LEED "Pledge" to Replace LEED Bond

One of the very first green building legal conundrums may be resolved. 

The Washington Business Journal reported on October 31 that legislation will be introduced in Washington D.C. that will create an alternative to the much maligned LEED bond requirement in the D.C. Green Building Act of 2006. 

Under the Act, as currently written, as of January 1, 2012, all new construction greater than 50,000 square feet must obtain LEED certification.  Under the proposed legislation, developers will be permitted to make a binding "pledge" that LEED certification will be attained: 

Under the pledge route, if a new building fails to be certified LEED within two years of receiving its certificate of occupancy, the developer would be penalized $7.50 per square foot for buildings under 100,000 square feet, and $10 per square foot for buildings larger than 100,000 square feet.

Notably, the D.C. Council proposed to create an alternative enforcement mechanism instead of correcting the D.C. Green Building Act's many flaws.  Two prominent surety associations outlined these flaws in a white paper for the D.C. Government.  The associations suggested that LEED bonds would be made available if the legislation were to be corrected. 

For design professionals and contractors working in Washington D.C., the LEED Pledge will mean more onerous contract terms.  If developers can be penalized up to $3 million for not achieving LEED certification, these same developers will require guarantees of LEED certification from design professionals and contractors.  Don't be surprised to see penalty provisions in contracts that mirror the LEED pledge penalty. 

What do you think of the LEED Pledge?  

Photo credit: missrivs

What do Hurricanes, Earthquakes and LEED Bonds Have in Common?

Three weeks ago, Washington DC was hit by both an earthquake and a hurricane. But this was not the most shocking development during the week -- at least for me.  

Here's what shocked me the most: I learned there is a chance that LEED bonds could be available in our nation's capital.

On Wednesday, August 24, I attended a meeting of the DC Green Building Codes working group. The topic to be discussed was the DC Green Building Act's LEED bond requirement. For the uninitiated, the DC Green Building Act requires that all new construction in D.C. greater than 50,000 square feet be LEED certified starting January 1, 2012. Project developers have to post a bond guaranteeing the certification. The bonds range from 1 to 3 percent of a project's total cost, and can be as much as $3 million. 

I have been writing about the LEED bond requirement since the first week of this blog. I once compared LEED bonds to unicorns because they only existed in a fantasy world. 

LEED bonds do now exist and have been underwritten to support projects applying for the Arlington County, Virginia bonus density program. But it is unlikely that LEED bonds were going to be underwritten in Washington DC due to problems with the Green Building Act.  At the working group meeting, the SFAA and NASBP issued a white paper (PDF) summarizing the Act's many problem, including:

  • "The regulations should state the developer must furnish the bond"
  • "The regulations should provide for claims less than the full bond amount." 
  • "Consider the relationship between the bond amount and the financial thresholds required by the surety. . . . We suggest that the regulation should set the maximum amount at a lower level that is sufficient to provide the necessary financial protection to the District." 
  • "The regulations should set forth the appeals process by which a developer can appeal a USGBC determination.  Notice of appeal should be provided to surety." 

The last issue is of most interest to me.  The D.C. Department of the Environment (DDOE) has indicated that a party other than the US Green Building Council could determine compliance with LEED certification.  Whether these third-parties would be in the form of a government agency or a for-profit company remains to be seen.  But it would certainly be interesting to have another entity looking over the shoulder of the US Green Building Council. 

The DC government has less than four months to revise the Green Building Act to reflect the suggested changes in the SFAA and NASBP white paper.

Will DC make the necessary changes to the Green Building Act by January 1, 2012?

Photo credit: Cape Town Craig

Why the D.C. Green Building Act is Fundamentally Flawed and a Solution

I can’t believe it has come to this.

We are just over four months away from January 1, 2012. On that date, the D.C. Green Building Act of 2006 requires that all new construction of non-residential buildings greater than 50,000 square feet be LEED certified. While there are many technical problems with the Green Buildling Act, the very premise of the law is fundamentally flawed. Thankfully, there is a very obvious solution to the Act’s flaws and technical deficiencies.

Why is the D.C. Green Building Act Fundamentally Flawed?

How can I make this claim? Because the D.C. Government does not understand what a LEED mandate actually entails.

