Originally published Spring 2008

Green building is no longer the passion of a few; it is the new standard for commercial and residential developments alike. Green design is an undisputed selling point, remarkably enhancing commercial and residential project value. Green building practices reduce the tremendous impact that building design, construction, and maintenance have on both people and nature. The concept of environmentally friendly real estate is so ubiquitous today that green can be used to describe building without concern that readers will think it refers to the color of a structure.

The Green Advantage

According to the U.S. Department of Energy's Center for Sustainable Development, buildings consume 40% of the world's total energy, 25% of its wood harvest, and 16% of its water. In the United States, the building industry is the nation's largest manufacturing sector, representing more than 50% of the nation's wealth and 13% of its Gross Domestic Product. Because of its impact, the building industry is ripe for an environmental overhaul. Green policies help reduce unnecessary energy and material consumption, which have long-term benefits to the nation and the world.

In addition, these policies come with financial rewards. Short-term capital raising and long-term economic viability demand green building. Domestic and foreign capital is allocated to fund green building in multiples over other real estate development. The green building market has given rise to its own cottage industry, known as green lending. Green lending is supported by large and small commercial lenders and focuses solely on green design and related emerging regulations. In the wake of the collapse of the subprime lending market, many large institutional lenders have increased their funds allocated to green projects, even while less cash is generally available to lend.

Green demands extend to the private equity community, as well as to public investors. Private equity real estate investments and public investors (through REITs) gravitate to green building projects almost to the exclusion of those that are not. Developers and funds have learned that green initiatives are increasingly an investment prerequisite of pension and endowment funds. Accordingly, such investments and allocations by private equity fund-to-funds have increased dramatically and are expected to continue to rise.

Developers working with designs that are not green are finding it increasingly difficult, if not impossible, to raise capital. Existing developments and funded projects under development face longer-term challenges to their economic viability, strategic position, and operating costs. Green buildings are considered "Tier 1" properties in the commercial and residential market. All else has been relegated to "Tier 2." If today's trend continues, renewing tenants will choose green buildings over others, driving up the rate of vacancy at Tier 2 properties. Tenants who stay will likely insist that energy costs be capped to match the lower energy costs of green competitors. Consequently, as leases renew, look for sharp depreciation and escalating management costs associated with Tier 2 real estate.

LEEDing The Way To Sustainable Design

Most observers agree that sustainable design is the next phase of green building. Although often used interchangeably, not all green building incorporates sustainable design. Green building, as it has come to be understood, means resource efficient and environmentally conscious construction. By contrast, sustainable design goes a step further and looks to harmonize energy conservation, resource conservation, and quality of life, such as functional spatial design and improved indoor air quality.

The federal government has taken the lead in instituting this next phase in green building. The Leadership in Energy and Environmental Design ("LEED"") Green Building Rating System" is the broadest and most well-known federal initiative to promote sustainable building for construction in new and existing offices, retail establishments, libraries, schools, museums, religious institutions, hotels, and residential buildings with at least four or more habitable stories. LEED" certification levels are Certified, Silver, Gold, and Platinum. LEED"-certified buildings have lower operating costs, reduced waste, and increased energy conservation.

The majority of states have adopted LEED" as the baseline for sustainable design. LEED" evaluates environmental performance from a "whole building" perspective over a building's life cycle based on accepted energy and environmental principles. More than what is required for green building, LEED" focuses on six major design categories:

  • SUSTAINABLE SITES

  • WATER EFFICIENCY

  • ENERGY AND ATMOSPHERE

  • MATERIALS AND RESOURCES

  • INDOOR ENVIRONMENTAL QUALITY

  • INNOVATION AND DESIGN PROCESS

Since launching its LEED" rating system in 2000, the U.S. Green Building Council's Leadership has registered nearly 8,000 projects and certified nearly 1,000 buildings. According to the same report, at the same time, more than 38,000 professionals in the commercial building industry have become LEED"- certified. LEED" is the first broadly accepted program to objectively measure all new and existing construction.

A large number of California cities, among others throughout the country, have embraced the LEED" paradigm and mandate that new construction be designed and built based on LEED" certification standards. In fact, building owners, architects, developers, and contractors are required in many respects to incorporate meaningful sustainable building goals early in the building design process.

The City of Calabasas has adopted the Green Development Standards, which require that all construction or replacement of privately-owned and city-owned, non-residential structures over 500 square feet comply with the Calabasas- LEED" rating prior to the issuance of a certificate of occupancy (Calabasas Munipal Code, Chapter 17.34). Structures up to 5,000 square feet must at least meet the standards established by the Certified rating while structures over 5,000 square feet must meet the Silver rating.

In the City of Pleasanton, the Pleasanton Commercial and Civic Green Building Ordinance requires that commercial projects of 20,000 square feet or more meet a minimum LEED" Certified rating as a condition of approval (Pleasanton Municipal Code, Chapter 17.50).

Some California cities, such as the City of Santa Monica, provide expedited plan check processing for projects registered under LEED" (Santa Monica Municipal Code, Section 8.108.050). Many other California cities have mandatory building requirements outside the scope of LEED", and some have instituted voluntary programs, which will likely become mandatory in the near future.

The Color Of The Future

Green building principles already dominate commercial and residential development. The adoption and implementation of the LEED" rating system leaves little doubt that green building will soon incorporate sustainable design as a standard, and in some cases, mandatory part of development. These are remarkable changes to conventional real estate, and promise to define modern development practices.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2008 Goodwin Procter LLP. All rights reserved.