Important Revision to the D.C. Green Building Act
In December 2009, an Amendment to the D.C. Green Building Act of 2006 was introduced by the D.C. Council. Labeled the "Green Building Technical Corrections, Clarification, and Revision Amendment Act of 2009," this Amendment includes many revisions to the original Green Building Act. One of those revisions involves the "performance bond" requirement:
"'Sec. 6. Bond requirements.'.
(2) Section 6 is amended by striking the phrase 'performance bond' wherever it appears and inserting the word "bond" in its place."
That's it. This feels anti-climatic. We have been discussing this same issue since the dawn of Green Building Law Update. Back on August 15, 2008, one of my very first posts pointed out the performance bond issue. So what does this fix?
1. Replacing "performance bond" with "bond" will eliminate the confusion that was certain to ensue in the construction and surety industry. Performance bonds guarantee a contractor will building according to the plans and specifications. Here, a developer has to guarantee that a project will achieve green building certification.
2. I still have concerns about the bigger issue of whether these "bonds" will be available. Bond instruments guaranteeing green building certification simply do not exist in the market. Maybe a surety will develop these bonds, maybe they will not.
In the end, I applaud the D.C. City Council for addressing the "performance bond" issue.
What do you think about this revision? Disaster averted?
This seems like it will just push towards cash bonds like they do in Arlington to cover the density. Asking someone to post 2-4% of construction costs up front is nuts, those numbers still need to be tweaked or this is still a complete mess.
I think both you and Tim hit on the big issue here- they can change what the "bond" is called in the text of the legislation, but if sureties still won't underwrite it, the problem hasn't been resolved. I'm curious what NASBP has to say about the amendment. Have you gotten any feedback from them, Chris?
Sureties won't bond guarantees of certification by an independent third party. We shouldn't waste any more breath on this issue. As I have stated before, commercial surety is underwritten on the prospect of NO LOSSES. If you throw in oversight of a rapidly and constantly changing third party rating system, you make surety underwriters even more speculative than they already are.
Tim's point is right on - Arlington's cash bond is the only way this program will be funded. By creating risk without the support of the industry that deals in risk (i.e. liability and surety), legislators are fostering unintentional self-insurance. My advice to the readers is to spend some time understanding performance contracting and its relationship with liability insurance and commercial surety.
While we're at it, should we talk about Pittsburgh's green building ordinance? They don't have the bond component as their enforcement mechanism, just a hefty fine to the developer. Risk transfer is only good if it is supported by the industries that understand risk and can utilize actuarial data to price for the exposure.
This is a good time to be a green building lawyer in Washington, DC.
On another, far simpler note, I am glad to see this bill also amends the language specifying "LEED-NC 2.2" to "current version" so they don't have to amend the law every time USGBC updates their standards, and are not unintentionally binding projects to outdated performance criteria.
With the pending release of ASHRAE 189 and ICC's Green codes, is there really even a need for a DC Green Building Act if DC adopts the greener model construction codes?
And the entire performance bond issue seems to be a mess because it was written by non-surety bond practitioners who were more interested in trying to punish developers who cheated, rather than in putting together something that would actually work.
@Timothy - I agree with you that this is very similar to the Arlington green building requirements. Owners will not be happy if they have to post $3M line of credit to ensure certification.
@Stephen - I have not heard anything but I will check in with them. Good idea.
@Mark - I agree with you as well. A line of credit seems like the most viable option to comply at this point.
@Jason - Interesting observation. Although the incorporation of the "current version" raises new concerns for me. I will discuss in a future post.
@Anymouse - Good point. It may be more viable to include ASHRAE 189.1 instead of LEED certification. Has anyone heard if 189.1 will be incorporated into DC law?
Haven't heard anything about whether ASHRAE 189.1 will be adopted, and I'm not very familiar with it in general, but I scanned through it quickly just now and it's obviously been written in a very code-friendly language. My guess is USGBC will be trying to encourage jursidictions that have required LEED certification to switch to this standard instead. Certainly it makes more sense from a building code enforcement standpoint.
My one question would be is anyone familiar enough with 189.1 to know if a building designed to its minimum standard would merit a LEED Certfied status, or would you need additional LEED points from the system to achieve certification? Could be that the 189.1 minimum is less green than LEED Certified. Another interesting point is that aside from the PreRequisites, LEED allow projects to pick and choose which credits to pursue on any given project which allows some flexibility based on specific project conditions-- 189.1 appears to hardwire many more of these credits into the minimum standard. Just thinking out loud here, I should be more familiar with 189.1 than I am...
@Jason -- I agree with Chris on that one. Good topic to delve into. Auto-adopting third party standards that change regularly is a potential nightmare.
Does anyone else see the possibility of a very lucrative market writing these surety bonds?
With so many local governments mandating some form of green construction, there is going to be a need for these types of bonds. While it may be very difficult to set up the formulas and checks in order to minimize risk, surely experts in the green construction field can get a general feel for whether or not a project will achieve a certain certification. Using a quantitative and qualitative risk analysis an underwriter could have a fairly high degree of certainty that a project will achieve the set status.
This additional risk could either be rolled into the original performance bond, or could be an separate green bond of some form.
Just an idea from a Law/Finance Student.
@Max - Good luck with that.