I was recently reviewing materials published by the D.C. Department of the Environment (DDOE) regarding the Green Building Act (GBA). One slide caught my attention:

Do you see the problem with this slide? The DDOE views the Green Building Act LEED mandate as a “ceiling.” If the D.C. Government believes it has passed a ceiling then it truly does not understand how the Green Building Act and its LEED mandate will function.

A LEED mandate is not a ceiling. Rather, a LEED mandate is a floor. Because the GBA requires all buildings to obtain LEED certification, it functions as a quasi building code. In other words, LEED certification is a minimum requirement, the very definition of a so-called "floor."

Furthermore, the very premise of putting a "ceiling" on the green building industry is a terrible and nonsensical idea. A ceiling would actually prohibit buildings from being built to be greener or more efficient than LEED. The GBA requires buildings to meet LEED certification and yet there are numerous LEED Platinum buildings in Washington, D.C.. Does DDOE imagine that the GBA will serve as a cap and prevent future buildings from seeking LEED Gold or Platinum certification?

The Solution

The intent of the Green Building Act is to “raise the performance of the District's buildings so that they are environmentally sustainable, healthy, and more efficient to operate” and to “make the District of Columbia a national leader for green building.” The solution to the problems with the Green Building Act seems obvious to me and ensures the intent of the Act is satisfied.

First, the District needs more time to correct the many problems with the Green Building Act. The deadline for implementation of the LEED mandate should be extended to 2013 or later. It is very unlikely that all of the Green Building Act’s deficiencies, which will be discussed in a later post, can be corrected in the remaining four months.

Second, all of the D.C. government’s green building resources need to be applied to green building codes. The International Green Construction Code will be released sometime in 2012. D.C. can be one of the first cities to adopt a mandatory green building code if it starts reviewing IgCC public version 2.0 now. Adopting and implementing this code will raise the performance of District buildings and shine a spotlight on the city as the first to adopt the code.

For those of you interested in learning more about the D.C. Green Building Act, I would recommend that you attend a D.C. Green Codes Working Group meeting next Wednesday, August 24 at 9:30 am. The meeting is at 1350 Pennsylvania Avenue in Room 412. Email if you need more details -- chris@greenbuildinglawupdate.com.

Green Performance Bonds Necessary But Risky

Ever since I read the D.C. Green Building Act and its "performance bond" requirement, I have been morbidly interested in the idea of LEED bonds.  When Kristen Bradley, at SuretyBonds.com, offered to write an article on the topic, I couldn't help but say yes.  SuretyBonds.com, a nationwide surety bond producer, works with a number of construction companies and distributes information to help keep the industry's professionals updated on developing regulations.

As the concern for environmentalism continues to grow, so, too, do the regulations and systems involved with green building. Entrepreneurs continue to develop new building practices and products, and keeping up with new green building regulations can be challenging for some contractors. The growing concern for protection related to green building practices has only increased as new green products and regulations are pushed onto the construction industry. One possible solution for guaranteeing a contractor's compliance is the use of green performance bonds. However, concern regarding their implementation and enforceability continues to be heavily debated among stakeholders throughout the industry.

Confusion surrounding the 2006 Green Building Act

In 2006 the D.C. City Council passed legislation that would require green performance bonds to be used on construction projects beginning in 2012. However, no such bond actually existed when the legislation was passed. Although some advocates think the legislation's enactment will be crucial for the green building industry, contractors and government agencies alike have been struggling to clarify what the act actually means. As the deadline approaches, many construction professionals in the area are still confused as to what exactly will be expected of them.

How green performance bonds would work

Green performance bonds are a specific type of surety bond. Although there are thousands of surety bond types available, they all function similarly to guarantee a certain level of performance. Government agencies typically mandate the use of surety bonds to protect public funds as well as consumer interest. Most contractors who work on public projects are probably familiar with how other forms of contractor bonding work. Green performance bonds work in the same way, but they are specific to green building practices. Each surety bond that's executed acts as a legally binding contract between three entities.

  1. The government agency or project owner that requires the bond acts as the obligee.
  2. The contractor required to purchase the bond acts as the principal.
  3. The agency that executes the bond acts as the surety.

When it comes to green performance bonds, the bond would offer a financial guarantee that the principal will adhere to certain green building regulations. If the contractor should fail to do so, the surety would be accountable for making sure the principal resolves the problem, which usually requires monetary compensation.

