Destiny USA Reaches the Green Bonds Finish Line

I apologize for the recent hiatus here at Green Building Law Update.  If you want to see what I have been up to, check out ClaimKit (www.claimkit.com). 

Now, on to green building legal news.

You may recall that in 2011, I published many, many articles on the Destiny USA project.  Here's a quick summary of the Destiny USA story

In 2007, the developer of a large-scale mall project received $228 million from a federal Green Bonds program in exchange for installing green building and renewable energy technologies.  The developer recently revealed the many of the green technologies will not be incorporated as promised. 

As reported by Rick Moriarty, the Internal Revenue Service (IRS) notified the Syracuse Industrial Development Agency on March 17 (2011) that it would be auditing the Green Bonds issued by the Agency to the Destiny USA developer. . . .

If the IRS were to determine that non-compliance occurred, then the Destiny USA project could have lost hundreds of millions of dollars in estimated tax breaks.  

One year later, the IRS has come out with a ruling on the Destiny USA's compliance with the Green Bonds program: 

The IRS notified the Syracuse Industrial Development Agency Thursday that it has closed its audit of the bonds “with no change to the position that interest received by the beneficial owners of the bonds is excludible from gross income” under federal tax code.

In other words, income received on the bonds will continue to be exempt from federal income taxes.

The ruling also permits the release of $2.3 million that the developer had been required to hold in reserve. If the IRS had found the project out of compliance with the terms of the green bond program, it could have seized the $2.3 million as a penalty.

The IRS ruling fascinates me.  By finding the Destiny USA project complied with the Green Bond requirements, the IRS essentially conceded that the Destiny USA project simply had to promise to deliver green technologies in exchange for the Green Bond financing.  In a February 2011 letter to the IRS, the Destiny USA developer argued that the legislation simply required a promise to deliver the technology:

On February 21, 2010, Syracuse Post-Dispatch reporter Rick Moriarty published a story that disclosed the contents of a draft letter addressed to the IRS by the Syracuse Industrial Development Agency.  In the letter, the Agency and developer first divulge that many of the green building and renewable energy features that were promised as part of the Green Bonds program will not be included in the completed project.  The letter blames the economy for changes to the project. 

...

The letter then moves to the crux of the compliance argument.  The Agency and developer assert that actual installation of renewable energy systems was not required.  Instead, the letter claims the developer was only required to make promises related to renewable energy and LEED certification in order to qualify for the bonds. They conclude that the financial benefits of the Green Bonds program and the forfeiture of the Reserve Account do not depend on actual achievement of the green building and renewable energy goals.

I think it's fair to say the Green Bonds legislation was fundamentally flawed.  I can't imagine that the legislators would have been satisfied with a simple "promise" to deliver green technology in exchange for hundreds of millions of dollars in tax breaks.  

And so ends the Destiny USA debacle. 

Photo Credit:  Ben Sheperd

Maybe We Should Rethink LEED Laws

For much of 2011, my focus has been the Destiny USA project.  This should not come as a surprise to readers who waded through my thirteen posts on the topic.  I had planned to not write about the Destiny USA project again.  But then I came across a press release while I was at Greenbuild: 

Destiny USA in Syracuse Aims to be America's Largest LEED® Gold Certified Commercial Retail Project; More than 100 Tenant Retail Spaces to Also be Certified

As you may recall, the Destiny USA project received over $200 million in tax-free financing through the federal government's Green Bonds program.  In exchange for the financing, the developer of the project promised, among other things, to get LEED certification and rely on massive amounts of renewable energy. The IRS is now investigating the project because it appears the renewable energy systems were never installed.

I think it's safe to say the Green Bonds program was a failure.  But there is another policy issue that bothered me that I have not previously touched on. 

Did the US Green Building Council act appropriately in assisting the Destiny USA project? 

