Back in December of ’10, I gave you a list of lease provisions that are crafted to address topics unique to “green” buildings. Here’s another version or update on the list:

  • insurance provisions
  • annual environmental performance report (access to space, access to the report, etc.)
  • carbon credits (they belong to Landlord!)
  • building operations (in compliance with applicable green building standards)
  • substitution of space (same standards as original space)
  • janitorial and cleaning services (and specifications)
  • utilities and compliance with applicable green building standards
  • bicycle storage
  • tenant finish requirements (for example, high-efficiency plumbing fixtures, appliances, light bulbs, etc.)
  • use of renewable energy suppliers

If you’re dealing with a green building, consider having both this list and the earlier list at your elbow as you review leases in the building. Green buildings are different; so are the leases. (For my other comments on “green” buildings, search the blog with the search term “green.”) If you have additional provisions to add, please share them with us by commenting below.

 

If you collateral is a green building, then a litany of unique issues and approaches come into play.

Recently I discussed this topic with Bill Weinberg – my green building expert.

Here are a few "high level" issues offered up by Bill to get our attention (prior blog) –

  • What is nature of the collateral?
  • What are some unique operational and maintenance features, including contract warranties?
  • Get a green building expert involved

These high level issues impact due diligence, and terms of negotiation and forbearance agreements (prior blog).

Now let’s focus on more specific topics and tasks:

  • Identify latent or "hidden" green building features

A green building may include a mix of obvious and subtle green building technologies. It will be easy to spot the fifty foot windmill, but you might overlook –

– the non-toxic paint
– low-emitting carpet
– recycled content building materials
– pesticide free landscaping
– specialized software to operate lighting, shades, solar panels, HVAC and other building operating systems

Just because a building looks like every other normal building, do not assume that it does not have green features.

As Bill previously noted, you risk losing the value of innovative features if you do not identify and properly maintain these features. 

  • Is the building recognized, or pursuing recognition, under a certification program?

Examples include these programs: LEED, Green Globes and Energy Star

  • If the building is pursuing certification (for example, during a construction loan or a "repositioning" of it in the market), what additional steps are necessary to cross the finish line?
  • If the building has already obtained certification, what steps are required to maintain the status?  (For example, periodic reporting and associated book keeping requirements.)

Here are a few ways that I’d address all of this:

  1. Due Diligence: expand scope of work for third party (environmental) reports –
    – look for green building features
    – examine local building records to determine if the building is certified or has applied for certification
    – what are the record keeping and re-certification requirements for the particular certification (and evidence of compliance or status of re-certification)?
  2. Negotiation agreement term
    – list green building features (and warrant that the list is all-inclusive)
    – list certifications and permits, or applications for same (and warrant that the list is all-inclusive)
    – add covenants regarding applicable record keeping (with delivery of copies to lender or servicer)
    – include these features in legal compliance covenants (and related default events)
  3. Forbearance agreement term (same as #2)

If you have suggestions, comments or war stories, please add them below.

We’re investigating green buildings, from the perspective that some portion of the huge amount of distressed commercial real estate will include some green buildings.

Earlier this week, Bill Weinberg focused us on these preliminary topics:

  • is the collateral raw land or does it include improvements (buildings or other structures)?
  • operational and maintenance issues, including the possibility of warranties on equipment or systems 

These are all topics that are new to me – green buildings were science fiction to us as we worked through the commercial real estate busts in the late ’80s and early ’90s.

Let’s stop here and get these quick thoughts on the board: what do I need to be doing right now if I discover that the collateral has some "green building" feature to it?

  • Due diligence (one prior; second prior post):
    • hire a qualified expert to assist in the evaluation of the building, the laws and regulations relating to green buildings, and the materials that you need to complete your files (and corresponding changes to your loan documents) – so that you will be prepared to operate the building
    • dig into the loan files to find any materials collected at the loan closing (or during servicing)
    • review your loan documents to identify provisions relating to green buildings, in particular provisions relating to compliance with laws, collateral assignment of vendor warranties (and service contracts), identification of any local permitting requirements (and renewal dates), etc.
    • expand your ESA procedures to cover any green building features, compliance, etc.
  • Negotiation letter: to the extent that you identify any deficiencies, add covenants covering them in the negotiation letter
  • Forbearance agreement: again, to the extent that you identify any deficiencies, add –
    • covenants covering them
    • make compliance with those new covenants  –
      • a condition to the forbearance terms
      • a new default under the loan

 Question: what do you want to add to this preliminary list?

More to come from Bill Weinberg, and my conversation with him.

Please post any comments, questions or war stories below.

Enough of MERS and technology – but, how about technology but from a different angle?

The amount of commercial real estate debt in distress is huge:

  • delinquent unpaid balances on CMBS loans exceeding $62 billion (October 2010), and heading toward $70-$80 billion by year end ’10 (per Realpoint)
  • delinquency ratio of 8.04% (September, 2010) (per Realpoint)
  • Fitch predicts special servicing volume of @ $110 billion of CMBS loans by the end of 2010 
  • @ 3,000 banks and savings institutions have more than 300% of their risk based capital in commercial real estate loans (per JLL)

Late in the good economy, "green buildings" became a new distinctive for the newest construction.