The likelihood of green performance bond implementation

There's no way to predict how exactly green performance bonds will be used in the future. For now, though, there's no question that project owners need a guaranteed way to collect recompense on problems resulting from negligent green building contractors. Likewise, contractors need a financial guarantee to protect themselves from personal liability if such problems were to arise. Unfortunately, this pushes a great deal of burden onto surety providers who might be skeptical to execute bonds on risky projects. This is, in fact, what most surety agencies try to avoid. Ultimately, government agencies' decisions regarding the use of green performance bonds will require an evaluative process. Once Washington D.C. clarifies its expectations and contractors there begin securing green performance bonds, the rest of the nation can begin analyzing just how effective the bonds are. 

What are the Broader Implications of DC's Green Performance Bond?

I recently had the pleasure of sitting down with Chris Birk of Surety Bonds Insider to discuss surety issues and the green building industry, particularly related to the D.C. Green Building Act.  

As a quick reset, the D.C. Green Building Act of 2006 requires owners put up "performance bonds" that guarantee LEED certification for certain projects.  The surety industry has raised concerns that these types of bonds do not exist.  My favorite question was when Chris asked me about the implications of the D.C. Green Building Act "performance bond" issue for the broader green building industry:

Chris Birk:  "What sort of long term, beyond the District implications are there in this?"

Chris Cheatham:  "This same issue will pop up wherever there is a green building regulation being proposed or pushed forward.  Whenever you are mandating some type of certification, some type of green building certification, you have to have an enforcement mechanism.  Because if you don't then people won't comply and its pointless to have the regulation.  You have to have some type of penalty." 
I appreciate the opportunity to work with Surety Bond Insiders on this interview.  Please take a listen and let me know what you think.  What other issues should Chris and I discuss surrounding
the surety, construction and green building industry. 

Related Links: 

Surety Bonds Sit-Down: The Future of Green Building with Chris Cheatham (Surety Bonds Insider)

A Green Building Performance Bond (GBLU)

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? 

Related Links:
 

Hitting Reset on the D.C. Green Building Act

Back in April 2009, I took a vow of silence.  I promised to stop writing about the "performance bond" requirement in the D.C. Green Building Act.  I had faith the D.C. Council would address the issue.  Thankfully, it appears our long nightmare may be coming to an end.

Today, I am going to reset the "performance bond" issue (I have not written about it since April 2009!).  On Monday, I will discuss the "Green Building Technical Corrections, Clarification, and Revision Amendment Act of 2009" (pdf) and the proposed revision to the "performance bond" requirement. 

As background, for every green building mandate, you need an enforcement mechanism. The D.C. Green Building Act of 2006 requires that "after January 1, 2012, all new construction of projects 50,000 square feet or greater must comply to the LEED certification level."  Here is how I described the enforcement mechanism in a previous white paper:

"One of the most controversial provisions in the Green Building Act is the performance bond requirement.  After January 1, 2012, an applicant for construction of a privately-owned building must provide a performance bond which is due and payable prior to receipt of a certificate of occupancy.  Thus, after January 1, 2012, if a construction project must meet green requirements in the Green Buildings Act, the 'applicant for construction' must also provide a performance bond guaranteeing satisfaction of the green requirements." 

There are two primary problems with the D.C. Green Building Act "performance bond" requirement. 

1.  "The Act incorrectly uses the term 'performance bond' as the bond described in the Act 'seems to function more in the manner of a license or compliance bond, which typically guarantees compliance with a law or code.' A performance bond typically assures one party that another party will perform the contract in accordance with its terms and conditions."

2.  "Let me make this clear: no bond or insurance instrument has been created that guarantees green certification.  This type of security instrument does not exist.  I have discussed the issue with sureties, surety industry groups, insurance companies and insurance brokers.  None of them know of a security instrument that guarantees green building certification."

So what did the D.C. City Council correct either of these problems?  Check back on Monday as I continue this discussion. 

Related Links:
 
 
Photo:  Henry Stern

D.C.'s Green Bond: Best Case Scenario

Today I am speaking once again on the D.C. Green Building Act "performance bond" issues (see slides in this post).  I have a new message for this presentation because, frankly, I am not certain we are getting anywhere.  If you need some background, here are all of the Green Building Law Update posts regarding this hot topic
 
I have come up with a best case and worst case scenario for the D.C. green bond requirement.  Make no mistake, neither scenario is very good.  Here is the best case scenario. 
 