As I was reading the Destiny USA press release, one passage caught my eye: 

"This project is important to me and to USGBC," said Rick Fedrizzi, President, CEO & Founding Chair, U.S. Green Building Council.  "Not only is it in my backyard but it will also be a showcase in the community for what can be done with green building and LEED.  The visitors who walk through the Destiny USA doors every day will learn about the importance of green building and be able to see today's latest green building strategies in action."

For those looking for an argument that LEED should never be used in regulations or law, I present to you Exhibit A: 

  • The Destiny USA project has to get LEED certification as a condition of a federal law.
  • The USGBC is a non-profit entity responsible for the LEED rating system.
  • The USGBC CEO states the project is important to him and his company because it is located in his hometown of Syracuse, New York.

If a federal official displayed this type of favoritism for a project, he would be removed.  Litigation would certainly ensue challenging the procurement process.

If LEED is going to be used in law, whether it be through incentives or mandates, then the USGBC and its CEO should not get to play favorites with projects.

Of course, this is not what is happening.  And this type of conflict of interest and favoritism could undermine the credibility of the LEED rating system and of the green building movement.  

Could Solyndra Happen To Green Building Policy?

Of course it could -- it already has.  But first lets recap the Solyndra saga. 

Solyndra is the solar panel manufacturer in California that qualified for a $535 million federally-backed loan.  Since receiving the loan, the price of solar panels has plummeted - good news - which has squeezed the margins of manufacturers like Solyndra.  The result:  two weeks ago, Solyndra announced bankruptcy.  And taxpayers are now responsible for repaying a half billion dollars. 

As I started thinking about the broader implications of the Solyndra collapse, I could not help but draw parallels to a similar federally-funded green project that has not panned out as expected:  Destiny USA.

Destiny USA was a proposed $20 billion mega-mall that was supposed "to be not only the biggest man-made structure on the planet but also the most environmentally friendly."  To support the project, the developer applied for a $2 billion Green Bonds program that Congress passed in 2004.  In 2007, the Destiny USA project qualified for $238 million in tax-free financing through the Green Bonds program.  In exchange, Destiny USA promised to redevelop a brownfield site, use massive amounts of renewable energy, and get LEED certification for 75 percent of the project. 

However, from the outset, there were groups questioning whether Destiny USA could satisfy the Green Bond requirements: 

[Ashok Gupta, senior energy economist at National Resources Defense Council] said he was impressed by the DestiNY team's enthusiasm for the strict guidelines, but wasn't sure the mall builders knew what they were in for. "I have a hard time believing that the DestiNY executives can deliver on their green promise," he said. "These are not developers who have ever attempted a green project, and it's not clear to me that they understand the extent of their commitment, financially and practically." Even developers who have worked on multiple green buildings would find a project of this scale to be extraordinarily challenging, he said.

It appears Gupta was right.  In February 2011, Rick Moriarty reported that the Destiny USA project would not deliver on its renewable energy promises.  Furthermore, it appears that the building itself will not be obtaining LEED certification.  Instead, the USGBC and Destiny USA developers announced that all retail units inside the mega-mall would seek LEED certification: 

“It’s never been done before,” said [USGBC CEO Rick] Fedrizzi as [Destiny USA developers] sat nearby. “When a major, major mall puts together a program creating leases requiring —requiring —tenants to be LEED-certified, it’s a major, monumental event.”

Coming back to our original question, the answer is yes, a Solyndra-type failure could happen to green building policy.  It already has.  And if the Green Bonds that funded the Destiny USA project were part of the American Recovery and Reinvestment Act, I can promise you it would be splashed on the front page of many newspapers.  

What do you think?

IRS To Audit Destiny USA's Green Bonds

Yesterday was tax day.  A few unlucky souls will face the prospect of an audit in the coming months.  But for the Destiny USA project, the IRS has already announced an audit of the project's $228 million Green Bonds.  

If you need background on the Destiny USA story, I would suggest you review the e-book I published on the subject.  In 2007, the developer of a large-scale mall project received $228 million from a federal Green Bonds program in exchange for installing green building and renewable energy technologies.  The developer recently revealed the many of the green technologies will not be incorporated as promised. 

