DEMAND
New construction in many sectors has ground to a halt so, at some level, the demand for green building is suffering along with the rest of the industry, but the practical benefits of energy efficient design still hold true. “I think what we’re starting to see at Jones Lang LaSalle and with our clients is that owners are not necessarily focused on ‘green’ as the right thing to do but from a financial perspective,” Savitsky says. As green design gained traction, the demand for measurement of cost savings, energy savings and other benefits quickly followed. Given that green design is having a positive effect on operating costs, building owners continue to pursue green strategies, either formally or informally, in new construction as well as renovation work.

“We’re definitely seeing fewer projects, but I can’t really say that we discern a trend that sustainability has been deleted in order to reduce cost,” Nall points out. “If they have financing to do a project, then we see just as strong a trend toward incorporating sustainability as we saw previously.”

The growing availability of sustainable materials has an important impact on the success of green building, Nall says. Alternative building materials and energy efficient architectural features have become standard in the industry, and their increased availability makes these methods more cost-effective for a project. Education and the dissemination of information on green practices have become increasingly widespread. “Designers, engineers and architects are really learning how to do this, how to achieve the results more economically. And certainly with respect to materials, it is almost assumed that materials will have the appropriate safety and environmental characteristics. I can’t see anyone buying into what was used before,” Nall says.

Savitsky points out that perception among tenants has a major impact on the success of green design. Where an effort is made to educate tenants on the benefits and new methods associated with green design, Savitsky notices greater appreciation and satisfaction. “There’s a placebo effect where you know you are in a green building so you are going to feel better.” That value is difficult to measure, Savitsky points out, but an important component in demand.

COSTS: WHO PAYS THE PREMIUMS?
Perhaps the greatest challenge to the development of green building is the distribution of cost. The question is, what are tenants willing to pay? When the market was thriving, the demand seemed sufficient to cover any increase in cost but, as Savitsky points out, “When you put pen to paper, what we were finding with our brokers was maybe a 10% premium, maybe less.”

Now the market is geared toward using LEED certification by the U.S. Green Building Council (USGBC) as a means to attract tenants, with or without passing rent premiums or cost savings on to tenants. Nall has been working with organizations and associations concerned with incenting both owners and tenants to pursue the energy savings promulgated by sustainable design. According to Nall, on the one hand, many leases offer the landlord no route of capital recovery for energy efficiency improvements. On the other hand, tenants rarely have any incentive to curb their use of resources or monitor behavior in a space. Nall and others are searching for ways to bridge that gap.

One tactic is negotiating leases whereby tenants can reduce the cost of occupancy through their own upgrades such as LED lamps. But the challenge is anything but simple, Nall admits. “It is really difficult to say what tenants are willing to pay for, because it’s not clear what they are actually paying for.”

Often overlooked in the buzz about energy efficiency is the high cost of water and sewage. Savitsky suggests this may be the gateway to seeing real and immediate cost savings in building operating expenses. “The cost of water and sewer has gone up tremendously over the last decade and in the last year it went up another 13 percent,” Savitsky points out. “I can make a few changes to my water usage and see immediate savings—that puts things in personal terms.”

Another challenge in realizing and measuring savings, according to Nall, is that many costs of operation are externalized—the new generators, substations and treatment plants that have to be built to support a building and that are ultimately paid for by the utilities’ customers. Nall believes that imposing regulations on energy and water use is the best bet for universal savings. “Every additional increase in demand that a new project is going to require is money out of everyone else’s pockets, so we are all paying for it; we ought to have a right to minimize that to a degree that is reasonable,” Nall says.

LEED LEADING THE WAY
With the USGBC’s Leadership in Energy and Environmental Design serving as the dominant measurement criteria for environmentally sustainable buildings, many owners and developers have come to see LEED as synonymous with ‘green.’ At the same time, LEED certification, or certification at a particular level, is not a given.

“When you say, ‘we are going to go for LEED certification,’ and this becomes part of your PR and your marketing materials, if all of a sudden you don’t achieve it, then what?” Savitsky says. The key is communication throughout every phase of a project. “Everybody has to be at the table, involved in the decisions, participating on a regular basis,” Savitsky warns. “And when I say everybody, I mean the entire project team—the owner, everyone.” As the marketing of LEED certification becomes more prevalent in the industry, and with more and more ambitious projects, coming up short is not an option.

Nall has noticed that some projects are opting out of LEED certification entirely. Nall points to the New York Times headquarters, in which the developers chose not to pursue LEED certification. “They did have an ambitious sustainability program, but it was a program that was tailored entirely to their needs and goals,” Nall says. “They thought that subscribing to LEED would in fact compromise some of the sustainable elements they were trying to achieve.”

As LEED and other sustainable design criteria become more refined, Nall expects LEED certification to demand more follow-up from construction projects. “I think the long term vision of the U.S. Green Building Council is that the initial LEED certification is ultimately going to be sort of a temporary thing,” Nall warns. “So your as-designed certification will not necessarily be permanent if you don’t demonstrate that your building is operating as it was designed to be.” In fact, LEED Version 3.0 requires for the first time ongoing reporting to the USGBC of energy and water usage data for five years after project certification.

A NEW BUILDING STOCK?
Jean Savitsky is confident that higher performing buildings are inevitable. “I think there are still maybe 50 percent of owners who say ‘well, maybe this will go away,’ but it is happening and it is here.” Savitsky and Nall agree, however, that in order for change to occur in all areas of buildings—particularly in existing residential and office buildings—regulations have to be imposed.
Already, Nall is working with the U. S. Green Building Council to extend the LEED standard to data centers and other high equipment density mission critical facilities. He is also working with a committee of the American Society of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE) to develop an energy label system for buildings similar to the system that is now mandatory in the United Kingdom. As the sustainable building industry grows, so too does the complexity of measuring its achievements.

In looking toward the future, Nall anticipates urban life to be the model for sustainable living. “If we are to achieve some sort of a long term accommodation of how to live on this planet in perpetuity rather than depleting its resources as we go along, it’s probably going to be in a very dense fashion with as much undisturbed natural landscape as possible,” Nall says. “We minimize our impact by minimizing the area that we impact.”

