 22, 2005, entitled "Energy Efficiency in State Facilities and Operations". Exercising her authority under the Michigan Constitution and the Management and Budget Act, Governor Granholm identified various mandates with respect to ways the government of Michigan could reduce energy consumption and improve energy efficiencies with the twin goals of saving taxpayer dollars through greater energy efficiency and improvement of the environment by reducing pollution that is created as a result of energy consumption. Executive Directive 2005-4 was an ambitious plan by which Michigan departments would reduce grid-based energy purchases 10 percent by December 31, 2008 and 20 percent by December 31, 2015 (compared to energy use for the fiscal year ending September 30, 2002). Government agencies are required to conduct energy analyses and obtain energy reductions through improved efficiency, including the purchase of Energy Star certified equipment and "green" goods and supplies, to the extent feasible and available. The Executive Directive also required that all state-supported capital outlays in excess of $1 million for state departments, agencies, universities or community colleges a LEED score of at least 26 points.
In 2007, Governor Granholm expanded the mandates in Executive Directive 2005-4 with the issuance of Executive Directive 2007-22, entitled "Enhanced Energy Efficiency and Conservation by State Departments and Agencies", which became effective November 14, 2007. Now, each State department is required to designate an Energy Use Reduction Coordinator, who is responsible to review the department's energy use and carbon footprint, and from that review, establish a departmental plan to meet the energy consumption goals. With respect to LEED certification, all new buildings or renovations in excess of $1 million must be energy efficient and environmentally sustainable. In addition, new procedures will be implemented to guarantee that all new buildings, whether owned by the State or leased by the State, will strive for a "Platinum" LEED rating for Existing Buildings and Commercial Interiors. The design of facilities maintenance and minor renovations are to be accomplished in a manner that is consistent with LEED, but a LEED rating would not be required. Finally, the Department of Management and Budget (DMB) and other State departments as determined by the DMB will be required to join the United State Green Building Council (USGBC). Other states mandating or encouraging LEED certification for their buildings and leases include, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Indiana, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Nevada, Oklahoma, Rhode Island, South Carolina, South Dakota, Virginia, Washington, and Wisconsin.
Some states have gone beyond requiring public buildings be LEED certified and now are providing incentives for LEED certification for private development. California has tasked its Department of Housing and Urban Community Development to review green building guidelines when preparing building standards. California has in place a Green Building Standards Code which is voluntary through 2009, but then becomes mandatory. Connecticut has in place legislation that requires a revision of the State's Building Code to meet or exceed LEED Silver for all private buildings constructed after January 1, 2009 that cost in excess of $5 million and for major renovations exceeding $2 million. Hawaii passed legislation that provides priority processing for all construction or development projects that achieve LEED Silver. Illinois has set up a fund to pay 1.5 percent of development costs for up to three neighborhood developments that meet the LEED for Neighborhood Development standard. Minnesota provides technical assistance for commercial or residential projects that incorporate green building into their development. New Mexico provides tax credits that increase with the level of LEED certification. New York provides incentives for green residential building. North Carolina has granted permission to cities and counties to promote green building by reducing permitting fees or to provide partial rebates for LEED certified projects. Virginia has created a separate tax class for real property that meets LEED performance ratings resulting in lower tax rates for such properties.
Local Initiatives
Local communities are taking their cues from the various state initiatives. At this point, most community policy makers don't know what they don't know about LEED. But some have charted a course in favor of green building. In Michigan, Auburn Hills has joined the USGBC. It has adopted a Green Building Policy. It encourages development within its jurisdiction to include green building techniques and LEED certification. The City of Novi has taken similar steps. However, there are no direct incentives or requirements. Grand Rapids has taken more direct action. It has passed a policy entitled "Sustainability for City Buildings". Under this policy, all City building and renovation projects over 10,000 square feet and in excess of $1 million must obtain LEED certification. Its new zoning ordinance incorporates some aspects of the USGBC's LEED for Neighborhood Development.
Cities throughout the United States have taken more aggressive action towards encouraging green building. As examples, Chicago provides an expedited permitting status for LEED certified projects. Cincinnati provides a property tax exemption LEED certified projects for fifteen years for new residential, commercial or industrial buildings, twelve years for renovated commercial and industrial buildings, and ten years for renovated residential buildings with one to three units. Washington, D.C., will require all non-residential and post-secondary educational facilities to achieve LEED after 2012. This trend seems to be growing exponentially. Cities and counties throughout the United States are becoming better informed about green building and LEED certification. We can expect more of these types of incentives and requirements in the future.