As reported by Rick Moriarty, the Internal Revenue Service (IRS) notified the Syracuse Industrial Development Agency on March 17 that it would be auditing the Green Bonds issued by the Agency to the Destiny USA developer:

"The IRS notice states that the Destiny bonds were selected for examination 'because of information we received from external sources or developed internally that causes a concern that the debt issuance may fail one or more provisions' of the Internal Revenue Code.

Destiny said in a notice to the bond market that it believes it has met the requirements of the federal code relating to the bonds and is cooperating with the IRS."

The Internal Revenue Service (IRS) is the agency ultimately responsible for determining compliance with the Green Bonds requirements.  If the IRS were to determine that non-compliance occurred, then Destiny USA could lose hundreds of millions of dollars in estimated tax breaks. 

Keep in mind, the IRS issued its notice just seventeen days after the Agency and Developer were required to submit a letter stating whether compliance with the Green Bonds program occurred. The IRS moved quickly to get involved. 

What do you think will be the result of the IRS audit? 

Caught in the Middle: Tax Implications of an Adverse Green Bonds Ruling

The following post is written by Kirk Dryer, a law student at the University of Missouri.  Kirk is also the first Green Building Law Update intern.  His assistance researching the Destiny USA matter was priceless.  Below, Kirk explains the tax implications of an adverse ruling in the Destiny USA dispute.  If you want to read more on the Destiny USA dispute, please read my short e-book on the subject.  

While Destiny USA stands to lose $122 million in financing costs if the IRS strips the project of it’s green bond tax exemption, an adverse ruling will also result in a significant investment income loss for individual bondholders.  In total, these bondholders purchased $228,085,000 in green bonds for Destiny USA and would owe taxes they were not expecting to pay which would significantly cut into their investment gains.  The tax exemption itself and not green building promises is the means through which the developer was able to offer an interest rate lower than the market rate and remain a competitive investment. Most (if not all) of the individual investors would have chosen an investment with a higher return if the gain had been taxable.  

It is easy to assume that most individual investors with enough income to hold a significant sized investment in the Destiny USA bonds would be in one of the two highest federal income tax brackets which means that any additional income for 2010 would be taxed at either 33% or 35% depending on the investor’s taxable income.  This means that if the IRS takes away Destiny USA’s green bond tax exemption, any gain collected on a bondholder’s investment would be taxed and would cut his/her investment gain by at least a third.

For example: We’ll say an investor, Bob, had an adjusted gross income of $250,000 for 2010 and he held a $50,000 bond in Destiny USA.  The Destiny USA Green Bond interest rate is 4.420% meaning that Bob would have a gain on his bond investment of $2,210.  With the tax exemption, he would not have to pay any income tax on that bond income.  However, if the tax exemption is stripped from the Destiny USA project, Bob would owe 33% of that gain or $729.30 in federal income tax.   If Bob bought his bond at issuance in 2006 he would owe a total of $3,646 in back taxes for his investment gain for the five years (2006-2010) he took the tax exemption.  He would then no longer have the exemption for the next 25 years until the bond matures on January 1, 2036.  Over the life of the bond Bob would pay $21,879 in income taxes he would not have owed if Destiny USA fulfilled its obligations for the Green Bond program.

Ultimately, bondholders like Bob would have legal recourse, but the filing of a lawsuit to recover the money lost on a bond investment is sure to create a domino effect of filings resulting in lengthy legal battles.  If the tax exemption is revoked due to Destiny USA’s noncompliance with IRS Green Bond requirements, the bondholders can sue the Syracuse Industrial Development Agency and Citigroup as the bond issuers.  The bond issuers may then recover their losses from their bond insurer who may then recover its losses from the Destiny USA.  

Overall, Bob is simply an example of a bondholder who purchased one $50,000 bond out of the $228 million.  For simplicity’s sake, if all bondholders were in the same tax bracket as Bob, the bondholders would pay $99,805,434.30 in income taxes over the 30 years of the bond. While the bondholders may ultimately recover their losses, the IRS ruling nonetheless has a large impact on the financial gains of their investment.

