Levi Reilly, PE, LEED AP
The first green lawsuit associated with lost tax incentives was filed in Maryland, and subsequently settled out of court in 2007. Insurance providers are rolling out specific programs to cover green real estate projects including coverage for failed green products, unrealized tax credits, cost premiums to rebuild green after a loss event, and adverse publicity for green projects.
Over the past few years we’ve all heard about the benefits of building green, but with new regulation and financial incentives driving green buildings, it’s important for owners to understand the risks of building green.
RECENT REGULATION
Many communities across the country are mandating green buildings in the permitting process or implementing financial incentives for green buildings. Regardless of whether these programs are permitting or incentive-based, we are seeing a paradigm shift within sustainable design from a voluntary effort to a regulatory/incentive driven process.
One of the communities that is pushing for a financial incentive program is Portland, OR. The city is proposing a feebates program for new real estate projects. The feebates model requires developers of conventional buildings to contribute money to a fund, while developers of green buildings are allowed to withdraw money from the same fund. The amount of money available for withdrawal is dependent on the level of green building achieved by the developer.
Closer to home, the Massachusetts Department of Public Heath (DPH) recently enacted regulation requiring new healthcare facilities to build green. The program is similar to Article 80 in the City of Boston, which requires large projects to meet LEED Silver standards.
Through both permitting and financial incentives, the stakes associated with green design are increasing, and owners and developers will need to be more aware of the risks associated with building green.
GREEN COST PREMIUMS
The risk that receives the most attention in building green is the undefined cost premiums. Numerous studies have been devoted to quantifying the cost impacts of building green, most of which focus on Leadership in Energy and Environmental Design (LEED) certified project. The case studies performed by Leggat McCall Properties indicate the lowest level of LEED certifications typically adds 1% of the total construction cost to a commercial project in the greater Boston area. The cost premiums nearly double for each subsequent achievement threshold: 2% for Silver, 4% for Gold, and 8% for Platinum.
These estimated percentages may change slightly this year as the LEED system undergoes an upgrade to LEED 2009. LEED 2009 places more emphasis on energy performance and selection of urban sites close to mass transit. The new emphasis on urban sites may result in larger LEED cost premiums for suburban projects. Urban developments will likely continue to see cost premiums similar to the current rating system.
The best way to minimize green cost premiums is to make the decisions to go green early in the project design. Green premiums are dependent on the type of project but one observation is consistent: green is cheaper when integrated early in the design process.
NEW GREEN COMPANIES AND PRODUCTS
In order to meet the demand for green buildings, numerous startups have flooded the market offering materials and technologies tailored to green buildings. Many of these new green products have little or no track record, posing increased risk for owners. Construction trades may be unfamiliar with how to correctly install the product, or it may be unclear how this product will interact with other construction materials. If the products fail down the road, there is a risk that the new startup will no longer be in business to stand behind their guarantee. Additionally, the maintenance personal may not be able to correctly maintain or operate the unfamiliar products.
Owners should engage experienced design and construction management teams and encourage the teams to perform due-diligence when using new companies and products.
ADVERSE GREEN PUBLICITY
The ability to achieve a successful green building places responsibility on multiple parties including the designer, the contractor, the subcontractors, the material suppliers, and often third party reviewers, such as LEED. Due to the diversification of responsibilities, ownership should be careful about committing externally to a specific level of green building.
If any of the abovementioned players drops the ball, and the specific level of green building is not obtained, there is the potential for adverse publicity. Whether statements were made to potential buyers, or local community organizations the failure to live up to these green expectation can impact the success of the project. Before stating green achievement goals, owners should consult with their design teams to understand the implications, and whenever possible, permits and sales should not be contingent on a specific green threshold.
There are risks associated with building green, but these risks can be mitigated by consulting with experienced professional early in the project conception to understand the cost premiums, and by integrating green early in the design phase. Consultants should be encouraged to perform in-depth due-diligence on new products and technologies, and owners/developers should avoid structuring any permits or sales on specific green achievement levels.
— Levi Reilly, PE, LEED AP, is a project manager at Leggat McCall Properties in Boston.