Rational Green

Businesses and local governments are learning that green development makes sense. It is rational. However, there are times that requirements imposed by local governments with respect to green buildings appear arbitrary or irrational. For example, recently a local municipality wanted to impose a standard of LEED certification on a retail development that was in the planning stages. LEED certification is a national benchmark by the U.S. Green Building Council for the design, construction and operation of green buildings. However, the U.S. Green Building Council currently does not have a classification for LEED Certification specifically for retail. In another situation, a Central Florida county promised fast track permitting for a LEED certified office building but refused to approve plans for certain features that would help with LEED certification even though such features complied with its building codes. Headlines have highlighted Orlando and Orange County officials wrestling with the principles and costs of sustainable development being incorporated in the new downtown sports and arts venues. This is representative of the same dilemma facing developers and businesses across Central Florida as strained resources and environmental concerns move “green development” from a perceived left-leaning political stance to the mainstream forum of the business community.

The monetary benefits of green development are becoming better known. The topic no longer conjures up images of houses made out of bales of hay but modern developments housing Fortune 500 companies.  Lower energy costs are part of the benefits. However, for most companies, less than twenty percent of their operating costs are attributed to utilities such as electricity and water. Instead, labor costs, including salaries and benefits, are the largest expense that most businesses incur. Studies are showing the health benefits of green buildings lead to lower absenteeism, better productivity and higher morale – all of which can boost a company’s bottom line.

Counties and cities across Central Florida are recognizing the benefits of green buildings as well. Sustainable development can lower the demand on utilities and infrastructure already pushed to capacity.  It can result in lower energy and water consumption, less drainage runoff and the promotion of recycling and mass transit. As more local governments consider requiring sustainable design standards to be implemented for public and private development, it is important to remember that no matter how noble the benefits, the costs must also be considered. Just as the City of Orlando and Orange County are dealing with tight budgets in the development of the art center or new arena, small and large businesses face this reality every day.

Requirements for sustainable design should be rational – they should make sense. One size does not fit all. The green principles that could benefit a restaurant will be different from those benefiting a retail development which, in turn, would be different for an office building, a hotel or a residential high-rise. Such requirements cannot be applied unevenly or in a knee-jerk reaction. Municipalities should develop a comprehensive and rational policy which should encourage green development through guidelines, voluntary standards, education, promotion and incentives.  Fast track permitting, lower application fees and impact fee rebates are some of benefits cities and counties can offer.  The development and business communities should be an integral part of the process in the development of such policies. As local governments develop rational policies with respect to sustainable development, with adequate education of the business community and the provision of proper incentives, developers and businesses will buy into the process instead of resisting it.

Michael McNatt is the founder of the McNatt Law Firm, P.A. located in Orlando, Florida. Michael is a U.S. Green Building Council LEED Accredited Professional (LEED AP) and practices in the area of commercial real estate, finance and general business law.

The Green Shift: Market Forces Encouraging Sustainable Development

Whether one calls it a market shift, a trend or a fad, the movement to “go green” or build sustainable development in the commercial marketplace is an undeniable occurrence. Sustainable development is nothing new, though it is certainly a popular buzz phrase these days. European governments have been encouraging some form of green development from as early as the 1960s – and arguably before – mostly in the form of mandates or requirements by the government, that require developers to implement technologies and practices that increase energy efficiency and decrease negative environmental impact.

While it might have taken a while for such technologies and practices to be more broadly embraced on this side of the Atlantic, the impact of sustainable development is being felt “American style,” through the demand by market forces. While there may be some government mandates requiring sustainable development, market forces are the major contributing factor in the inclusion of green buildings into modern cityscapes: daily headlines draw the public’s attention to the debated evidence of global warming; energy costs are skyrocketing; and, concern over the impact our society has on the environment is heightened. Further, there seems to be a growing awareness that “business as usual” is no longer acceptable.

The marketplace is responding: hybrid automobiles are bestsellers; businesses around the country are trying to “out green” their competition; and businesses that are traditionally not “green-related” are jumping on the bandwagon (i.e. funeral homes and banks).