 

An E-book, A Conference, an Intern and a Hiatus

I finally finished the Destiny USA e-book (PDF).  If you read the blog posts, then the e-book is probably a waste of time.  If you don't know what I am talking about, download the story (PDF).  And if you want to share the story of the Destiny USA Debacle with friends and loved ones, then the e-book is the most convenient way.  Enjoy.  

I will be in Kansas City next week for the University of Kansas Green Building and Sustainability conference.  If you are in the area, I recommend that you attend.  I will be presenting on Friday about green building liability.  I have a totally new presentation ready to go based on a slew of green building lawsuits that have come out.  Register today for the event!  

Thanks to Kirk Dryer for all of his help with the Destiny USA research.  Kirk is the first-ever intern at Green Building Law Update.  He knows a ton about green buildings and he's a self starter.  I really enjoy working with him.  Glad to have you on board, Kirk.   

Finally, I am going away for one month.  I have another blog in the works and I am going to focus on getting it launched.  While I am away, Kirk and I will be posting guest articles and interviews.  If you are interested in being featured, contact me:  chris@cheatham-law.com.  

It's time to go watch some basketball.  Rock Chalk Jayhawk! 

Did the USGBC Purchase Destiny USA Green Bonds?

I am wrapping up my discussion of the Destiny USA project this week with one final post.  You can select the Destiny USA tag to review all of the previously published posts on this topic.  I will also be publishing a compendium of posts on the topic -- plus bonus coverage -- later this week.  Thank you for reading. 

I am wrapping up the Destiny USA Debacle discussion with a truly bizarre story. 

When I first read Rick Moriarty’s story on the Destiny USA project, I was shocked to learn that the U.S. Green Building Council invested in the Green Bonds issued for the project.  Additional research turned up a USGBC press release from 2007 touting the purchase of the Green Bonds.  

Why did the USGBC’s involvement shock me?  

In order to qualify for $238 million in tax-exempt Green Bonds, the developer had to provide written assurances to the federal government, including written statements from the USGBC, that the project would achieve LEED certification.  Investors in the Green Bonds received tax-exempt returns based in part on the promises made by the Destiny USA developer to achieve LEED certification.  

By investing in Green Bonds, the USGBC would have been investing in bonds that received tax-free status that was dependent on the USGBC’s decisions and written assurances related to LEED certification.  That could be perceived as a conflict of interest.  

I contacted the USGBC to confirm the purchase of the Green Bonds.  

Here’s where the story becomes bizarre. According to the Judith Webb, Senior Vice President of Marketing & Communication, the USGBC did not purchase the Green Bonds:

“Unfortunately Rick Moriarity was mistaken — USGBC actually didn’t purchase the bond.  (In hindsight, when we didn’t make the purchase we should have taken the press release down, but that was before my time).”

What are your final thoughts on the Destiny USA Debacle?

The Destiny USA Debacle: Why Should You Take Green Building Liability Seriously?

I am wrapping up my discussion of the Destiny USA project this week with two more posts.  You can select the Destiny USA tag to review all of the previously published posts on this topic.  I will also be publishing an e-book of posts  -- plus bonus coverage -- at the end of this series. Thank you for reading.  

The Destiny USA project is more than just a good story.  It’s a warning to design professionals and contractors that they must take green building liability seriously.  

Today we are going to talk about how messy litigation could develop from the Destiny USA dispute. Due to onerous contract requirements, design professionals and contractors may face penalties if green building certification is not obtained for the Destiny USA project.  

Why the IRS Ruling Could Create Messy Litigation

The Internal Revenue Service will eventually rule on whether the Destiny USA developer complied with the Green Bonds requirements.  How the IRS rules could have substantial financial repercussions for many parties.  An adverse ruling could result in the IRS:

  • Seizing the Reserve Fund of $2.38 million setup by the Destiny USA developer.
  • Revoking the tax-exempt status of the investment received by the Destiny USA developer. The developer estimated the tax-free status amounted to a $120 million savings.
  • Revoking the tax-exempt status of the returns received by Green Bonds investors. 

