Green Buildings – Moving to the Mainstream

By the Commercial Real Estate Group at Clark Wilson LLP

Ask around the development community and most of its members can tell you something about green buildings. Terms like LEED, BOMA BESt and geothermal heating and cooling systems are becoming part of the real estate lexicon. As yesterday's environmentalist has become today's clean-tech engineer, the green building industry is no longer the development industry's offbeat cousin. With the ever increasing global response to climate change, the real estate development industry too is responding to the green ethic permeating society.

These are still early days for green buildings in British Columbia. While it isn't hard to envision a future where the majority of new development will encompass some green elements, green projects are currently being undertaken by willing volunteers from both the public and private sectors (see these lists of current Canadian LEED Certified Projects and BOMA BESt BC Projects).

It might be that developers and property owners decide to go green because it's the right thing to do – however, it is well understood that financial incentives to go green are key in order to push green buildings from exception to rule. One only needs to look south of the border to the United States to see their current federal, state and local incentives being offered to industry in connection with green projects. In Canada, there currently appear to be more incentives in British Columbia than elsewhere in the country.

The recent introduction by the City of Vancouver of its electric car parking requirement is good evidence that developers will soon be faced with a list of mandatory green requirements for new projects. In May of this year, Toronto became the first city in North America to adopt a bylaw to require and govern the construction of green roofs on new development.

Our informal survey of various local governments in BC indicates that most planning departments are in the midst of developing more formalized green building incentive programs. Until such formal processes have been implemented (Vancouver's Green Building Strategy is scheduled for implementation in October 2009), the current trend is for planning departments to offer various incentives on a project by project basis. These incentives include fast tracking the approval process for green projects, providing bonus density in exchange for green initiatives (with many departments looking to LEED as the measurement standard) and in some cases, like the District of Sannich, to partially reimburse or even waive certain development or building permit fees.

As more developers consider building green, there are a number of legal issues that require careful consideration by the developer and its professional team as a green project moves forward. One such issue centres on the green character of the development itself. What sustainability or efficiency features is the developer seeking to achieve and how will the success of such features be measured? In other words, how will the parties involved in the development allocate the risk of a green building performing to the required green standard?

Take, for example, a situation where a developer has been incentivized to construct a building that must meet the LEED Gold standard. The Canada Green Building Council, the body that administers the LEED standards in Canada, is quick to point out that the LEED rating system is performance based, meaning that the rating is obtained only after certain points are allocated for building performance once the building is completed. In our example, there is an obvious risk that the building will fail to meet the Gold standard because of performance issues that are not easily fixed once construction is complete. Consequently, the green incentive that was penciled into the developer's pro forma is no longer available. It is therefore important for the developer to assess and mitigate the risk and understand the consequences of failing to meet an incentivized green standard or efficiency.

While assigning responsibility for achieving green standards should be addressed in contractual project documents, developers and professionals involved in green projects will likely also look to the insurance industry to protect against green risks. James Clay, President of JT Insurance Services Canada confirms that while specialized project specific policies are always available, the Canadian insurance industry will soon catch up with its European counterparts to provide appropriate standardized policies that will cover risks associated with intended green developments failing to meet their expected green targets. Clay goes on to say that, "The insurance industry like many others are working on reducing their carbon footprint but also recognizing their customers who are going green by offering discounts." In support of this insurance industry trend, Clay points to recent examples of some Canadian insurers who have come out with green insurance policy enhancements, some of which provide special replacement terms for environmentally friendly construction or environmentally responsible building products.

Another significant issue that must be considered by developers of green buildings is from the marketing standpoint. Whether stated in a disclosure statement for a multifamily project or in an offer to lease for a tenant in new construction, a developer's promises of energy efficiency or other green standards must be carefully crafted. In a business environment where green-washing is common, inaccurate or exaggerated descriptions of a project meeting certain standards of performance or efficiency or containing building products with certain green characteristics can expose a developer to liability. In these early days of the green building movement we still have not seen the British Columbia courts comment on claims related to projects not meeting their green promise, but we have already seen some green building litigation in the United States.

With increasing government initiatives centred on addressing climate change and with the increased market visibility of the green building rating systems, sceptics would be hard pressed to now describe the green building industry as a passing fad. As green buildings continue to make their move to the mainstream, developers and their professional consultants will be have no choice but to navigate through this new landscape.

Also see our October, 2008 Feature Article, Commercial Leases – Going the Extra (Green) Mile