As today’s cutting-edge becomes tomorrow’s building and operational standard, Savitsky and Nall are helping their companies and clients navigate a new market with unprecedented challenges. The building trend is poised to turn toward energy and water efficiency and preservation of resources. It looks like sustainable design will set the pace for years to come.

Jones Lang LaSalle

Employing over 30,000 people across 60 countries, Jones Lang LaSalle specializes in real estate management, serving signature New York properties such as the Empire State Building. JLL has interests throughout the real estate industry, providing lease administration, construction consulting and tenant representation among multiple other services across the spectrum of real estate industries, including data centers, government institutions, healthcare facilities, higher education, hotels, logistics and industrial facilities, law firms, non-profit organizations, retail and senior housing.

WSP Flack + Kurtz

WSP Flack + Kurtz is an international leader in engineering, performing mechanical, electrical, plumbing, fire protection, security, information technology and architectural lighting design. Since 1994, WSP Flack + Kurtz has been ranked as one of the world’s top engineering firms in World Architecture. Numerous projects have received awards for excellence, including New York Construction’s Best Healthcare Project, Best Industrial Project, Best Rehabilitation Project and awards of merit for green, educational, office and special projects. WSP Flack + Kurtz has offices across four continents, employing thousands of professionals worldwide.

Patricia A. Harris, LEED AP
Managing Partner
Zetlin & De Chiara LLP

The USGBC introduced LEED Version 3.0 on April 27, 2009. Most interesting, from a legal perspective, is the appearance of the Minimum Program Requirements (MPRs) of LEED 2009. The MPRs are a list of seven requirements with which all projects must conform in order to be eligible for LEED certification:

1. Compliance with Environmental Laws;
2. Must be a Complete, Permanent Building or Space;
3. Must Use a Reasonable Site Boundary;
4. Compliance with Minimum Floor Area Requirements;
5. Compliance with Minimum Occupancy Rates;
6. Commitment to Sharing Energy and Water Usage Data; and
7. Compliance with a Minimum Building Area to Site Area Ratio.

In its publication entitled “LEED 2009 MPR Supplemental Guidance” (Version 1.0, Nov. 2009), the USGBC states that certification may be halted or certification may be revoked if a project is or was in violation of an MPR. The language is silent as to who has standing to challenge or at least compel the USGBC to investigate whether a LEED project is in violation of an MPR, opening the door to a multitude of parties and claims that may cause harm to a building owner or tenant. For myriad reasons, decertification would be a one-way ticket to litigation for many project participants.

One MPR requires that a project comply with all federal, state and local environmental building-related laws. For LEED-CS projects, interior fit-out work conducted by a tenant will be subject to this MPR if the fit-out space contributes to tenant sales and license or lease agreement credits. While it would be difficult to imagine a LEED project not complying with environmental laws, it is important that the project owner take steps to ensure that a tenant that may or may not be vested in the LEED certification is in fact also complying with environmental laws as they pertain to such tenant’s space.

Another MPR requires all certified projects to share with USGBC and/or GBCI, certain energy and water usage data for an operational period of at least five years. This MPR is most troubling from a legal perspective. Reporting could become an issue if a building is sold or transferred during the five-year commitment period or there could be some other inhibition to reporting during that time period. Moreover, failure to report could be grounds for LEED decertification, given the revocation language highlighted above. To the extent this issue is addressed in the MPRs, the USGBC states “GBCI respects the realities of situations in which reasonable efforts to maintain the commitment are not successful. In this situation, the initial building owner will no longer be required to provide the data or access the data.”

The other concern raised by this MPR is what could happen when the data does not bear out the projected energy savings or water reduction required by the credits earned during the initial certification process. While the USGBC is emphatic that this MPR relates to reporting only, one can only assume that it will at some point relate to the achievement of promised results. Conceptually, this may be a good goal for sustainable design, i.e., a rating based on actual results rather than aspirations, but owners and design professionals could be left with a provisional certification, with reputations, financial incentives and insurance policies at risk or long and potentially costly revisions required later.

Carol J. Patterson
Senior Partner
Zetlin & De Chiara LLP

Our firm conducted a roundtable in April of last year, bringing together more than 20 industry experts from a wide variety of professional disciplines to explore their insights on how New York City owners, developers and builders will adopt sustainable construction and energy conservation practices. All agreed the time is now. The question: who will pay for it?

During the past few years, there has been much reform of New York’s outdated building regulations, codes and administrative procedures, along with both the imposition of and proposals for new regulations that would begin to improve the energy use and efficiency of the City.

Because so much of the New York inventory is in existing buildings, dealing with the issue of carbon output requires looking beyond new construction. It is widely known that existing buildings absorb much of our energy consumption. Unless we retrofit existing building stock, we will continue a longstanding practice of using energy at alarming rates.

UPGRADING NEW YORK’S INFRASTRUCTURE

Many roundtable participants agreed that sustainability will become part of ‘good architectural design’ rather than a separate characteristic. The construction industry is taking that into consideration when reviewing the numerous opportunities for upgrading New York’s utility infrastructure.

The electrical distribution network can be greatly improved by the appropriate application of distributed generation technologies. Energy efficiency can be improved by capturing the wasted heat from power generation for use in buildings for domestic hot water, space heating and cooling. Local treatment of sewage can also provide a non-potable water resource for cooling tower make-up, flushing, exterior housekeeping and other non-potable uses that would greatly relieve the pressure on the New York drinking water supply system. Municipal legislation, regulation and funding must evolve to help New York capture these opportunities.

In addition, new construction and product technologies (such as BIM) will continue to require even greater technical competency from design firms, and firms must be open to adopting these advances.

CHANGE IN MENTALITY

There is a perceived added cost to sustainable building, in the form of greater up-front expenditures, which makes clients balk initially, when, in reality, operating costs are significantly lower for green buildings. “Buildings are designed to last for at least 50 years, but the payback period in energy savings for building green is realized within the first five to seven years,” said Nancy Goshow, President of Goshow Architects, the largest women-owned architecture firm in New York City. “There are already pioneering examples of how green buildings can protect the environment, add to the quality of life and save money in the long run.”