It’s this last scenario that would result in the messy litigation.  The investors would likely sue the bond issuer, the Syracuse Industrial Development Agency.  The bond issuer presumably has insurance on the bonds.  The insurer would then turn around and sue the developer for its losses.  

And all three of the above scenarios would occur if the IRS were to find that the developer did not satisfy his LEED and renewable energy promises.

Who do you think the developer might blame for failure to achieve LEED promises?  I could envision the developer blaming the design professionals and contractors because the project did not achieve LEED certification. 

Why the Destiny USA Debacle is a Warning to Design Professionals and Contractors

In addition to messy litigation, the design professionals and contractors may face penalties because the project did not achieve LEED certification.  

In order to qualify for $238 million in Green Bonds that are now at issue, the Destiny USA developer had to state in its application that it created incentives and penalties for design professionals and contractors to obtain LEED certification:  

“The application must include . . . information on financial incentives and penalties that will be included in the design, construction, engineering and other building contracts and subcontracts to tie a part of the contractors’ and subcontractors’ compensation to their level of success in designing and constructing LEED-certified, sustainably-designed buildings.”

Depending on how the contract was written, the design professionals and contractors may face incentives and penalties because the owner made decisions that negatively impacted the project’s ability to obtain LEED certification.  

When negotiating a design or construction contract, it is imperative to negotiate fair terms related to green building certification.  Otherwise, you may face stiff penalties because of decisions made by the owner that impeded LEED certification.

 

The Destiny USA Debacle: May It Please the IRS

I am publishing a series of posts on the Destiny USA Debacle -- the federally sponsored Green Bonds project that has failed to incorporate promised green building features.  To read all of the posts at once, you can download a PDF version now.  Or you can select the Destiny USA tag to review all of the published posts on this topic.  

This is the seminal post in the Destiny USA Debacle series because we cover the big issue -- did the Destiny USA project deliver on its Green Bonds promises?  As a brief recap:

  • The Destiny USA project received $238 million in tax-free investments created by the federal Green Bonds program.
  • In exchange, the Destiny USA developer made promises related to LEED certification, renewable energy systems, and brownfield redevelopment.  
  • The Destiny USA developer reportedly will not deliver the promised renewable energy systems, and the project’s ability to obtain LEED certification is in doubt.  
  • The IRS must decide whether the project complied with its Green Bonds promises.  An adverse ruling could mean the developer would face forfeiture of a Reserve Account containing $2.38 million, the revocation of tax exemptions, and angry bond investors looking for recourse.  
  • The Green Bonds issuer, the Syracuse Industrial Development Agency, had to submit a report to the IRS by the end of February describing whether the project has met its Green Bonds promises.   
On February 21, 2010, Syracuse Post-Dispatch reporter Rick Moriarty published a story that disclosed the contents of a draft letter addressed to the IRS by the Syracuse Industrial Development Agency.  In the letter, the Agency and developer first divulge that many of the green building and renewable energy features that were promised as part of the Green Bonds program will not be included in the completed project.  The letter blames the economy for changes to the project.  

The Agency and developer argue that other environmentally-friendly features have been included, like LEED-Gold certification.  This last claim is curious since construction is not completed and the US Green Building Council confirmed that the project had not actually received certification.  

The letter then moves to the crux of the compliance argument.  The Agency and developer assert that actual installation of renewable energy systems was not required.  Instead, the letter claims the developer was only required to make promises related to renewable energy and LEED certification in order to qualify for the bonds. They conclude that the financial benefits of the Green Bonds program and the forfeiture of the Reserve Account do not depend on actual achievement of the green building and renewable energy goals.  

If you would like to review the IRS Code requirements for Green Bonds, please see my post “Why the IRS is the Key Player.”  

How do you think the IRS will rule?