First, the surety industry is able to come up with a bond that works for the Act's bond requirement.  Even better, by mandating green building, D.C. has more green buildings then any city in the nation.  
 
But here is where things start getting bad.  Some projects fail to achieve LEED certification.  The District of Columbia then has to call on the bond.  The Surety has two options at this point.  Either the Surety can forfeit the bond amount to D.C. or the Surety can defend the debtor (in this case the developer) against D.C.  In both scenarios, LEEDigation will ensue. 
 
What will this LEEDigation look like?  The Surety will file a lawsuit against the Architect or Contractor, blaming them for the project's failure to achieve LEED certification.  The Architect will file an additional lawsuit blaming the Contractor, or vice versa.  Oh, and the Architect will also file lawsuits against all of the Engineers.  The Contractor will go a similar route and sue all the Subcontractors. 
 
This is the best case scenario. 
 
When you mandate green building certification and require an enforcement mechanism, you are ensuring there will be failures.  Those failures will lead to LEEDigation.  Bottom line, best case scenario?  D.C. becomes the hotbed of LEEDigation. 
 
Unless of course some other jurisdiction implements another LEED mandate sooner. 
 


 

Green Bonds, Car Insurance Not the Same

If you have been paying attention to Green Building Law Update, you know D.C. has a bit of an issue regarding a green building "performance bond" currently required by law.  In short, green building "performance bonds" do not exist.  A few weeks ago, George Hawkins, Director of the District Department of the Environment, testified in support of the use of “performance bonds” as a method of enforcing the District’s Green Building Act (PDF link).  Among the comments that caught my attention, Mr. Hawkins stated that green building performance bonds will be created just as car insurance was created: 
"For example, before there were automobiles, there was no such thing as car insurance.  When the law recognized a growing need to insure against harms that may be perpetrated by automobile drivers to others, the market rose to the demand." 
I made a note to research this specific issue.  Thankfully, I didn't have to do the research.  Will Clark, multi-family housing expert and budding renewable energy entrepreneur, provided a critique of Mr. Hawkins' testimony that deals specifically with the auto insurance claim.  

Automobiles were invented in the mid-1890s. Although various vehicle insurance schemes existed in the late 1890s through the first decades of the 1900s, Massachusetts was the first state to make vehicle insurance compulsory in 1927. New York was the second state to make vehicle insurance mandatory, in 1956. The 'invention' of automobile insurance clearly preceded the state's mandating of such coverage. The DC GBA reverses this precedent by mandating something for which no appropriate instrument exists.

More directly, auto insurance is an extension of tort law, and vehicle insurance exists to compensate a party for its loss, whether personal or property. These loses are either known (cost of repair or treatment) or negotiated. In the case of the DC GBA, the compensated party (District's Green Building Fund) is not the party of loss.  Regarding forfeiture, the legislation states "All or part of the performance bond shall be forfeited to the District and deposited in the Green Building Fund if the building fails to meet the verification requirements." There is no method in the legislation to negotiate (or dispute) the severity of loss or even identify the loss. Certification of LEED projects is made by the US Green Building Council (USGBC), a non-governmental entity, and includes a mix of objective and subjective requirements. Because a failure to achieve the desired certification could be the result of subjective failures, a surety bond is an inappropriate method to ensure compliance.
Will's entire critique is available after the jump.  To be honest, I am not sure I agree with all of Will's points, but I hope this sparks debate.  Like Will, I am not entirely convinced that the Green Building Act creates an inherent conflict of interest.  I am extremely concerned that a bond instrument will not be on the market when the time comes (more on this in a future post). 
 
Will also raises the much bigger question, should LEED be included in government regulation?  I have not committed one way or the other yet and I would love to hear your thoughts.   

Photo:  Larry Miller

Will Clark
 
George Hawkins, Director of the District Department of the Environment, recently testified in support of the use of “performance bonds” as a method of enforcing the District’s Green Building Act (PDF link).  His support for the current legislation was expected, and assuming a performance bond was an appropriate enforcement mechanism, he gave the following defenses: 
1. Where a market for coverage exists, products emerge. He gave the example of auto insurance as an instance where insurers met a need for a product.
 
2. Other environmental regulations, such as RCRA, require the use of financial assurance products. These funds must be sufficient to provide for satisfaction of the relevant statute.
 