Dana Schneider, Northeast Market Lead for Sustainability Services at Jones Lang LaSalle, agreed. “It will soon be a matter of course that environmental responsibility and the highest standards of energy and sustainability performance will be taken into account when we design new projects and retrofit existing buildings,” she said. Out of necessity caused by global warming and limited resources, she said, there will be a mandate to be more responsible in how we build and occupy our buildings.

RECESSION VS. SUSTAINABILITY

The construction industry continues seeing typical changes for a recession: fewer contracts in commercial and residential markets and lenders less willing to fund new projects and change order work on projects that are underway. This hesitation has led to a substantial slowdown throughout the construction industry. In this challenging time, much of the work that is moving forward relates to sustainability, which is a recurring theme from coast to coast.

Dan Kaplan, Senior Partner at FXFowle Architects, agrees. “Everyone is bemoaning the state of affairs and re-gearing to understand what the next few years will be like,” he said. “Government and the public sector are voicing strong, specific requirements for a baseline of sustainability; in terms of the pure private sector, there is a macro-wave of sustainable consciousness.” It seemed to the roundtable participants that the biggest question is no longer, “Is your building green?” but “HOW GREEN is your building?”

Ray Quartararo, International Director & Program Lead at Jones Lang LaSalle, who is responsible for the sustainable and transparent retrofitting of the Empire State Building, said that although there is presently very little data to demonstrate that LEED and sustainable buildings have generated higher sale values or rental values, he intuitively believes that there will be soon, as demand will ultimately drive prices up. This increasing demand is becoming readily visible even in the midst of a financial crisis. “Even in a recession, on the list of significant issues for major tenants, sustainability has gone from being number 18 or 20 five years ago to number 1, 2 or 3 on the list today,” he said.

Ron Bowman, Executive Vice President of Tishman Technologies Corporation, acknowledged that sustainability and energy are taking a greater role in today’s construction industry. “The energy conservation methods are target-rich and the cost and barriers to entry are far lower, so you can almost do this as a good citizen,” he said. “If you believe that energy is the new IT or ‘ET,’ then you can finance anything out the door for energy conservation. Energy creation, on the other hand, requires a more sophisticated lender. These lenders or energy banks are currently in short supply.”

The participants were largely in agreement that even in this time of economic challenge, there continue to be efforts to move forward toward a more sustainable future.

Kyle Hendrickson, Esq.
Associate
Zetlin & De Chiara LLP

Across the United States and around the world governments are imposing requirements on the private sector in an attempt to reduce carbon emissions and combat global warming. As part of this broader push, New York City recently enacted legislation aimed at reducing the amount of energy used by buildings by increasing energy efficiency. Federal legislation relating to building codes, retrofiting and labeling energy efficient buildings is pending in the U.S. Senate.These newly enacted laws have the potential to impose substantial expense and responsibilities upon building owners.

NEW YORK CITY LEGISLATION
Local Law 22 of 2008 mandates that New York City reduce its greenhouse gas emissions by 30 percent below 2005 levels by 2030. Because buildings have been estimated to account for approximately 80 percent of the greenhouse gas emissions of the City, on December 28, 2009 New York City enacted four new local laws that aim to curb these emissions and move the City towards compliance with the mandate of Local Law 22. Specifically, this legislation adopts the New York City Energy Conservation Code for all new construction and renovations, and requires, for existing buildings larger than 50,000 square feet, energy audits and optimization of existing building systems, upgrades to lighting, sub-metering of tenant spaces and energy and water use benchmarking.

NEW YORK CITY ENERGY CONSERVATION CODE
The New York City Energy Conservation Code (the “Energy Conservation Code”) sets standards for energy performance that apply to the design, construction, renovation and alteration of most buildings in New York City. Importantly, all additions, alterations, renovations and repairs are required to conform to the requirements of the Energy Conservation Code regardless of the percentage of the building or the building’s systems affected. In contrast, the New York State Energy Conservation Construction Code, from which the Energy Conservation Code was derived, only applies when an alteration leads to the replacement of at least 50 percent of a building’s systems.

To ensure compliance with the Energy Conservation Code, all building permit applications are required to include (i) a signed and sealed statement by a design professional or lead energy professional for the project that the plans and specifications are in conformance with the Energy Conservation Code, (ii) an energy analysis, which must demonstrate how the project design complies with the Energy Conservation Code and include for new buildings analysis of the envelope, mechanical, service water heating, and lighting and power systems or for alteration projects, a comparison of the proposed design to the prescriptive requirements of the Energy Conservation Code for building alteration projects, and (iii) the approved construction drawings for the project demonstrating conformance of the drawings with the energy analysis for every affected building system and with the other mandatory requirements of the Energy Conservation Code such as mechanical and lighting systems controls. Additionally, under the New York City Administrative Code, all construction documents are required to provide detailed drawings of all architectural elements of the building showing compliance with the Energy Conservation Code as well as a certification that the design complies with the Energy Conservation Code.

LIGHTING RETROFITS 
AND SUB-METERING
The new local laws mandate that all lighting in buildings larger than 50,000 square feet, with limited exceptions, be updated to comply with the standards for new lighting systems in the Energy Conservation Code by January 1, 2025. However, no upgrades are required for lighting systems (i) that are in compliance with Energy Conservation Code as of July 1, 2010, (ii) within dwelling units classified as R-2 or R-3 (i.e., apartments) under the 2008 Building Code and spaces serving the dwelling units such as hallways, or (iii) within houses of worship. Upgrades are to include lighting controls (interior lighting controls, light reduction controls and automatic lighting shutoffs), tandem wiring, exit signs, interior lighting power requirements, and exterior lighting. Finally, building owners must file a report by January 1, 2025, prepared by a registered design professional or licensed master electrician certifying that the upgrades have been completed.