This is the "technology-smart" building – designed, built and operated to be environmentally friendly for all of us, and resource efficient and healthier for the occupants.  And the rent is a little higher.  A good thing.  Unless the tenant moves out or goes bankrupt.

Combining the large number of distressed investments with the green building concept:

  • What does a "green building" mean for real estate lenders dealing with distressed debt? How much extra trouble is a green building?

A green building is an operational and legal disaster in the making for a foreclosing lender.

I brought this concern and my questions to Bill Weinberg, a friend and partner at my law firm.  As you’ll read in his answers to my questions, it depends on the nature of the collateral, where it is located, and what the lender intends to do with it.  But since Bill is the expert . . . . 

Keith: "first, Bill, thanks for that tip about adding this topic to my ‘watch list’ on distressed debt, and for alerting me on changes in local building codes that come into play on a construction loan – I actually blogged on it . . . over a year ago."

Bill Weinberg: "yeah, but you forgot to mention me in that blog . . . should I say ‘thanks?’"

Keith: "well the bet at the firm was that I wouldn’t still be blogging. . . so here’s your opportunity to see your name a bunch of times out there in the vastness of the internet . . . "

Bill Weinberg: "you need my help . . .  remember, your distressed debt decision tree list after ACMA did NOT even mention this topic"

Keith: "guilty . . .  bad oversight . . . this is a topic begging for trouble. . . Question #1: What is the first question, or step that needs to be taken?"

Bill Weinberg: "let me make this simple for you . . . and I know that you like bullet points –

  • What is the nature of the collateral?
  • Is it raw land, an occupied building, or something else like a half-finished building?
  • If the collateral is raw land, it is fairly safe to say that there is no green building issue. 
    • First of all, there is no building. 
    • Secondly, the lender will probably be long gone before anyone lifts a shovel to start work on a building.
    • BUT: you still need to get that environmental study BEFORE you take possession or take title 
  • If the collateral is improved . . . 
    • and an occupied building, the lender may have to maintain it appropriately
    • or is a half-fished building, the lender may have to build it appropriately
    • either way, you’ll still need to get that environmental study BEFORE you take possession or take title

Keith: " love how you talk in bullets . . . let’s just assume that you’ve taken possession or obtained title  . . . . foreclosure or a deed in lieu . . . . Question #2: what’s next on the list?

Bill Weinberg: "you’re the dog that just caught the car – so:

  • Do you know how to operate and maintain the green building features?
  • A green building may contain some high-tech features with which the typical maintenance or janitorial crew may not be familiar.
    • Do you know how to operate the solar panels or the rain water re-use system?
    • How about the geothermal heating and cooling system?
    • Does the janitorial staff know how to clean a waterless urinal?
  • Do you have the warranties for the specialized fixtures and equipment?
  • Don’t lose the value of the innovative features by neglecting to seek expert assistance.

If you have any comments, questions or war stories, please comment below.

More from Bill Weinberg shortly . . . .

We all love our mother earth, no doubt.  However, if your troubled credit is a real estate construction loan, then you need to add yet another topic to your workout due diligence list: green building laws and ordinances.

  • Do you really want to wake up with the title to the property, and only then realize that there is a laundry list of "green building" requirements preventing completion of construction, and perhaps tenants only too happy to terminate their leases due to your failure to comply with those requirements?

This trend truly is a grass roots movement since it germinates at the city and building department level (OK, enough of the alliteration).

I suggest that you investigate this even if the only "construction" at your collateral is tenant finish.  This movement appears to be more than simply new vertical construction.

To give you some flavor on this topic, here’s some information on the situation with the City of Dallas:

Dallas’ new green building ordinance (PDF) takes effect on October 1, 2009.  The Building Inspection Department developed checklist forms to verify that developers comply with the law. Copies of the following checklists are attached: (i) homes, (ii) commercial buildings less than 50,000 square feet, and (iii) commercial buildings 50,000 square feet or greater.

The checklist will be used by the City of Dallas at both the plan review stage and the building inspection stage.  In addition to submitting the checklist, developers must submit several supporting documents, such as invoices, receipts, diagrams, photographs and product specifications.  In the coming weeks, the City of Dallas will publish additional forms for developers to show the calculations that back-up the assertions made in the checklist.  The architect, engineer or contractor that is responsible for a certain checklist item must sign the checklist.  The City of Dallas will also publish a handbook that should be a practical guide to complying with the new law.

The ordinance is based on Version 2 of the U.S. Green Building Council’s LEED program, which has been around for a few years.  The USGBC recently introduced Version 3, but the City of Dallas will stick with Version 2 because people are already familiar with it.

Yes, change is all around us.

Please comment if you’re seeing this in your city.