3. The financial instrument is not financially burdensome because the District (and other entities) frequently require various payments, deposits, or guarantees to be made at the start of construction and those fees have not (in this telling) imperiled or impeded development.
 
4. Although the DDOE will receive any forfeited funds, this does not create a conflict of interest because such a funding mechanism for regulatory agencies is fairly common.
In order of reverse importance, Mr. Hawkins misstates the objections to the performance bond and through an imprecise comparison obscures the larger abdication of a significant public policy goal.
 
Defense 4 (Conflict of interest): Per testimony to the Council of the District of Columbia, DDOE required a one-time supplemental appropriation of $725,000 for developing, training, and implementing the GBA. States Hawkins, "We expect that the increased funding will be used primarily to provide technical and engineering support, via contract, so we can achieve the following key objectives: leveraging resources and knowledge across the government to ensure full GBA implementation for public and publicly-financed buildings; finalizing and implementing the revised “green” building code; training and educating agency and private sector partners to implement LEED and other green requirements; and developing detailed green building design specifications that promote application of innovative methods and practices. 
 
This appropriation was reduced by $125,000 in a subsequent revision (PDF link).
 
Going somewhat further afield, "DDOE also seeks to become a primary green building resource for the development community, residents and non-profits, so as to encourage the widespread adoption of green building principles and standards.  Related, but separate from this enhancement, is also the Mayor’s proposed funding for a climate change program.  This proposal, which complements the benefits generated by the Green Building Act’s requirements, designates one FTE to work specifically on the District’s response to the issue of global warming." 
 
Alone, this is not a significant worry, however DDOE's FY 2009 Gap Closing Plan (page 48) mentions "Stormwater Administration: Reduce FY2009 enhancement funding for Low-Impact Design to $375,000 from total of $750,000. DDOE successfully completed the process to increase revenue from stormwater fees, and, therefore, has significantly more funds to implement Low-Impact Design projects. DDOE seeks to keep a portion of the enhancement, because this enhancement will specifically target the older portion of the city within the combined sewer area." 
 
Assurances that this will not become a revenue source in the future are not wholly credible, but given the impact fees and proffers typically required by suburban jurisdictions, some conflict of interest is not wholly objectionable.
 
Defense 3 (Reasonable cost): The assertion that the performance bond does not create an undue burden is offered with no serious evidence of fact. Mr. Hawkins' testimony ignores the cumulative effect of fees, bonds, and other charges, and fails to acknowledge that the imposition of up to $3m (or 4% of total building cost) in the form of a bond or letter of credit presents a true and verifiable cost to a developer. His assertion that the District's Condominium Law, which requires 10% of the construction cost to be secured by escrow or letter of credit, had no negative effect on condominium development in the District is specious. It ignores the ability of a developer to build a non-residential project or to withdraw a condominium filing and convert the project to rental apartments or alternate uses. The policy goals in both cases may be admirable but to suggest "fears of business disruption from this new assurance requirement are unwarranted" is woefully unsupported by testimony.
 
Defense 1 (Availability of financial products): Mr. Hawkins acknowledges appropriate instruments "do not currently exist in the financial assurance world," and continues with the <em>non sequitur</em> "Before there were automobiles, there was no such thing as car insurance." 
 
Automobiles were invented in the mid-1890s. Although various vehicle insurance schemes existed in the late 1890s through the first decades of the 1900s, Massachusetts was the first state to make vehicle insurance compulsory in 1927. New York was the second state to make vehicle insurance mandatory, in 1956. The 'invention' of automobile insurance clearly preceded the state's mandating of such coverage. The DC GBA reverses this precedent by mandating something for which no appropriate instrument exists.
 
More directly, auto insurance is an extension of tort law, and vehicle insurance exists to compensate a party for its loss, whether personal or property. These loses are either known (cost of repair or treatment) or negotiated. In the case of the DC GBA, the compensated party (District's Green Building Fund) is not the party of loss.  Regarding forfeiture, the legislation states "All or part of the performance bond shall be forfeited to the District and deposited in the Green Building Fund if the building fails to meet the verification requirements." There is no method in the legislation to negotiate (or dispute) the severity of loss or even identify the loss. Certification of LEED projects is made by the US Green Building Council (USGBC), a non-governmental entity, and includes a mix of objective and subjective requirements. Because a failure to achieve the desired certification could be the result of subjective failures, a surety bond is an inappropriate method to ensure compliance.
 