Impact on Real Estate Transactions
Legal
While many attorneys will likely deal with all aspects of sustainability, especially if they represent developers of green buildings or product suppliers, the most immediate effect will come from the USGBC's advocacy efforts. At all levels of government, the USGBC will strive to incorporate sustainable design, generally, and LEED, specifically, into codes and ordinances. While currently a developer must want to design sustainability and achieve LEED certification, sustainable building and LEED may become part of what all developers may need to meet in order to have permits and certificates of occupancy issued. In addition, clients who are seeking to build green or locate their operations in green buildings will be looking for ways to guarantee that they are getting what they are paying for. Lawyers will need to work with designers, architects, LEED-Accredited Professionals, suppliers, and contractors to ensure that the client's goals are being met. One important aspect will be to confirm that the systems incorporated into buildings are being operated as intended and that the goals of the technology are being met after inhabitation. In the event performance goals are not met, lawyers will become involved in litigation regarding the failure to meet desired standards. Valuation will be an important issue, as the measure of damages might be the value of the building without LEED certification versus what it is worth without that certification. Courts will grapple over whether to require defendants to pay damages or impose specific performance to require the building to achieve the desired status. Attorneys may also find themselves embroiled in disputes with local communities over code issues. Much of the new technology and techniques that are used to make a building green involve things that traditional building codes do not anticipate or with which code inspectors are familiar or comfortable. One example is waterless urinals, which may violate some local building codes. Of course, the irony is that some communities now require the installation of such fixtures. However, with the acceptance of green technologies and familiarity with these types of systems, these issues should ebb. At the development stage, attorneys should be familiar with incentives provided for green building and energy efficiencies. Along with brownfield credits, there are funds in some locations that can be used to offset construction and development costs. The attorney should be able to work in tandem with his client and developer to find additional financial resources to fund the project.
Transactions
Aside from the issues between the developer or owner and the designer of the building, green buildings will bring challenges for their owners. Specifically, one area that is currently emerging and for which no consensus has been reached are terms for leases. Most recently, the Building Owners and Managers Association has developed green provisions for a model lease, which obviously favors the landlord. But, it raises several key issues in negotiations. Briefly, the issues one may face include how to balance the competing interests of the landlord and tenant with the desire to become energy efficient. Depending on the nature of the lease, it may be more important for one party rather than the other to establish a green building and maintain it. The party benefiting least would obviously be less inclined to pay for the costs of going green. For example, if the landlord is passing the utility costs along to the tenant, it may not have much of an interest in improving the efficiency of its building. Another potential issue is ensuring that each party is living up to the terms of the green portions of its lease. To maintain its green status, the landlord may wish to require tenants to undertake efforts they would not normally undertake, like specific recycling parameters, for example. Any agreement between the parties needs to take these types of things into account, including means by which to correct deficiencies. Also, tenants will need to factor possible higher costs of operating to maintain their green leases. Insurance issues will also be relevant. The building owner will need to confirm that its insurance coverage anticipates the potentially higher costs with replacing more advanced technologies or rebuilding to green specifications. Companies like Chubb and Fireman's Fund Insurance will cover expenses related to having someone confirm that heating, ventilation and air-conditioning ("HVAC") equipment are operating at peak performance after a loss and reconstruction. In addition, at least one insurer, AIG, provides a discount for LEED certified buildings. AIG also provides coverage in the event a "green" building experiences "adverse publicity" when it fails to meet green standards.
Lenders are also involved in the green building movement. Some lenders are directly involved by mandating that their own operational facilities meet LEED standards. Other lenders have set aside specific financing to lend to support the construction of green developments. Other banks provide direct discounts for their borrowers who build green. Of course, with lending comes appraisals of property and just now appraisers are grappling with how to value green buildings.
Conclusion
Practitioners can expect to see LEED and other green or sustainability issues creep into traditional real estate issues. Those not familiar with these issues should take great care to consider the practical effects of mandates, either legislative or private, on relationships between developers, contractors, landlords, tenants, etc. They should also take heed to take advantage of any incentives, grants or tax breaks provided to those who build or renovate to exacting green standards, like LEED. These issues will become more common and grow exponentially with time.
Saulius Mikalonis
Giarmarco, Mullins & Horton, P.C.
Tenth Floor, Columbia Center
101 West Big Beaver Road
Troy, Michigan 48084-5280
248.457.7117
smikalonis@gmhlaw.com
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