Big business has become one of the largest front-runners demanding sustainable development. This is important to the development community to recognize because big business can either be tenants or buyers of development services. Big business also tends to set trends that smaller businesses may ultimately embrace. Large corporations, Citibank and IBM for example, have banded together to create consortiums to require developers of buildings they intend to occupy to meet certain green standards. These requirements usually include the conservation of energy, water and other resources.

Companies are also becoming more conscious of the environment they create within their offices and the impact that such environments have on their most costly asset – their employees. Studies are highlighting the health impact of toxins emitted by carpeting or paints. Other factors becoming important in the design phase of commercial buildings include daylighting and access to fresh air, which are shown to increase employee productivity, thus improving a company’s bottom line.

Local governments have felt the pressure from citizens wanting action to be taken in response to the environmental and energy crisis. Municipalities are responding to demands on limited resources and infrastructure by providing incentives for builders and owners of green buildings that include fast track permitting, rebates on impact fees, abatement of sales and/or property taxes or the allowance of greater intensity of development. Such incentives can have a material impact on the financial analysis of a project. For example, fast track permitting incurs few additional costs to the municipalities that offer such an incentive while providing a substantial benefit to the developer by reducing carrying costs (including interest, taxes and insurance) and accelerating the cash flow from a completed project.

America’s market driven response is being played out in several ways. First, there is the debate of what makes a building “green.” The same forces that bring infomercials and newspaper ads guaranteeing weight loss and hair growth can also make empty promises with regards to minimizing carbon footprints and saving energy. Organizations like the U.S. Green Building Council (USGBC) and its equivalents on regional and local levels have provided standards and certifications that help sort out the legitimate from false or exaggerated claims, or what has now been dubbed “green washing.” The USGBC certifies buildings for LEED (Leadership in Energy and Environmental Design) at different levels (certified, silver, gold and platinum). This has become the dominant national standard but there are still other standards, including “Energystar” or “green globes.”

Green buildings are springing up in every area of the country. They can be found in large metropolitan areas such as New York City and Los Angeles, but also in smaller cities like Akron and Sarasota. While climate and region impact the design, the movement – which was first embraced by the commercial office segment – continues to expand its influence and is affecting retail and industrial segments as well. Large retailers have begun to incorporate sustainable applications in many of their locations.

Originally, green buildings were more of a concept than a reality. One was more likely to read an article about green buildings rather than to actually walk into one. That has changed, and as green buildings have become more common, data on costs and results is becoming more accessible. Additionally, contractors have more experience with sustainable technology and practices, which reduces costs. The more predictable the requirements of a job are to a contractor, the more certain the bid, resulting in lower margins. As a result, the differential in costs to “go green” is gradually disappearing. While construction costs may still be impacted by the degree to which a building is made green, the increased costs in one area can offset the costs in another. (For example, more energy efficient windows can reduce the need for HVAC capacity).

If the factors that have influenced the market shift towards sustainable development continue, new and existing developments that do not incorporate green features may become obsolete. Just as HVAC may have been thought of a passing fad by some in the 1950s, it is rarely considered an option in commercial real estate today. Aspects of green development that were traditionally called “experimental” a decade ago are quickly becoming the norm. And, if energy prices continue to climb, becoming more sustainable may be a necessity.

From a competitive standpoint, developers and owners need to be familiar with the impact that sustainable development is having in their particular market. Developers also need to know what incentives are offered by local governments, and how those incentives might change the economic scope of a particular project. Developers should understand the level of experience the local government has with green buildings. If building inspectors are not familiar with sustainable technologies, a developer can spend a lot of time and resources on education. Such municipalities may also require a project to be certified by a certifying agency in order for a developer to take advantage of incentives. It is important to fully understand all of the requirements for earning such incentives.

In order to maximize the efficiency of incorporating green principles into a development, a developer must assemble a knowledgeable team early in the design process. Sustainability can impact the type of property upon which a project is built and the positioning of the project on such property. For example, are there benefits for building on a brownfield? Is the property accessible to public transportation? These are just a few of the thoughts that need to be given attention before beginning a project.