Defense 2 (Existing environmental regulation): Most alarming is Hawkins citation of the Resource Conservation and Recovery Act (RCRA) as the model for implementation and enforcement of the DC GBA.  The legislative history of RCRA began with the 1965 Solid Waste Disposal Act with multiple amendments in the intervening 40 years. These environmental laws governing the disposal of solid and hazardous waste were approved by Congress and are implemented by the EPA. The policy and compliance mechanisms of RCRA are known and the regulations can be modified through petition, legislation, or judicial appeal. Like most regulations, RCRA has a defined period for an agency to accept, review, and opine upon submissions. Most importantly, it offers multiple methods of providing financial assurance for clean up obligations (RCRA Financial Assurance Training Module, pg 9).
 
By contrast, LEED is administered by the non-governmental USGBC, certified by the Green Building Certification Institute and modified through a non-public process with limited avenues of appeal. DC has simultaneously endorsed the goals of LEED/USGBC and abdicated any oversight of this policy to the USGBC without modification. By leaving review and certification to USGBC and its review processes, neither the developer nor the District have a method of decision making, scheduling, or directly participating in the revision of the LEED guidelines. 
 
The expressed desire of the DC GBA to create "an integrated, whole-building approach to the planning, design, construction, operation, and maintenance of buildings and their surrounding landscapes that help mitigate the environmental, economic, and social impacts of buildings, so that they are energy efficient, sustainable, safe, cost-effective, accessible, healthy, and productive" is noble and fulfills a public good. The legislation is poorly served by the misleading and inaccurate testimony of its supporters and its misuse of LEED-certification without an appropriate and identifiable method of modification and appeal needlessly antagonizes a natural constituency.

Proposed Revisions to the D.C. Green Building Act Performance Bond

I am very excited for an event taking place today:  the Public Oversight Roundtable on Green Building Practices hosted by the Council of D.C. Committee on Government Operations and the Environment. 

As you may recall, Green Building Law Update has repeatedly discussed the "performance bond" requirement of the D.C. Green Building Act .  As currently written, the D.C. Green Building Act, starting in 2012, will require a performance bond as a guarantee the private development projects will achieve LEED certification. 

Last week, I wrote that no bond, security or insurance instruments exist to guarantee LEED certification.  I have never liked pointing out problems without also providing a solution.  Today, at the Roundtable, I will be speaking about problems with the performance bond and highlighting two potential solutions:

(1) "Financial security" in the form of a fee if a project fails to achieve LEED certification; or
(2) a "D.C. Feebate" similar to Portland's feebate system

In order to crystallize these solutions, I wrote a white paper discussing this complex issue and potential solutions.  You can download "White Paper:  Revisions to Performance Bond Requirement of the D.C. Green Building Act" or read the white paper in its entirety after the jump. 

If you have any critiques or suggestions, please do not hesitate to share. 

Photo:  Echo9er

White Paper:  Revisions to Performance Bond Requirement of the D.C. Green Building Act

Chris Cheatham, Esq., LEED AP

On March 8, 2007, Washington D.C.’s Green Building Act went into effect.  With this Act, D.C. became the first major U.S. city to require LEED certification for private projects.  The key to any regulation mandating LEED certification is the enforcement mechanism.  As currently written, the Act requires that “commercial applicants”  post a “performance bond” that serves as a guarantee of LEED certification.  The “performance bond” requirement is problematic because no security or bond instrument has been created to guarantee LEED certification.  Two options will be proposed for replacing the “performance bond” requirement:  (1) financial security; or (2) a D.C. Feebate.  

I.  The Act’s “Performance Bond” Requirement

Under Washington D.C.’s Green Building Act of 2006, after January 1, 2012, non-residential, privately-owned buildings 50,000 square feet or greater must fulfill or exceed LEED for New Construction 2.2 or LEED Core and Shell 2.0 standard at certification level.   Importantly, the Green Building Act also requires “commercial applicants” who must comply with the LEED certification requirement to also submit a “performance bond.”  If the building fails to meet the LEED certification requirements, “all or part of the performance bond shall be forfeited to the District.”