In addition, in buildings larger than 50,000 square feet, with limited exceptions, separate electrical sub-meters are to be installed in all tenant space of 10,000 square feet or more let to the same person prior to January 1, 2025. Tenant spaces smaller than 10,000 square feet may share an electrical meter with other tenant spaces on the same floor of the building. The owner of each building covered under this law must file a report by January 1, 2025 prepared by a registered design professional or licensed master electrician certifying that sub-meters have been installed as required by the law. Further, the building owner is to provide to every tenant with a separate sub-meter a monthly statement showing (i) the amount of electricity measured by the sub-meter for the month, and (ii) the amount charged to the tenant for electricity.

ENERGY AND WATER USE BENCHMARKING
Under the newly enacted laws owners of buildings larger than 50,000 square feet with limited exceptions, are required to benchmark the total use of energy (electricity, natural gas, fuel oil and steam) for each building by May 1 of each year. Owners are also required to benchmark the total water use for each building by May 1 of each year, beginning in 2011, but only if a building has been equipped with automatic meter reading equipment for the entirety of the previous calendar year. An owner can comply with its obligation by uploading the energy and water use information to an internet-based database developed by the United States Environmental Projection Agency. Where tenants are separately metered, a building owner will be required to obtain and tenants will be required to provide the tenant’s energy and water use information.

After being uploaded and following an initial period of non-disclosure, the energy use information will be made available to the public. The information may include the following (i) the energy utilization index (energy use per square foot), (ii) water use per square foot, (iii) a rating that compares the energy and water use to that of similar buildings, and (iv) a comparison of data across calendar years for each year benchmarking is available. This publicly available information would enable property owners to learn the relative energy efficiency of their buildings in comparison to other similar buildings, and encourage the overall environmental performance of these large buildings.

AUDITS AND RETROFITS
The new local laws require that owners of buildings larger than 50,000 square feet with limited exceptions file Energy Efficiency Reports every ten years. The first Energy Efficiency Report is to be filed in the calendar year with a final digit that is the same as the last digit of the building’s tax block number beginning with the year 2013. Prior to filing the Energy Efficiency Report an owner must conduct an energy audit and must perform retro-commissioning measures on the building. A report on the energy audit and a report on the retro-commissioning are to be included in the Energy Efficiency Report.

The required energy audit must cover the base building systems and must identify: (i) all reasonable measures, including capital improvements, that would reduce energy use and operating cost; (ii) the annual energy savings for each measure, the cost to implement each measure, and the expected number of years it will take to recoup, through energy savings, the costs to implement each measure; (iii) the building’s benchmarking output; (iv) a breakdown of energy use by system and predicted savings; and (v) an assessment of how energy use within tenant spaces impacts the energy consumption of the base building systems. Base building systems are the systems of a building that use energy or impact energy consumption including the building envelope, HVAC systems, conveying systems, hot water systems and electrical and lighting systems. The energy audit must be performed by or under the supervision of an “energy auditor.”

An energy audit is not required if, as certified by a registered design professional: (i) the building has received an EPA Energy Star label for two of the three years prior to filing the Energy Efficiency Report; (ii) the building’s energy performance, according to the LEED 2009 rating system is at least 25 points better than the average of similar buildings over a two-year period within the three years prior to filing the Energy Efficiency Report; or (iii) the building has been certified under the LEED 2009 rating system. For buildings with limited or no central chilled water system or cooling system, an energy audit is not required for the first Energy Efficiency Report if the building is in compliance with six of the following: (i) each dwelling unit has individual thermostats for heating or, if the building has a central heating system, ten percent of the building’s dwelling units have temperature sensors; (ii) common area and exterior lighting comply with the Energy Conservation Code in effect on July 1, 2010; (iii) all faucets and showerheads are low flow per the New York City Plumbing Code in effect on July 1, 2010; (iv) exposed piping is insulated in compliance with the Energy Conservation Code in effect on July 1, 2010; (v) all domestic hot water tanks are insulated with a minimum insulation value of R-8; (vi) all common area clothes washing machines are front loading; and/or (vii) the roof is a “cool roof” per the New York City Building Code in effect on July 1, 2010.

Retro-commissioning must also be performed on the base building systems. Retro-commissioning requires building owners to repair defects, clean, adjust valves, sensors, controls or programmed settings, and/or change operational practices in base building systems in order to optimize the energy efficiency of existing bases building systems. Retro-commissioning must be performed by or under the supervision of a “retro-commissioning agent.”

FEDERAL LEGISLATION
On June 26, 2009, the House of Representatives passed the American Clean Energy and Security Act of 2009 (H.R. 2454) (“ACESA”). Title II of ACESA, described as “comprehensive energy legislation,” addresses energy efficiency with Subtitle A focusing on energy efficiency programs for buildings. Subtitle A addresses, among other things (i) energy efficiency building codes, (ii) retrofitting buildings for increased energy efficiency, and (iii) energy performance labeling for buildings. The ACESA is currently up for consideration by the Senate.

SEC. 201. GREATER ENERGY EFFICIENCY IN BUILDING CODES
Pursuant to Section 201 of the ACESA, the Secretary of Energy would establish national energy efficiency building codes. Within one year of the creation of a national building code, states would be required to demonstrate that they have updated their building codes to meet or exceed the requirements of the national code, that they have adopted the national code, or that 80 percent of each state’s urban populations have adopted the national code or updated their building codes to equal or exceed the national code. If a state has not updated its building code or its local governments have not provided the appropriate certification, the national building code would apply.

Within two years of enactment of a new national energy efficiency code, states would be required to demonstrate compliance with the new code or that the state has been making “significant progress” towards compliance with the new code. Non-complying states would be ineligible for federal funds to be allocated under this Section of the ACESA as well as for a portion of all funding under the ACESA. The penalty for non-compliance would increase for each year of non-compliance. Section 201 of the ACESA also authorizes direct enforcement of the new energy efficiency codes. The ACESA specifically provides that where a state and its local governments “fail to enforce” the applicable state or national energy efficiency building code, the Secretary of Energy would be required to enforce the codes. The Secretary of Energy is to establish enforcement procedures that include penalties applicable to violators of the energy efficiency codes.