Also, experienced team members are a benefit. The architect must understand the certification process, if applicable, and any pre-determined standards for green development. The developer’s attorney should address sustainable issues in the project’s various agreements at all stages of development including the purchase agreement, agreements with consultants, the general contractor agreement, restrictive covenants, easements, management agreements and leases.

As the ramifications of the green movement continues to be felt in the commercial real estate sector, developers and owners need to understand sustainability to remain competitive. Understanding the market forces at work and the public’s changing viewpoint with regards to health, energy and the environment can give a developer an advantage. The “greening” of society is leading to the “greening” of our buildings. For the astute developer, this can create significant development opportunities.

Michael McNatt is the founder of the McNatt Law Firm, P.A. located in Orlando, Florida. Michael is a U.S. Green Building Council LEED Accredited Professional (LEED AP) and practices in the area of commercial real estate, finance and general business law.

Can Developers and Municipalities Play Well Together in the Green Sandbox?

Planning staff of municipalities often view developers with a degree of suspicion, while developers tend to see municipalities as roadblocks – or, at the very least, speed bumps – when it comes to building projects. Developers respond to market forces and pursue the rewards of capitalism while municipalities are concerned about infrastructure issues and meeting the long-term needs of its citizens. While somewhat oversimplified, these competing needs can put developers and municipalities at odds with each other. There are times, though, when developers and municipalities share common perspectives and goals, even if their individual motivating factors differ.

Green or sustainable development has gained a lot of attention over the last few years. For the most part, developers have approached the concept cautiously and with a degree of skepticism. Municipalities seemed to have embraced the concept more quickly. But as the demand for buildings with sustainable features has grown, coupled with a slowing economy and rising energy costs, builders are encouraged to find a niche that provides an expanding opportunity for development.

How municipalities benefit

Municipalities benefit from green development in a number of ways. First and foremost, green buildings tend to focus on saving resources. Buildings that require less water, power and sewer capacity are attractive because they place less strain on the municipality’s infrastructure. Further, green development creates jobs, worksites and business settings – whether office, retail, manufacturing or industrial – without the typical demands of non-green development. Thus, it allows the municipality to better serve its citizens, providing the places where they can work, shop and play without significant cost.  Another benefit is that sustainable development tends to encourage the use of mass transportation, lessening the need to expand roadways and create parking.

As municipalities have started to understand the benefits they directly derive from sustainable development, they now offer many incentives to developers to encourage green building. Other municipalities have established mandates that require green standards be achieved in all new buildings. Whichever approach is used, the requirements can lead to confusion as to what makes a building “green.”

Understanding the certification process

Some municipalities delegate the establishing of sustainable standards to certification programs such as EnergyStar, the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) or Green Globes. There are other regional and state-specific certification programs as well. While this approach simplifies the requirements for the municipality, it raises other issues. Since developers may be denied certain benefits for failing to achieve established certifications, must a municipality provide some right to appeal? If so, would the right to appeal be to a municipal body, to a court or to the certifying agency itself? It is also uncertain whether these certifying agencies will want to be the arbiter for granting municipal incentives. Lawsuits over such issues have yet to play out, but this may hinder such approach by municipalities.

A different approach has municipalities utilizing the standards of certifying organizations but distinguishes between “certifiable” and “certified.”  ”Certified” is when the municipality requires a developer to take the time and expense to have a building actually certified. For larger projects, the costs are not as material when compared to the overall construction budget. However, for smaller projects, the investment for certification can be an obstacle. For “certifiable” projects, the municipality may follow the standards of a certifying organization but not require the developer to actually go through that organization’s certification process. Instead, the municipality has a process where it determines whether or not the standards were followed. This can be a huge savings to the developer, both in terms of money and time. The challenge is for the municipality to have qualified individuals that not only have the knowledge, but also the experience, in certifying buildings. For the municipality to retain control over the certifying process, it requires little effort for the addition of an appeal process. The certification process can be handled by a separate, newly created department or by the municipality’s existing building inspection department.