Unfortunately, as written, compliance with the performance bond requirement of the Green Building Act will be extremely difficult, if not impossible for commercial applicants.  There are two reasons why compliance will be a problem.  First, a “performance bond” is not a security instrument used to ensure compliance with a regulation.  Suretyship is a “contractual relationship whereby one person engages to be answerable for the debt or default of another.”   In terms of a performance bond, a surety agrees to guarantee satisfactory completion of a construction project by a contractor.  If the contractor fails to build according to the plans and specifications, the surety must (1) complete the project; or (2) allow the owner to complete and the surety then pays the related costs to complete. 
The D.C. Green Building Act’s “performance bond” is, instead, a guarantee that the project will achieve LEED certification.  

There is no bond or security instrument that can be substituted for the “performance bond” requirement.  During my review of the Green Building Act performance bond requirement, I spoke with international sureties, the Surety and Fidelity Association of America, the National Association of Bond Producers and bond brokers.  The individuals I spoke with knew of no bond instrument that exists which could be substituted for the “performance bond” requirement.  

Additionally, as part of my work for Green Building Law Update, I have closely monitored major green building regulations.  To my knowledge, no municipality has successfully required a “bond” as a guarantee of certification.  Interestingly, Arlington County, through its bonus density program, requires “financial security (in the form of a bond or letter of credit or other form approved by the County Attorney)” as a guarantee that LEED certification will be obtained.  To date, two developers have had to comply with the Arlington County “financial security” requirement.  A copy of one “financial security” was obtained from Arlington County and clearly is a letter of credit.

II.  Enforcement Mechanism Options

There are two options for replacing the “performance bond” requirement with a new enforcement mechanism.  The first option is to replace “performance bond” with “financial security.”  Under Sec. 6 (c) of the D.C. Green Building Act, two alternative instruments are permitted in lieu of a performance bond:  a letter of credit or cash in escrow.  Thus, if “performance bond” was replaced with “financial security,” then “financial security” can be defined as an “irrevocable letter of credit from a financial institution authorized to do business in the District or evidence of cash deposited in an escrow account in a financial institution in the District in the name of the licensee and the District.”  Additionally, (c) under Sec. 6 can be struck under the proposed rule.

While creating a “financial security” requirement is the easy answer, it may not be the best solution.  Recent economic turmoil has created financing and cash flow problems for many developers.  As a result, it may be extremely difficult and burdensome for developers to provide letters of credit or escrow in amounts up to $3,000,000 (the maximum requirement under the Green Building Act). For comparison, under the current “performance bond” requirement, a developer of a 72,500 square feet privately owned nonresidential building that costs $28,000,000 would be responsible for a $560,000 “financial security” or “performance bond.”

The second option is to replace “Sec. 6 Performance Bond” with a new enforcement mechanism:  the Feebate.  Portland, Oregon is currently in the final stages of implementing a Feebate green building regulation.  Essentially, under the Portland Feebate, projects that do not achieve LEED certification are charged a fee.  The proposed fee will be in the range of $0.51 to $1.03 per square feet.  If a project achieves LEED Silver certification and implements specific green building strategies, the fee is waived.  If a project achieves LEED Gold or Platinum certification and implements specific green building strategies, the project receives a rebate that increases with the level of certification.

A Feebate properly incorporated into the D.C. Green Building Act would resolve two problems.  First, the Portland Feebate fee amount is less onerous then the current “performance bond” fee.  For comparison, under Portland’s proposed fee structure, a developer of a 72,500 square feet privately owned nonresidential building that costs $28,000,000 would be responsible for a fee between $36,975 and $74,675.  

Additionally, a Feebate would contribute directly to green building development.  An additional criticism of the current “performance bond” requirement is that the enforcement mechanism creates an inherent conflict of interest because those that would determine forfeiture of bonds would also directly benefit from the forfeiture.  If forfeited, performance bond funds are to be “deposited in the Green Building Fund.”  Under Sec. 8 of the Act, the Green Building Fund is to be used, in part, for “staffing and operating costs to provide technical assistance, plan review, and inspections and monitoring of green buildings.”  If Green Building Funds are used strictly for the Feebate, or even for a combination of the Feebate and education purposes, the conflict of interest will be eliminated.  

III.  Conclusion

The D.C. Council should be commended for the forward-thinking Green Building Act.  By simply passing this important Act, D.C. has become a leader in the green building industry.  As stricter requirements are phased in over the coming years, certain revisions are necessary to ensure a smooth transition for D.C. and the green building industry.  The D.C. Green Building Act’s “performance bond” requirement, as written, is unworkable.  Simply put, this type of security instrument does not exist and will not exist for some time, if at all.  There are two alternative options:  (1) “financial security” or (2) a Feebate system.  The latter option is preferable because it is less onerous on developers, will lead to more green buildings and removes the inherent conflict of interest in the current regulation.