BUILDING RETROFIT PROGRAM
Pursuant to Section 202 of the ACESA, the Administrator of the EPA would develop and implement standards for a national building retrofit policy designated Retrofit for Energy Performance (“REEP”). Under the REEP program, the Administrator of the EPA would implement a program to retrofit existing buildings for cost-effective energy efficiency. The REEP program would be administered by the states and would provide economic incentives to building owners to retrofit their buildings for increased energy efficiency. The incentives, which would increase in proportion with the improvement in energy efficiency obtained, would not be allowed to exceed more than 50 percent of the total cost to retrofit the building.

BUILDING ENERGY PERFORMANCE LABELING PROGRAM
Under Section 204 of the ACESA, the Secretary of Energy would establish a building energy performance labeling program for the residential and commercial sectors. The label is to display achieved performance and designed performance data for the buildings. The information on the label will then be made available to owners, lenders, tenants, occupants and other interested parties so as to increase the public’s knowledge of a building’s energy performance.

CONCLUSION
The recently enacted New York City local laws and the pending ACESA mandate increased energy efficiency for buildings in order to reduce greenhouse gas emissions and combat global warming. While compliance with these laws is expected to result in reduced energy expenses through increased energy efficiency, such savings may come at the expense of the imposition of significant costs and legal responsibilities on building owners.

Lori Samet Schwarz, Esq.
Partner
Zetlin & De Chiara LLP

Incorporating sustainable working conditions into commercial buildings has presented a new spate of lease issues for landlords and tenants alike. Both landlord and tenant must approach lease negotiations with an awareness of the costs and benefits that a green lease will bestow on each party. While the landlord seeks to recoup its investment in sustainable practices through higher rents or lower operating costs, the tenant also endeavors to realize at least part of the tangible financial rewards in addition to the benefits of a healthier working environment.

In order to negotiate a lease that emphasizes sustainability, the landlord should develop an environmental management plan (EMP) that outlines the landlord’s goals and how those goals will be achieved and monitored on an ongoing basis. The landlord may wish to engage its own design professional to create uniform guidelines that will ensure compliance with sustainability certifications and goals.

The EMP should identify the applicable requirements of governmental agencies on the local and state levels, such as building codes and zoning laws. Additionally, the landlord must determine whether it will meet minimum standards or whether it desires to implement the more stringent requirements legislated in many states to qualify for green tax credits. Regardless of the initial goals, and particularly with long-term leases, the landlord should retain flexibility in the lease language to enable modifications as sustainability requirements continue to develop.

Once the landlord’s program has been established, it should be clearly incorporated in the lease and specifically referenced when identifying the tenant’s obligations in ensuring compliance. This can be achieved by inclusion of a new lease provision or a rider that articulates the landlord’s goals, be it maintenance of an existing certification or the quest for future LEED or Green Globes certification. If the goal is simply implementation of cost-saving and environmentally friendly practices, those specific goals should also be articulated.

Landlords should provide clear system benchmarks to enable prospective tenants to determine whether their practices will enable them to meet these goals. Lease language can also require specific measures such as the use of Energy Star-approved equipment, energy efficient light bulbs, lighting controls, and use of appropriate receptacles to implement recycling or other waste management programs.

Language should be added to standard clauses such as “permitted uses” provisions to contain a representation that the tenant’s use will conform to the landlord’s designated certifications or to the landlord’s sustainability program. Assignment clauses should similarly provide that the landlord can withhold its consent to any proposed assignee/sublessee if that party’s proposed uses would run afoul of these same certifications or goals.

Provisions relating to tenant alterations, an area where landlords already have the ability to exercise a great deal of control, are ripe for revision to ensure compliance with sustainability goals. While tenants often rebuff landlords’ efforts to dictate too many details of their initial fit-out or subsequent alterations, such restrictions can be critical to achieving the EMP’s sustainability goals, particularly where third-party ratings are sought. Depending on the nature and scope of the alterations, the tenant can be required to have its plans reviewed by a Green Globe or LEED Accredited Professional and, after construction, certified for compliance with the landlord’s sustainability goals. Alternatively, the landlord can obtain that review and include the cost as part of the tenant’s alteration allowance.

While sustainability provisions often make a lease more complex, it is important to remember that the goal is to try to foster a spirit of cooperation between the parties and shared pride in the results. Therefore, a landlord should consider including a separate dispute resolution procedure for lease provisions related to sustainability practices and compliance rather than allowing any breach of such a provision to trigger a material default under the lease. However, such an alternative dispute resolution procedure may need to be drafted to carve out an exception where the tenant’s noncompliance threatens to jeopardize the unit or building’s certification or tax credits.

These are just some of the customary lease provisions that will require a makeover to adapt to the changing times. Specific terms will vary based upon factors such as the length of the lease term, square footage, number of tenants in the building, and whether the space is in a new or existing building. Sustainability provisions require careful drafting, given the relative absence of legal precedent interpreting lease obligations. Investment in a thorough EMP with clearly stated goals that can be referenced throughout the lease will enable both parties to benefit from the rewards of a cleaner and healthier work environment.

Also known as ‘privatizing’ or ‘monetizing’ public assets, a P3’s scope can range from simple litter removal at a site to the outright sale of a government transportation asset.

The process has generated considerable controversy on Capitol Hill, with critics claiming that the sale of public assets and privatization of government projects display a lack of concern for the public good. But, according to Michael Della Rocca, President of Halcrow North America, the benefits of P3s have been proven in the global marketplace. Michael Della Rocca sat down with Michael Zetlin to discuss the economy, the condition of public projects, and the light at the end of the tunnel.

Halcrow: An International Perspective
Della Rocca has had considerable experience with P3s.  A London-based multinational firm, Halcrow has been in business for 140 years, working in countries where public-private partnerships are considerably more common. That experience has afforded Della Rocca confidence in the future of P3s, although he admits that convincing state governments to experiment with P3s is a complex challenge. “Many people looking at the U.S. market tend to view it as a single market, which is inappropriate,” Della Rocca says. “It really is 50 distinct markets, each with their own perspective on how the project can be considered. So you need to have a tailored approach, that is unique to the expectations and legal framework in each of those states.”
With funding in the public sector dwindling just as rapidly as in the private sector, many state and municipal government projects are stalled or have been sacrificed in the interest of other priorities. Infrastructure competes with healthcare and education for government dollars, and funding to those programs maybe preserved by diminishing funds thats states have previously allocated to infrastructure. At that point, moving projects forward means raising revenue through taxes or transportation tolls or the allocation of federal stimulus funds.
The success of stimulus packages is inconsistent, Della Rocca points out, as many states and other entities used the most recent tranche of federal funding in lieu of their own dollars, rather than adding federal money to current expenditures and enhancing programs.

“When the funds were first available from the stimulus package, people were hoping that the money spent would go into projects that would generate long term economic benefits,” Della Rocca explains. “The reality of what has happened, at least with this first wave of funding, is the money has been allocated principally to rehabilitation projects, which do serve a purpose in fixing an existing problem but don’t necessarily generate the kind of long term economic returns that infrastructure investment usually does.”

The stimulus money has helped states maintain a holding pattern, Della Rocca says, which preserves existing jobs but doesn’t stimulate growth. Della Rocca admits, “There are examples of programs where major capital investments with long term benefits have received funding, but I think they are more the exception than the rule.”

One such exception was the ARC Tunnel improvement by NJ Transit and The Port Authority of New York and New Jersey, which Della Rocca hails as a “successful” project that was moving along on its own in terms of funding and environmental approvals, but some of that money did go into accelerating its implementation.
For the most part, however, Della Rocca has been disappointed with how the money has been allocated in terms of generating work. Even in a down economy, savvy businesses are striving to take advantage of government priorities to find work. Della Rocca points out that, even though education and healthcare compete with construction projects, school and hospital construction ultimately become a boon to the construction industry as well.

Della Rocca remains confident for P3 progress. “The market here is still maturing. If you look at what happened in the U.K. 10 to 15 years ago, they were in the same position the United States is in right now,” he says. “It took some growing pains to get to the point where it was a commonly accepted approach and delivery mechanism.” One by one, state and local governments are catching up, with states like Virginia and Texas leading the way in procurement and evaluation of unsolicited proposals with sophisticated new mechanisms.
Ultimately, the situation is driven by need. With funds for infrastructure development falling short, Della Rocca predicts P3s will become more common simply out of economic necessity. As the economy continues to struggle, infrastructure as a necessary means to drive the economy becomes more evident, and Della Rocca predicts that need will bring government agencies around to consider alternative funding options.

High-speed rail
“When the President, without any foreshadowing, put into his stimulus package $8 billion to move the high-speed rail program forward in the United States, we were really energized,” Della Rocca says. “When you look at the 11 corridors that have been designated for a potential high-speed rail investment in the United States, we see that as a real growth opportunity for our firm but also for the industry at large.”

Halcrow’s own success with public transportation overseas gives it a unique advantage as U.S. demand for mass transit improvements increases. Again, Della Rocca points to the success of high speed rail in overseas projects, “Most recently, we completed the Channel Tunnel Rail Link in the U.K. It was completed on time, it was completed under budget, and it is the type of high-speed rail technology solution that really advances the state of the art in the industry.”
Sustainable building

Throughout the recession, green and energy efficiency initiatives will result in demand for new sustainable structures, or existing structures will be retrofitted to meet the demands of an economy that can no longer afford massive waste.

Even as the economic crunch is forcing budget cuts, the demand for efficiency and sustainability continues to attract business. This means a higher demand for green buildings and a greater investment in alternative energy, says Della Rocca.
Tenants are now more concerned than ever with LEED-certified buildings, a real marketplace consideration that, as Della Rocca says, is “not just a socially responsible thing to do anymore.” The demand for green building specifications drives a need for energy audits, retrofits for improving the mechanical/electrical systems and façade replacements that improve operating costs. With the capital to build new commercial towers under constraint, retrofits are often the best way for owners and developers to offer a competitive product and compete for tenants.

Technological innovations are driving the market. Alternative energy systems and high efficiency projects are quantified by carbon footprinting, which allows tenants and developers to analyze the effectiveness of green policies. Advanced software makes green construction easier than ever before as services and design elements can be evaluated immediately under industry-standard criteria. The growing demand for green building, paired with the operational savings benefits means a growing marketplace in both public and private projects.

8:00 AM – 8:30 AM
Breakfast & Networking
8:30 AM – 10:30 AM
Panel Discussion

Moderated by:

Lina G. Telese, Esq.
Partner, Zetlin & De Chiara LLP

Featured Speaker:

David J. Burney
Commissioner
NYC Department of Design and Construction

Guest Panelists:

Wendy Feuer
Assistant Commissioner of Urban Design & Art
NYC Department of Transportation

Gale Rothstein
Assistant Vice President
Design Review
Liaison to Public Design Commission
NYC Economic Development Corporation

Anthony Fieldman
Design Principal
Perkins + Will

Greg Pasquarelli
Principal
SHoP Architects

To Register:
contact Whitney Murray at 212.682.6800 or via email at wmurray@zdlaw.com

On September 8, 2009, the Governor of New York signed into law new legislation amending the Construction Contracts Act (the “Act”).  The amendments to the Act (the “Amendments”) expand the number of contracts subject to the Act, convert many of the Act’s default rules into mandatory requirements and provide for expedited arbitration if an owner does not comply. According to the New York State Legislature, these Amendments were needed to “ensure greater enforcement mechanisms are available for employees, contractors and subcontractors.” Additionally, the Amendments were deemed “necessary to ensure that payments required by construction contracts are made in a timely manner.”  While they may ensure prompt payment to contractors, they will limit the flexibility of owners in contracting for construction, alteration or maintenance of their property.

The pre-amendent construction contracts act
Prior to the Amendments, the Act contained a set of default rules for construction contracts that required payment to contractors within a prescribed period of time. The Act applied to contracts for the “construction, reconstruction, alteration, maintenance, moving or demolition of any building, structure or improvement” except for public buildings or structures, “where the aggregate cost of the construction project including all labor, services, materials and equipment to be furnished, equals or exceeds” $250,000. However, the Act did not apply to individual one-, two- or three-family homes, residential tract developments of 150 or fewer one- or two-family homes, residential projects where the aggregate size of the project was 9,000 s.f. or less, public housing projects of fewer than 150 units or projects related to the reconstruction of the World Trade Center.

If a project was subject to its provisions, the original Act created a set of default rules entitling contractors to submit invoices on a monthly basis, at which time an owner was generally required to approve or disapprove the invoice within 12 business days. If approved, the owner was then required to pay the contractor within 30 days.

Regardless of whether the default rules of the Act applied or the parties had agreed to different terms for payment, aggrieved contractors had certain remedies under the original Act that could not be changed by agreement. First, if payment was delayed beyond the established time period, the contractor was entitled to interest on the unpaid balance at the rate of one percent per month (well above the legal rate of nine percent per year statutorily applicable to most contracts in New York). Second, if an owner failed to approve or pay undisputed invoices, the contractor was entitled to suspend performance after providing the owner with written notice and an opportunity to cure.

2009 amendments to the construction contracts act
Although the Amendments do not fundamentally alter the rules for payment set forth in the original Act, they convert many default rules into mandatory requirements, expand the reach of the Act and provide for arbitration as a remedy for non-payment.

The Amendments expand the number of projects subject to this statute.  First, the cost threshold for contracts for construction, alteration or maintenance of structures to which the Act will apply is reduced from $250,000 to $150,000. Second, the threshold number of one- or two-family dwellings in a residential tract development is reduced from 150 to 100.  Third, the size threshold for residential construction projects is reduced from 9,000 s.f. to 4,500 s.f. or less. Fourth, the threshold number of residential units receiving financial assistance from the government is reduced from 150 to 75 units.

The Amendments also convert the default rules regarding payment into mandatory requirements and provide that any contractual provision establishing payment terms which differ from those established in the Act are “void and unenforceable.” Accordingly, all contracts to which the Act applies must now provide for payments on the terms set forth in the Act.

Generally, the Amendments only prohibit contractual provisions that depart from the Act’s payment provisions. Thus, although owners may not negotiate for an extension of time in which to pay contractors after approval of an invoice, owners may negotiate for an extension of the time to approve or disapprove an invoice.

The Amendments also create an additional remedy for contractors for non-payment beyond the interest payment and work suspension remedies contained in the original Act. The Amendments provide for expedited arbitration and describe the procedures to be followed.  Specifically, upon service of written notice that a violation of the Act has occurred, the parties are to attempt to resolve the matter between themselves. If unable to do so, 15 days following delivery of the written notice, “the aggrieved party may refer the matter…to the American Arbitration Association for an expedited arbitration.”  As with the payment provisions, the Act expressly provides that any contractual provision making this expedited arbitration unavailable to any party is “void and unenforceable.”

Conclusion
In short, the Amendments to the Act have significantly limited the latitude of owners entering into certain construction contracts to negotiate the terms of payment to contractors.  While latitude still exists to negotiate for additional time to approve payment applications, owners must be cognizant of the limitations imposed by the Act or they will be caught off guard by the potentially powerful remedy newly granted to contractors to compel compliance through an expedited arbitration procedure.

The current economic climate has changed the landscape of government-funded construction projects. As the demand for experienced contractors and design professionals and the availability of new construction projects have decreased, those in the industry must do what they can to set themselves apart in order to bring in work. For some, that is relatively straightforward, as they can rely on their knowledge and reputation to earn jobs. Others may consider resorting to corrupt tactics when submitting bids, or attempt to obtain or siphon money from a project.

To combat such corruption in government construction projects, Congress enacted the Federal False Claims Act (“FFCA”). The FFCA is a body of law originally passed during the Civil War in response to overcharges and other abuses by defense contractors. Under the FFCA, both the Attorney General and private persons – known as qui tam “relators” or colloquially as “whistleblowers” – may institute civil actions to enforce the FFCA. Congress intended the FFCA to help the government uncover fraud and abuse by unleashing a “posse of ad hoc deputies to uncover and prosecute frauds against the government.”

The first substantial amendments to the FFCA came in 1986. In those amendments, Congress sought to broaden the reach of the FFCA to “enhance the Government’s ability to recover losses sustained as a result of fraud against the Government.” Thus, the FFCA currently enables private litigants to bring actions on behalf of the government against anyone who:

1. Knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;
2. Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government; or
3. Conspires to defraud the Government by getting a false or fraudulent claim allowed or paid.

The success of the FFCA has become evident in recent years. Since being revised in 1986, the federal government has recovered over $21 billion through actions brought under the Act. In fiscal year 2008 alone, the federal government recovered over $1 billion.

In addition to the FFCA, many states have enacted their own versions of a False Claims Act. At least 16 states, including California, Florida and Massachusetts, have adopted versions of the FFCA.

Who Can Bring an Action?

The FFCA authorizes an action to be brought by any “person.” This means that almost any current employee, former employee or even business competitor possessing evidence of fraud, can initiate a civil suit under the FFCA. Importantly, if a claim is brought under the FFCA by a current employee, contractor or agent, certain safeguards are in place to protect him or her. The FFCA specifically protects any employee, contractor or agent who is “discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of employment” when that individual brings an action under the FFCA by allowing recovery of damages from the employer.

There is considerable incentive to institute an FFCA action. If the relator prevails, he or she receives 15 to 25 percent of the government’s total recovery (if the Attorney General joins the lawsuit) or 25 to 30 percent (if the Attorney General declines joining the lawsuit but allows the relator to pursue the lawsuit alone). Between January and September of 2008, relators were awarded approximately $198 million in successful FFCA actions.

Who May Be Liable?

The FFCA allows a wide range of project participants to be found liable. Owners, design professionals, construction managers and contractors have all been found liable under the FFCA. For example, in a recent Nebraska case, the owner of an architectural and engineering firm was ordered to pay the government $460,428 for violating the FFCA. Similarly, a builder was found to have committed 76 FFCA violations when it falsely certified the costs of construction of a low-income housing project.

Basically, anyone in the construction industry who presents a false claim for payment to the government can be liable under the Act. Importantly, the FFCA requires that the defendant know of its wrongdoing, as it prohibits a contractor from “knowingly” presenting a false or fraudulent claim to the government or “knowingly” making a false record or statement to get a false claim paid. However, the Act defines “knowingly” as actual knowledge, deliberate ignorance or reckless disregard. This means that, in some instances, a contractor can be subject to liability under the FFCA even if it did not actually know of the falsity of the claim submitted.

