Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

About a year ago, I wrote a post on the trending topic of LEED revocation or de-certification.  That issue has not gone away ... it actually has been brought to the front page of the news.  The hot topic, recently reported by Stephen, Chris and Doug (...sounds like three men in a tub...), involves the LEED certification received by Northland Pines High School in Eagle River, Wisconsin. 

When the story first began buzzing around the internet last year, I called Larry Spievogel, an independent engineering consultant, who was giving a presentation on "the actions of the designers that led to the first ever decertification of and plaque removal from a LEED Certified project.”  What I learned a year ago was just confirmed by fellow bloggers, as well as another friendly email from Larry.  Here is what Larry sent me:

• The Executive Summary
• December 23, 2008 appeal to USGBC
• Correspondence with USGBC
• January 5, 2010 report of Horizon Engineering Associates
• April 26, 2010 report of Taylor Engineering
• April 27, 2010 letter from USGBC
• North Pines' response to Horizon report
• North Pines' response to Taylor report
• North Pines' statement

I am not going to retell the facts or the procedural background to this dispute (...you can check out the three men in a tub for that ...).  However, since it worked so well for the Spearin Doctrine, here is my Tweet about the LEED certification challenge in less than 140 characters:

Green school built. LEED color gold. Cheddar-heads revolt. GBC-Gods review. LEED challenge tossed. What now? Green atty!

According to representatives for the School, the fundamental allegations in the appeal for the revocation of the LEED certification are that the building did not comply with the mandatory ASHRAE prerequisite standards.  Since these standards are prerequisites to any level of LEED certification, the School argues that even a single instance of non-compliance with the ASHRAE standards provide a sufficient basis to deny certification.

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This guest post was written by Kevin Kaiser of SuretyBonds.com, specializing in teaching consumers about surety bonds through the Surety Bond Education Center.  I do not represent Kevin or his company, nor do I sponsor any of their products.  Kevin has some great things to say about the surety's perspective in green construction, which is particularly timely given the announcement of a recent challenge to a LEED certification in Wisconsin. 

The Green Performance Bond

Green building continues to gain momentum across the country, as project developers and consumers look for ways to incorporate environmental consciousness into everyday life.

Last year, Energy Star homes accounted for almost 20 percent of all new single family construction, up from 12 percent the year before. There’s also greater interest this year in LEED-certified homes and other more involved green-certified standards from the U.S. Green Building Council.

But it isn’t all smooth sailing. In fact, green construction is proving extremely problematic for the surety industry, which ensures that construction projects are completed and in accordance with contracts by issuing bonds.

And until that’s rectified, a nationwide wave of green construction might be on hold.

The Friction

In short, the issue is a performance bond. These are a key part of the normal construction bonding process that guarantee a contractor completes all work up to contract and code.

Surety companies typically scrutinize a contractor’s financial health, expertise, work history and likely ability to perform the job before underwriting a bond. They also look at a given project’s specific contract. Performance bonds are tied to specific, quantifiable goals grounded in industry standards and accepted practices.

That’s why green building performance standards are becoming a significant and mounting problem for surety companies.

To obtain certain green building designations, third parties like the U.S. Green Building Council look for specific levels of energy efficiency and other quantifiable improvements. But most sureties will steer clear of bonding a company with a contract that calls for third-party certification or requires specific energy reductions.

The reasons revolve around risk mitigation and responsibility: Who’s on the hook financially if the building falls to meet those third-party requirements?

“It’s not always the party that has to post the bond that’s responsible for that element of LEED certification,” Bob Duke, director of underwriting and assistant counsel for the District-based Surety and Fidelity Association, told the Washington Business Journal. “Maybe the party posting the bond doesn’t have control of the total obligation.”

Because of those lingering questions, most surety companies will not issue a bond for a contract that calls for any type of green or energy efficiency benchmarks, which are not performance standards but prescriptive requirements.

“In the event that a building fails to perform to a specified level of resource efficiency, should the surety be required to compensate the owner to rebuild the structure?” Mark Rabkin, a risk manager for Althans Insurance Agency, noted in a recent blog post. “That is not what they are in business to do and will not bond contracts guaranteeing efficiency and performance specifications.”

The D.C. Green Building Dilemma

The green performance bond issue has garnered headlines in the last year because of new regulations in Washington, D.C.

The District in 2006 created a green building requirement for certain private and public projects. The regulation basically requires the use of a bond that doesn’t really exist yet — a green performance bond.

Surety companies and associations have lobbied against the new regulations, which take full effect in 2012.

Projects that fail to meet the new green standard would pay claims of up to 4 percent of building costs to a city green building fund. Compounding the situation is a clear conflict of interest: The District agency that maintains the green building fund is the same that can determine whether a project is in compliance with the new regulations.

Last fall, surety claims attorney Bryan M. Seifert addressed the D.C. green building regulation in a piece on Entrepreneur.com:

This type of legislation involves a fundamental misunderstanding of the marketplace, the type of products available in the insurance and surety industry and how those products respond to today's construction needs. Performance bonds typically guarantee the performance of a quantifiable objective. Rather than legislate a performance bond to guarantee a quantifiable goal based on an objective standard for which the bond is written, the District has chosen to legislate a particular prescriptive rating system with attendant unknown risks. The surety product will more likely end up contributing to the District's green building fund and not the sustainable performance objectives of the District's projects.