If you have any questions, I am available to speak on this very important issue.  Thank you for your consideration.

Chris Cheatham, Esq., LEED AP
W: 703-749 1056
C:  202-553 3181
Email:  ccheatha@wthf.com
Website:  www.greenbuildinglawupdate.com

The Green Building Unicorn

I have been working with the D.C. City Council recently on revisions to the D.C. Green Building Act of 2007.  In particular, I have been looking for an enforcement mechanism that can be used to ensure compliance with LEED certification requirements for commercial buildings.  The problem is that the current Green Building Act requires a "performance bond" to guarantee certification.  Green Building Law Update has covered the issued extensively and you can read more about it here
 
My research has led me to one conclusion:
 
A security instrument guaranteeing LEED certification is the unicorn of the green building industry. 
 
Seriously. 
 
First, and most importantly, unicorns are mythical creatures.  A security instrument that guarantees green building certification is also a mythical creature. 
 
Let me make this clear: no bond or insurance instrument has been created that guarantees green certification.  This type of security instrument does not exist.  I have discussed the issue with sureties, surety industry groups, insurance companies and insurance brokers.  None of them know of a security instrument that guarantees green building certification.
 
You know what?  Everyone would love to have a unicorn (maybe not, but bear with me).  Similarly, everyone would love for a security instrument to exist that guarantees green building certification.  This instrument could be used in the hundreds of states and localities implementing green building regulations and the innumerable residential and commercial green building contracts being signed nationwide.  Unfortunately, this instrument does not exist and is years away from being developed. 
 
So if you are drafting a green building regulation, do not include the word "bond," "security" or "insurance" as an enforcement mechanism for a green certification guarantee.  You might as well just include the word "unicorn." 

Photo:  Martyn and Debz

D.C. Council Delivers Present to Surety Industry

Here at Green Building Law Update, sometimes we wonder if we are just talking to our parents and significant other.  Then we get a comment or a great email from one of our readers and we realize someone is actually paying attention.  With that said, what happened this past week in the green building industry astounded and amazed Green Building Law Update.  

Earlier in the week, your humble author presented a seminar “Green Building Law from a Surety’s Perspective” to a client.  Just prior to the seminar, an article was published in the Washington Business Journal that highlighted the D.C. Green Building Act of 2006 performance bond requirement.  The first few paragraphs were sent to me but I didn’t have time to review the full article before the presentation. 

You may recall that this performance bond requirement drew the ire of the Surety and Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP) and Green Building Law Update.  When I first read the performance bond requirement, I literally gasped out loud and realized the green building industry may have some serious legal problems in the very near future.  Basically, the D.C. Council was demanding an insurance instrument that didn’t exist.

During the presentation to the surety client this past week, I highlighted the D.C. Green Building Act performance bond requirement as an enforcement regulation that was going to cause the surety industry problems.  After the presentation, I returned to my office and attempted to unbury myself from hundreds of emails.  With time on my hands, I opened the full version of the Washington Business Journal article and, once again, gasped out loud when I read the following paragraph:

Both trade groups, as well as the Surety and Fidelity Association of America, have met with D.C. officials to air their concerns, one of the first challenges to legislation that is among the first of its kind nationwide.

Alan Heymann, a spokesman for the D.C. Department of the Environment, said his agency has formed a working group with the Department of Consumer and Regulatory Affairs to address the surety industry’s concerns. Both agencies are tasked with implementing parts of the act.

Green Building Law Update is not taking credit for the D.C. Council’s reconsideration of the green building performance bond requirement.  But after writing numerous articles, posts and having discussions with the D.C. Council, I would like to think I played some small part in effecting change. 

Congratulations to the D.C. Council for taking steps to remedy what could have been a problematic regulation.  Congratulations to the SFAA and NASBP for pointing out this problematic provision.  Congratulations to the green building attorneys writing about these issues and helping the green building industry avoid legal problems. 

Of course, there are going to be more green building legal problems.  Green Building Law Update is excited about discussing these issues in 2009 and, hopefully, effecting more change.  

Related Links: