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.