Though it may be hard to imagine how a false claim could be unknowingly submitted, a Pennsylvania Court was recently faced with that very situation. In that case, the Court found that enough evidence existed to allow a case to go to trial where a contractor had submitted reports to the San Francisco Bay Area Transit System that overstated the amounts of money it paid to certain subcontractors. Though the contractor claimed that the report contained only “honest mistakes,” the Court found that the evidence showed that the contractor knew of these mistakes or should have caught them while reviewing the reports prior to their submission.

Contractors Beware

The Department of Justice has had remarkable success in prosecuting claims under the FFCA. In fact, of the cases that the Department of Justice has prosecuted to resolution since the enactment of the Act, it has recovered money approximately 97 percent of the time. This alone is troubling for contractors, and when coupled with the fact that a claim under the FFCA is so easy to allege, contractors encounter treacherous ground.

Though there are many ways to be found liable under the FFCA, there are three examples which demonstrate the most prevalent of those situations.

a. False Representations in the Bidding Process

Any time a party submits a bid for a government contract, it must be mindful of the representations it makes as part of its submissions. If a contractor knowingly makes a false statement in submitting a bid, it could face liability under the FFCA.

In Daewoo Engineering and Constructing Co., Ltd. v. United States, Daewoo, an engineering firm and construction company, entered into a contract with the U.S. Army Corps of Engineers to build a 53-mile road around a tropical island in the North Pacific. Daewoo’s initial bid was $73 million, which was below the government’s original estimate for the project. Daewoo was awarded the project and work ensued. Ultimately, the government brought a claim against Daewoo alleging, in part, violations of the FFCA. Following a 13-week trial, the court found the following actions by Daewoo in submitting its bid to have been fraudulent:

• Submitting a bid identifying a specific individual, who had an excellent reputation in the construction industry and considerable experience to serve as Project Manager on the job, while knowing that the individual was unavailable to work on this project;
• Representing to the government in its bid that it would perform its own earthwork removal, yet accepting bids from subcontractors to perform those services, and failing to disclose the potential use of these subcontractors to the government;
• Representing to the government in its bid that it would work double shifts to perform the earthwork and failing to do so, causing an approximately seven-month delay to the project schedule.

b. Submissions of False Certifications for Payment

Once a party is awarded a government contract, it should check and re-check its certifications for payment. In Lamb Engineering & Construction Co. v. United States, the Department of Energy, the Western Area Power Administration (“WAPA”) and Lamb Engineering & Construction Co. entered into a contract for Lamb to construct an electrical substation in Kingman, Arizona. In the course of performing the contract, Lamb submitted five progress billings to WAPA, the last four of which were supported by attached invoices from subcontractors and suppliers.

Accompanying its submission of at least four of the progress billings were certifications by Lamb that “payments to subcontractors… have been made… and timely payments will be made.” The Court found that the evidence proved that, at the time Lamb submitted its last progress billing and certification, it still owed money to at least one subcontractor and at least 12 vendors on invoices it had attached to earlier progress billings.

The Court further found that Lamb’s submission of certifications averring that payments to subcontractors have been, or will timely be made, to be a false statement made with the aim of securing progress payments from the government, thus violating the FFCA.

c. Submissions of False Certifications of  Compliance

A party must also be sure not to submit false certifications of compliance. In Commercial Contractors, Inc. v. United States, the U.S. Army Corps of Engineers awarded a contract to Commercial Contractors, Inc. (“CCI”) to construct several segments of the Telegraph Canyon Channel in Chula Vista, California, as part of a flood control project. The contract required CCI to excavate the areas in which the channel segments were to be built, to construct the channel segments, and to backfill the excavated areas surrounding the channel segments. The contract contained detailed specifications that governed all aspects of the work to be performed, including drawings indicating the lines to which CCI was required to excavate, quality control standards specifying the hardness that the poured concrete was required to achieve before the supporting forms could be removed, and other provisions specifying the proper composition and required compaction density of the backfill materials.

Ultimately, CCI asserted a claim against the government for additional costs, and the government counterclaimed against CCI, asserting violations of the FFCA and the Contract Dispute Act (CDA). The court determined that CCI violated both the FFCA and the CDA and awarded the government $14,190,161.85 in damages. The court’s judgment rested on its finding that the following submissions by CCI were false or fraudulent:

• Excavating less than the contract drawings required, but submitting cross-sections and quantity surveys indicating that it had excavated up to the contract lines;
• Overstating the amount of backfill it removed from the project;
• Burying debris under and alongside the channel at the project in violation of the terms of the contract, then submitting claims for properly filling the excavated areas and for clearing the excess fill and debris;
• Moving the survey stakes set forth in the contract documents to avoid construction difficulties due to wet ground caused by the tide; and
• Improperly heating concrete test cylinders to precipitate drying time where the contract set forth specific concrete placement methods.

Penalties and Damages for Violating

The FFCA authorizes the Court to impose a civil penalty between $5,000 and $11,000 for each violation. Though a single violation of the FFCA may impose a relatively modest penalty, in situations where a person is found liable for submitting 50 or 60 false claims for payments, the violator could be facing a substantial penalty.

Moreover, this penalty is in addition to any award of damages that may be granted against the violator, and the FFCA allows a person harmed by the false claim to recover triple its damages. For example, if the government incurred $50,000 in damages from a contractor’s submission of falsely certified work, the contractor may be required to pay the government three times its damages or $150,000. In addition, the FFCA allows for the award of reasonable attorney fees and costs to a successful claimant.

Conclusion

In view of the steep penalties and damages that may be imposed for violating the FFCA, a contractor, owner, construction manager or design professional should be petrified of (and strongly deterred from) intentionally or recklessly submitting any type of false claim. In fact, it would be prudent for every company to implement a compliance system to verify that bids and claims are vetted carefully before submission to the agency overseeing the project. In that way, project participants can steer clear of the formidable danger posed by the FFCA.