Unprecedented Green Building Dispute Could Cost Developer $122.3 million

Up until yesterday, the biggest green building dispute I had come across was Shaw Development v. Southern Builders.  That case involved $635,000 in damages because a project did not obtain the LEED certification necessary to qualify for state tax credits.  

That is chump change compared to the Destiny USA green building dispute that is simmering. Because the mega project allegedly failed to incorporate green building components it had promised  the federal government -- including LEED certification -- the developer may be penalized $2.3 million by the IRS.

I am going to be writing about this example of LEEDigation for some time.  This post will cover just the basics but I will be diving into the messy details throughout the week.  

In 2004, federal legislation was passed to create a Green Bond program.  Under the program, a few developers received tax-free financing for the construction of green building projects.  One of those projects was Destiny USA, which is a proposed 4.5 million square foot retail and entertainment complex in Syracuse, New York.  The Destiny USA project received $228 million in tax-free Green Bonds.  According to Syracuse.com, the tax-exempt status of the financing saved the developer $120 million.  In exchange, the developer of the project, Robert Congel made promises about green building features and LEED certification that would be incorporated into the project.  

But what happens if the developer does not satisfy his green building promises?  We will likely find out within the next year.  

According to an incredible article written by Rick Moriarty of the Syracuse Post-Standard, the project will not include many of the promised green building building components:

There is no 45-megawatt electricity generating plant running on “biofuel” made from soybean oil and recycled cooking grease. If there were, it would be the largest such plant in the nation and consume more than one-third of the total U.S. biodiesel supply.

Nor are there 290,000 square feet of solar panels on the mall’s roofs and other surfaces, enough to blanket six football fields.

The fuel cells that were to make 7 megawatts of electricity, five times more than the nation’s largest existing commercial fuel-cell installation? Nowhere to be seen.

Additionally, there is confusion as to whether the project has received its LEED certification, which was also promised.

The Destiny USA developers are facing a month-end deadline to certify to the IRS that the green building promises were met.  If the IRS determines the developer did not meet its promises, the project could lose its tax-exempt status -- which reportedly saved the developers $120 million -- and be slapped with a $2.3 million penalty.  

There is so much more to this story.  If you are interested, I would advise you to check back over the coming days as new posts will be frequent.  I will also be publishing a white paper describing all of the sordid details.

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Comments (8) Read through and enter the discussion with the form at the end
Arlene Z. Stewart - February 21, 2011 12:47 PM

Can't wait to see your upcoming posts! Great info!

Cliff Ashburner - February 21, 2011 2:09 PM

Looking forward to your future posts. This story has lots of angles and I'm not sure any of them are particularly good.

Alan Whitson - February 21, 2011 3:03 PM

This is going to be great reading -- all the perfect ingredients for a project gone bad; greed, stupidity, and unabashed marketing hype.

Bill Eklund - February 21, 2011 5:27 PM

You missed a really important statement in the article "The Green Building Council in 2007 bought $50,000 worth of Destiny’s green bonds in a gesture of support for the program. In response to a request for comment last week, Green Building Council President and CEO Rick Fedrizzi issued a statement expressing support for the program but not commenting specifically on Destiny." I see a major conflict of interest in this if the certifying body is a project investor.

Chris Cheatham - February 21, 2011 5:33 PM

Good catch Bill. I noticed that as well and I will be writing about it for an upcoming post. Thanks!

Stephen Del Percio - February 22, 2011 9:29 AM

Just a note as your series on this story moves forward that this is the same development that, in 2009, sought- and obtained- a preliminary injunction from the Appellate Division requiring the lender to continue funding the project based on its "revolutionary" green features and financing:

http://www.greenrealestatelaw.com/2010/01/appellate-division-grants-preliminary-injunction-based-on-revolutionary-green-construction-financing/

As far as I can tell, this is the only appellate decision in the country specifically addressing green building and financing.

Leigh Monette - February 22, 2011 10:36 AM

Ah, Destiny. This project is very near my hometown and, as noted, is riddled with problems. That's not surprising given its scope.

I represented one of the major players in connection with the lending issues mentioned by another commentator. The numbers that were in play were impressive. I guess we'll see what happens with LEED certification soon enough...

Peter Britell - February 24, 2011 1:11 PM

Excellent reporting, as usual. There will be many more controversies like this.

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