A municipality’s retention of the certification process gives it greater control, but is also more expensive and requires more manpower and resources. In an environment when municipalities are undergoing budget cutbacks, the addition of staff – not to mention the expense of their training and support – could be a political or fiscal impossibility. The other challenge is to have enough experienced inspectors on staff who can evaluate the plans and specifications as well as the completed project, and who understand the applicable green standards. At the same time, however, the addition of application and inspection fees could help make such a department self-sustaining.

Another option is for municipalities to actually have their own set of green standards, and to step fully into the role of certifying organization both with the development of standards as well as with the application, inspection and enforcement processes. This allows the municipality to tailor the standards to meet any unique geographic or climate-oriented issues specific to that municipality. Again, there is the challenge of a municipality having the expertise to develop green standards, much less to enforce them. Also, it is important for the sake of credibility of such green standards that political influence is kept from the development of such standards.

What it means for the developer

Regardless of the model that a municipality may use in developing and monitoring green standards, the incentives that are offered to developers tend to be relatively consistent across the country. Such incentives include rebates of impact or permitting fees, fast track permitting, abatement of property taxes or sales tax, and higher development intensity.

Rebates of impact or permitting fees typically requires the builder to pay the fees in the normal development approval process, and then receive the rebate once the project has attained green standards. This can be a financial incentive worth tens or hundreds of thousands of dollars to the developer, depending upon the size of the project, and is usually given as a partial rebate that is amortized over several years. This process benefits the municipality by giving it an element of control. Should the developer fail to achieve the required standards, there simply is no rebate. Since some incentives may be granted at the beginning of the development process, it can be challenging for municipalities to enforce or take back incentives.

Fast track permitting provides a powerful incentive to developers because it can provide many financial benefits, including reduced carrying costs (interest, insurance and property taxes) and accelerated cash flow resulting from opening operations upon the accelerated completion of the project. This costs the municipality very little. Some municipalities will guaranty a certain approval period; others will merely grant priority to green projects. The incentive can accelerate the completion of a project by months or years, depending on the jurisdiction.

Abatement of property taxes is also partial and typically lasts a period of time, and either ends or requires recertification to continue the benefit. This incentive not only encourages the development of green buildings, but also their maintenance. It also is something that the municipality can withhold until the certification standards are achieved. The abatement of sales taxes tends to be only for certain sustainable products and focuses primarily on the construction phase, versus the maintenance phase that the property tax abatement addresses.

Dealing with the challenges of going green

As with any new technology or process, there is a learning curve. One way that municipalities have been able to help create interest and local labor talent in green building technologies is to have new municipal facilities built green. This trend has several positive ramifications. First, it creates tangible examples. Since green buildings are still not very prevalent, most builders’ experience is from reading an article or hearing about them. Having an actual green building that people can come into and experience creates a “hands on” example that makes the theoretical real. It also gives the municipality credibility in that they are practicing what they preach; they are implementing sustainability into their own buildings. Utilizing local labor in the construction of such green buildings also creates skill sets and gives contractors and subcontractors practical experience with green practices.

When incorporating new materials or new practices, it is not uncommon for contractors to deal with the cost or time uncertainties by creating a cushion in any estimate. This can artificially increase the costs of green buildings. By giving local contractors the opportunity to work on green buildings, uncertainties, and therefore costs, can be reduced. Typically, the first green building constructed in a locale bears much of the cost of training of local labor and helping local building inspectors become familiar with green technologies. For example, one builder spent three months educating the local building inspection department that waterless urinals complied with the state building code. For a municipality, to bear any costs of being the first in the market with a green building helps “grease the wheels” of the green projects to follow.

Although incentives offered by municipalities for green buildings can create more benefit for the municipality than the cost of offering such incentives, these perks are shrinking in the reality of budget cuts and a slowing economy. However, the mixture of market forces, the growing number of examples of municipal green buildings and the incentives offered from municipalities should expect to continue the growth and expansion of sustainable development.

Michael McNatt is the founder of the McNatt Law Firm, P.A. located in Orlando, Florida. Michael is a U.S. Green Building Council LEED Accredited Professional (LEED AP) and practices in the area of commercial real estate, finance and general business law.