The Destiny USA Debacle: Destined for Trouble

I am publishing a series of posts on the Destiny USA Debacle -- the federally sponsored Green Bonds project that has failed to incorporate promised green building features.  To read all of the posts at once, select the Destiny USA tag

We have now set the scene for the Destiny USA debacle.  The key players have been described.  The federal Green Bonds program and the green building requirements have been reviewed.  And we have reviewed the penalties if the Green Bonds requirements are not met.  

But when construction started at Destiny USA, how did it go?  

Construction started in 2007.  By the summer of 2009, construction was reportedly 90 percent complete.  

Then, problems arose as Citigroup pulled financing for the project, and construction ceased:  

“Construction came to a halt in June 2009 when Citigroup stopped advancing money on a $155 million loan. The bank said it was concerned about cost overruns, construction delays and a lack of any signed leases for the expansion after nearly two and a half years of construction. It publicly called the project a failure.”  

As reported by Stephen Del Percio at the Green Real Estate Law Journal, litigation ensued as a result of Citibank’s decision.  Ultimately, as Del Percio explained, a New York appellate court upheld an Onondaga Supreme Court decision that Citigroup had to resume funding of Destiny’s construction loan because the project involved “unique” and “revolutionary” sustainable features.  In hindsight, it is interesting that many of these sustainable features actually may not have been included in the finished project.  

As reported February 20, 2011 by the intrepid Rick Moriarty, the Destiny USA project has scrapped many of the green building and renewable energy features that were originally promised to the federal government in exchange for $238 million in Green Bonds:

“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.”

The project has also reportedly not received LEED certification.  

As you may recall, the bond issuer, the Syracuse Industrial Development Agency, was facing a February 28 deadline to report to the IRS regarding the Destiny USA project’s compliance with the Green Bonds requirements.  If the IRS finds the project is not in compliance, the tax-exempt status of the bonds may be forfeited and a $2.38 million penalty would be assessed.  

What do you think the Syracuse Agency will tell the IRS? 
 

The Destiny USA Debacle: Why the IRS is the Key Player

I am publishing a series of posts on the Destiny USA Debacle -- the federally sponsored Green Bonds project that has failed to incorporate promised green building features.  To read all of the posts, you can select the Destiny USA tag to review all of the published posts on this topic.  Or check back later in the week for an e-book that includes all of the posts, plus bonus coverage. 

Today, we will take a closer look at the very important role played by the Internal Revenue Service (IRS) in the Destiny USA Debacle.  This post is paramount to the entire story because it foreshadows the $122.3 million dollar question that the IRS will soon decide.  

As part of the Green Bonds legislation, the IRS was tasked with ensuring that the federal taxpayer received its end of the bargain: a green building project.  In response, the IRS issued Internal Revenue Bulletin 2005-27 to provide “guidance on the requirements a project must meet in order to be eligible for designation as a qualified green building and sustainable design project.”  

What were the green building requirements to qualify for Green Bonds?

In order to receive $238 million in Green Bonds financing, the Destiny USA developer had to meet three primary requirements:

1.  The applicant had to “demonstrate, and provide written assurances” that the project would receive LEED certification.  

2.  The project had to include “a brownfield site as defined by section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980.”  

3.  The project had to meet a number of “goals for conservation and technology innovation.” 

The conservation and technology goals relate to the following four items:

  • the “amount of electric consumption (in megawatt hours) reduced by the project,”
  • the “amount of sulfur dioxide daily emissions reduced by the project as compared to coal generation,”
  • the “amount of the gross installed capacity of the project’s solar photovoltaic capacity measured in megawatts,” and
  • the amount, “in megawatts, of the project’s fuel cell energy generation capacity, which includes the fuel cells’ generation of thermal and electrical energy used by the project.”

Because I tend to focus on regulations addressing LEED certification, lets take a closer look at the IRS’ requirements for LEED certification.  

“At least 75 percent of the square footage of commercial buildings that are part of the project is registered for United States Green Building Council’s LEED certification and is reasonably expected by the applicant (at the time of the designation) to receive such certification, based on all the facts and circumstances, including statements of the United States Green Building Council, opinions of independent experts in green building and sustainable design, and relevant experience of the project developer.