Owners, stakeholders, contractors, risk managers, insurers and sureties must be keenly aware of the flurry of legislative activity and its implications for their interests. Much of the recent green building legislation is a result of advocacy for intangible outcomes with little analysis given to the overall performance of the public asset and little consideration for the industries that support and sustain the construction process such as insurers and sureties. The D.C. Act is just one of many examples of legislative activity that may have profound and unknown affects on these industries.

Sureties continue to balk at the vague and risky language of this and other proposed green building bonding measures. If that persists, the burden will fall to contractors and developers to assume greater risk when taking on some green public and private projects.

Current Environment

After consistent outcry from the surety industry, officials in Washington, D.C., are trying to rework the language regarding performance bonds.

Industry officials and observers alike are unsure when or how the issue will likely get resolved. D.C. environmental officials have staked a claim that green performance bonds are feasible.

Now they have to find a practical way to prove it to the nation’s surety industry.

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When discussing the short and long term building performance of a green project, the issue generally comes down to the following question: Is there any identifiable or measurable gap between the predicted building performance (in the design and construction phases) and the actual bulding performance (during occupancy, operation and maintenance)?  This issue has been addressed in part by a number of my colleagues, including Stephen Del Percio ("Energy Performance in LEED Buildings: A History") and Chris Cheatham ("Real Life Example of the Energy Performance Gap").

Yesterday, I saw the following following press release: USGBC Tackles Building Performance Head On.  The USGBC announced the Building Performance Initiative, which is intended to assist LEED building owners and project teams to close the gap between predicted performance and actual performance.  The new initiative seeks to tackle building performance by the following:

1. Employ a comprehensive data collection effort from all buildings that have acheived LEED certification;
2. Implement an appropriate method to analyze the data collected; and
3. Provide feedback to building owners.

There will be four summits held across the country in September and October to preview the proposed data collection and data analysis methods.  "The local summits are a way to gather people's input for our vision and also for them to share their performance stories, successes and challenges," said USGBC LEED Senior Vice President, Scot Horst.

Although USGBC says that it is ready to rumble by tackling building performance head on, it will be interesting to see some of the ideas previewed in these summits.  Already, we have heard from numerous industry players about the proposed enforcement tactic of revocation.  One of the more significant unknowns is determining whether LEED certification (based upon design and construction) should be separate from building performance (based upon actual assessment). In other words, will USGBC have a multi-tier certification for design/construction and performance? Will USGBC have a conditional certification based upon predicted performance? Will USGBC extend the certification process to include building performance? The USGBC better be ready to rumble!

Photo: Wade

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Mom always said I was a late bloomer (... Wonder what she meant? ...)  Well, you can call me late to this game, but hopefully not too late. 

Perhaps the best summary of the new LEED 2009 Minimum Program Requirements (MPR) can be found on Stephen Del Percio's Green Real Estate Law Journal.  Last week, Chris Cheatham's Green Building Law Update caught on fire with comments about his post on LEED Decertification.  The match that lit the fire turned out to be the following language found on USGBC's website about the MPRs:

NOTE: CERTIFICATION MAY BE REVOKED FROM ANY LEED PROJECT UPON GAINING KNOWLEDGE OF NON-COMPLIANCE WITH ANY APPLICABLE MPR.  IF SUCH A CIRCUMSTANCE OCCURS, REGISTRATION AND/OR CERTIFICATION FEES WILL NOT BE REFUNDED. 

A couple of observations from my neck of the woods.  First, I am not sure that the fact USGBC has wielded this revocation stick is as noteworthy as its ramifications. Indeed, verification requirements and revocation/de-certification processes appear in various substantive areas of law (i.e., union and labor, banking, minority business, etc.). What is noteworthy, again, is the fact that the revocation stick will have undetermined consequences. 

In other words, the authority to revoke LEED certification from a project raises legal concerns beyond the scope of LEED’s stated intent—that is, to provide “building owners and operators a concise framework for identifying and implementing practical and measurable green building design, construction, operations and maintenance solutions.” Now we are talking about issues like: third party standing to initiate decertification proceedings, time elapsed certification, regulation enforcement and insurance coverage questions.

Next, would you be surprised to learn that the concept of "permit revocation" has been adopted by a local municipality for green projects that fail to provide proof of LEED certification? That’s right, last fall the City of Gaithersberg, Maryland adopted the “Green Building Requirements” to amend its building code, which included the following revocation provision:

3110.2.4 Verification. Within eighteen (18) months after the receipt of a Certificate of Use and Occupancy, the applicant shall provide proof to that the required LEED-level rating was obtained. Failure to submit the required proof shall be grounds for revocation of the Certificate of Use and Occupancy.

This code was passed almost one year ago. I’m looking into whether any revocations have occurred yet under this new Gaithersberg ordinance.

 Finally ... and here's the kicker … apparently, a LEED revocation is underway or has already occurred somewhere out there. According to the literature for the Green Buildings Seminars in September 2009, there is one reported instance of decertification proceedings. Lawrence Spielvogel, an independent consulting engineer, is scheduled to “discuss why this non-compliance typically occurs, and will describe the actions of the designers that led to the first ever decertification of and plaque removal from a LEED Certified project.” 

 Did I read that correctly?  Let's ask Larry ...  ring ... ring ... [conversation] ... hang up phone ... Yes, I read that correctly! Looks like we have to wait for the presentation in September 2009 to report on the whole scoop.  Perhaps Shari will go for me?

 And now ... what I promised in the title of this post ... here is what some the industry experts have said about the revocation issue:

  If I missed you, send me an email and I will update the list.

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