The Greening of Retail

When it comes to green development, Central Florida is becoming a leader.  A number of local counties and municipalities have implemented sustainable policies and ordinances providing incentives for green buildings. The construction of one of the first downtown office buildings seeking LEED certification is progressing. Green systems, processes and technologies that seemed new and unknown just a couple of years ago are becoming familiar.

In the midst of such change, retail is becoming a new front on which the impact of greening is being felt. Both local and national retailers have begun to incorporate green into their new and existing locations. Banks, supermarkets, big box retailers and home improvement stores are all jumping on the bandwagon. While some retailers are seeking LEED certification, others are simply “greening” their facilities without becoming certified. For example, a family-owned and operated organic restaurant downtown has small signs throughout, highlighting the sustainable features of its building and operations, although it is not LEED certified.

Sky-rocketing energy prices have been a recurrent reminder that businesses need to find ways to conserve. Sustainable building practices make a big impact in terms of not only preserving energy but saving money. However, while office buildings have been shifting towards green for a couple of years, the movement in the retail area is relatively recent, and there are several reasons.

First, unlike office buildings which tend to have more standardized needs, retail requirements tend to be more unique. For example, a restaurant needs a major refrigeration system that will run 24 hours a day, seven days a week, and ovens that may run 12 to 15 hours a day. In contrast, very few office buildings will have such demands for energy consumption. It has taken time for retailers to adapt green concepts to their unique needs.  A majority of office building occupants remain the same from day-to-day and may therefore be more familiar with their building’s sustainable features. Retailers, on the other hand, have customers that change on a daily basis and efforts to educate them on the use of green features can be challenging such as teaching diners in a food court how to utilize various recycling bins to separate and dispose of their trash. However, some other green systems are easy to understand and are becoming commonly accepted like lighting and water sensors or water conserving features in restrooms.

As the public becomes more familiar with such devices and embraces their use, retailers have begun to respond. In addition, studies are revealing unique benefits retailers may experience. For example, a recent study examined 73 store locations in California, a number of which received significant daylight through diffused skylights. The results showed that increased daylight had a material positive impact on sales.  Just as an interior with fresh air, natural light and low toxin levels have been found beneficial in the office context through lower absenteeism and higher employee productivity, retailers are finding that shoppers tend to stay longer and buy more with green interior environments.  Retailers are specifically looking for advantages in the sluggish economy.

As with office buildings, landlords and tenants are both wrestling with which party should be responsible for making changes or incorporating sustainability into their locations. Traditionally, landlords have paid for improvements or provided tenant improvement allowances for retail tenants. However, since tenants frequently pay for their own utilities and thus benefit can benefit more from energy efficient systems, landlords are requiring higher rents to offset their initial investments in these improvements.

Market forces are still establishing new norms. Landlords and tenants alike are learning that standard retail leases do not address the issues raised by green development and, until the market more firmly establishes what the new “rules” are, the parties are having to craft custom leases to apply to their specific transaction.

While commercial office leases are still evolving, these have benefited by having faced similar issues over the last several years and the market consensus on terms is more established. Green retailers, on the other hand, are realizing unique challenges in agreements dictating maintenance obligations (such as requiring any maintenance or replacements to maintain the same level of sustainability) and practices (using green cleaning products), shared parking and access routes, facilities management and the higher traffic counts.  Having knowledgeable and experienced professionals to assist and guide the parties through these challenges is important.

As the “greening” of Central Florida continues, the greening of Central Florida retailers will benefit our community as well as the retailers and their landlords.

Michael McNatt is the founder of the McNatt Law Firm, P.A. located in Orlando, Florida. Michael is a U.S. Green Building Council LEED Accredited Professional (LEED AP) and practices in the area of commercial real estate, finance and general business law.

Retail Leasing Pitfalls

Recent consumer spending increases are evidence the economy is starting to recover. Retail real estate tends to recover late in the economic cycle. Leasing issues will continue to be of concern in the retail marketplace – whether the location is in a distressed environment or where recovery is starting to take root.

Typically, tenants are negotiating from a position of strength during times of economic downturn. With the right location and the right market characteristics, landlords may not be required to accept poorer economic terms for empty space in order to attract appropriate tenants. In times of economic uncertainty, several potential pitfalls in retail leases can create problems if not properly negotiated.