The developer was also required to submit LEED Letter Templates, documentation demonstrating the design and construction of a LEED-certified building, information regarding LEED Accredited Professionals working on the project and other supporting information.  

What is the penalty for not satisfying the green building and renewable energy requirements?  


According to the IRS Bulletin, the bond issuer was to maintain a reserve account equal to one percent of the net proceeds, which would be forfeited if the project failed to comply with the Green Bonds program’s requirements.  For the Destiny USA project, the bonds totaled $238 million so an account somewhere, so the IRS required that a reserve account contain $2.38 million plus interest.  If the IRS determines that the Destiny USA project failed to comply with the Green Bonds requirements, then “amounts in the reserve account, including all interest, will be paid to the United States Treasury.”

But Why is this Coming to a Head Now for the Destiny USA Project?  

The IRS Bulletin also requires the bond issuer to submit reports to the IRS on the qualifying projects 48 months after Green Bonds are issued.  The reports must specify whether the project has complied or will comply with the Green Bonds requirements.  

Since the Green Bonds were issued for the Destiny USA project late in February 2007, the bonds issuer -- the Syracuse Industrial Development Agency -- must submit its report not later than the end of February 2011.  That was yesterday.   

The IRS is not messing around when it comes to these reports as the Bonds issuer must include the following certification language in the report:  

“Under penalties of perjury, I declare that I have examined this document and, to the best of my knowledge and belief, the document contains all the relevant facts relating to the document, and such facts are true, correct, and complete.”

Next time, we will look at the past history and present state of the Destiny USA project.

The Destiny USA Debacle: How Green Building Sausage is Made

I am publishing a series of posts on the Destiny USA Debacle -- the federally sponsored Green Bonds project that has failed to incorporate promised green building features.  To read all of the posts, you can select the Destiny USA tag to review all of the published posts on this topic.  Or check back later in the week for an e-book that includes all of the posts, plus bonus coverage.  

The Destiny USA dispute hinges on whether a developer complied with green building and renewable energy promises he made in order to obtain federal Green Bonds funding.   But what is the Green Bonds program and how did it come about?

In 2004, the United States Congress passed the American Jobs Creation Act of 2004, which is essentially a huge tax bill.  Section 701 of the legislation included a seemingly-innocuous provision titled the “Brownfields Demonstration Program for Qualified Green Building and Sustainable Design Projects.”  

According to Investopedia, this Section led to the United States Treasury issuing $2 billion in Green Bonds to support green building construction:

Green bonds in the United States got a major boost from an amendment to the America Jobs Creation Act of 2004. The amendment is officially titled the Brownfields Demonstration Program for Qualified Green Building and Sustainable Design Projects, but for those who prefer to have a little oxygen left at the end of their sentences, this has been shortened to "Green Bonds". It was designed to provide funding - in the form of $2 billion worth of AAA-rated bonds issued by the United States Treasury - to finance environmentally friendly development. The objective is to reclaim contaminated industrial and commercial land (brown fields), and encourage energy conservation and the use of renewable energy sources.

The Syracuse Industrial Development Agency was the bond issuer and sold $238 million of these Green Bonds in late February 2007.  Investors -- corporations and individuals who purchased the bonds -- received two benefits:  interest paid over the lifetime of the bonds, and tax-free status on the interest paid.  Because of the tax-free interest, Investors were willing to accept lower interest rates on the bonds.  The proceeds from the sale of these tax-free bonds were then provided by the Agency to the developer of Destiny USA in the form of a tax-free loan.

The taxpayer is also an important player in this scenario.  By waiving the normal tax obligation, the taxpayer is essentially investing in the developer’s project as well.  In exchange, the taxpayer is supposed to receive a public benefit in the form of a green building development on a brownfield site.  Who represents the taxpayer in this scenario?  The word “tax” should have tipped you off -- the Internal Revenue Service.  

They IRS is probably the most important party in the entire Destiny USA dispute. 