Use Restrictions

Use restrictions and exclusivity clauses frequently have the potential of hampering a landlord’s efforts to obtain new tenants. For the landlord, it is always important to have such provisions drafted as concise, narrow and clear as possible. Oftentimes, comprehensive use restrictions are mandated by big box anchor tenants. As vacancy rates have recently climbed and proven credit worthy tenants become scarce, use restrictions or exclusive clauses have become more flexible. Landlords are eager to fill empty space and tenants who may be slow in paying their rent may be more forgiving if use restrictions are infringed upon or ignored. However, non-documented waivers or alterations can cause problems as the economy recovers. As improved business allows tenants to resume prompt payment of rent, such informal waivers can become problematic as tenants assert their rights. Any waivers of use restrictions should be in writing and supported by separate compensation (such as one-time partial rent abatement).

While use restrictions are often negotiated to be tenant specific, leases will frequently contain general provisions that outline prohibited uses landlords one time deemed undesirable. The changing economy has made uses that were once considered detrimental to a retail center’s operations much more appealing. This can be partially attributed to the recession. It can also be partially attributed to changing public perception of such businesses entering into the mainstream of retailers. Other non-traditional uses, like emergency care facilities, are attracted by favorable leases rates, but may be prohibited due to over broad use restrictions. Existing tenants may prefer to amend leases to accommodate changes in use restrictions to support decreased vacancies. Landlords can avoid these problems by providing enough flexibility in use restrictions to allow changes in reaction to economic conditions.

Tenant Improvements

Tenant improvement allowances can be a costly incentive that a landlord offers to a tenant. The risk of a landlord being foreclosed upon by its lender or simply going out of business adds caution to a tenant that may be relying upon that landlord for paying the incentives agreed to under the lease. One of the measures a tenant can require is for the tenant improvement allowance to be escrowed in order to ensure the costs are covered regardless of whether the landlord is still around after the tenant improvements are completed. Such escrowed funds can be drawn upon based upon a percentage of completion or a predetermined schedule. Letters of credit are another option tenants can rely upon for the payment of tenant improvement allowances.

Common Area Maintenance Expenses

Changes for common area maintenance (CAM) can be a significant financial component of a lease and can change dramatically over a lease term. Landlords tend to have the superior control and historical information. While savvy tenants go to great lengths to put caps on controllable costs and clarify what is and is not a permissible CAM expense, there are still some areas where a landlord is making a profit on delivery of services. Conversely, landlord’s can find themselves in a tenuous position as the landlord’s share of CAM expenses increase as vacancy increases. By promising to provide a certain level of service to existing tenants, landlords must underwrite the cost of those services to the vacant lease space, which could be mitigated with carefully prepared lease provisions.

Subordination/Non-Disturbance and Attornment Agreements

The Subordination, Non-Disturbance and Attornment Agreement (SNDA) offers a benefit to both the landlord and the tenant. There is more of a direct benefit to the landlord’s lender, as the landlord is benefited by obtaining the financing that the lender provides. Lenders want to make sure that their lien on the landlord’s property is superior to the lien of the lease. The SNDA subordinates the lien to the lien of such mortgage.

In return, the tenant receives an assurance that so long as the tenant pays their rent and complies with the other requirements of the lease, regardless of whether the original landlord is still around or the bank has taken title to the property through foreclosure, the tenant will remain undisturbed in the premises. In the present economic climate, it is important that the SNDA be negotiated as rigorously as the lease, since the SNDA dictates how legal rights may be exercised by the lender. Too often, little thought was given to the long term effect of SNDAs, and some tenants and lenders are now seeing the results to waive of rights. What at one time might have been a simple form required by the landlord’s lender has taken on a more important role in the modern retail lease and will continue to play a prominent part so long as commercial foreclosures continue to be high.

Retail leases are complex legal documents, and should be reviewed in order to adapted to changing economic environment.

Michael McNatt is the founder of the McNatt Law Firm, P.A. located in Orlando, Florida. Michael is a U.S. Green Building Council LEED Accredited Professional (LEED AP) and practices in the area of commercial real estate, finance and general business law.