Photo credit: mjar81

The Destiny USA Debacle: What is Destiny USA?

I am publishing a series of posts on the Destiny USA Debacle -- the federally-sponsored Green Bonds project that has failed to incorporate promised green building features.  To read all of the posts at once, you can select the Destiny USA tag.  

In this post, I planned to describe the proposed Destiny USA project and its many features.

I think you will prefer this video.  



Did that remind anyone of Jurassic Park?  

If you prefer a written explanation, this is how the New York Times described the Destiny USA project in 2005:

Robert Congel, a commercial real-estate developer who lives in upstate New York, has a plan to ''change the world.'' Convinced that it will ''produce more benefit for humanity than any one thing that private enterprise has ever done,'' he is raising $20 billion to make it happen. That's 12 times the yearly budget of the United Nations and more than 25 times Congel's own net worth. What Congel has in mind is an outsize and extremely unusual mega-mall. Destiny U.S.A., the retail-and-entertainment complex he is building in upstate New York, aspires to be not only the biggest man-made structure on the planet but also the most environmentally friendly. Equal parts Disney World, Las Vegas, Bell Laboratories and Mall of America -- with a splash of Walden Pond -- the ''retail city'' will include the usual shops and restaurants as well as an extensive research facility for testing advanced technologies and a 200-acre recreational biosphere complete with springlike temperatures and an artificial river for kayaking.

That is Destiny USA.

The Destiny USA Debacle: The Biggest Green Building Policy Story to Date

I have been working tirelessly to understand the intricacies of the Destiny USA dispute.  It is quite a mind-bender, which I hope to illuminate for you in the coming days.  But I am sure of one thing:

This is easily the most important green building policy story to date.  

  • The dispute centers around a much ballyhooed Green Bonds program created in 2004.  I am going to do my best to avoid the political issues involved with the Green Bonds program, but if you are interested in that side of the story, I suggest you review this Boston Globe article.  
  • In its simplest form, the Green Bonds program works because both investors and developers get substantial tax breaks to create green building projects that benefit the public.  For example, it is estimated that the Green Bonds program saved the Destiny USA project upwards of $120 million.  
  • Tax breaks come at the expense of the taxpayer.  In exchange, the public benefit comes in the form of an environmentally-friendly project -- in this case, Destiny USA made promises about LEED certification and renewable energy features that reportedly will not be included in the completed project.  

The IRS is faced with a difficult question -- did the Destiny USA project comply with the Green Bonds green building and renewable energy requirements?  If the IRS rules that the requirements were not met, then the project could be penalized millions, the tax exempt status of the bonds could be stripped, and widespread litigation will likely ensue.  If the IRS rules that the requirements were met, then the developer and investors will retain the tax benefits but the public will reportedly not receive the benefit of the promised green building and renewable energy systems.  

In order to tell the story of the Destiny USA Debacle, I have written nine blog posts to be published in the coming days:

  • What is Destiny USA? - a review of the Destiny USA project as originally proposed.
  • How Green Building Sausage is Made - a review of the Green Bonds program that was passed in 2004.
  • The USGBC’s Role in Destiny USA - a review of the USGBC’s participation in the Destiny USA project and the Green Bonds program.
  • Why the IRS is Key - a review of the Bulletin issued by the IRS that will be essential in deciding this dispute.
  • Destined for Trouble - a review of disputes and litigation that have arisen from the Destiny USA project.  
  • May it Please the IRS - a review of the letter prepared by the local bond issuer to the IRS arguing that the project complied with the Green Bonds requirements.  
  • LEEDigation on Steroids - what happens if the IRS rules against the Destiny USA developer and strips tax-exempt status?
  • How to Avoid LEEDigation Liability - some thoughts on how contractors and design professionals could get dragged into the Destiny USA dispute; and how to make sure your company avoids this type of scenario.  

If you do not want to wait for each blog post, then please check back on Monday, when I will be publishing a full e-book that contains all nine posts -- plus bonus coverage -- of the Destiny USA Debacle.

 

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.