green building operations

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.

For most commercial real estate projects in distress, the focus ultimately centers on the leases.  It is all about money, and the leases generate the money.

Hopefully, Laura Sims’ blogs on lease challenges and issues was of interest to you.

Green buildings make those challenges even more complicated.  In my earlier postings, I’ve covered "high level" issues, focusing on the building itself and the tasks of due diligence (and the impact upon negotiation agreements and forbearance agreements).

If your collateral is a green building (some times referred to as a "sustainable" building), the building leases demand you immediate attention.

What lease provisions could contain terms unique to a green or sustainable building?

Here’s a list (not in priority order):

  • covenants on indoor air quality (and pollution)
  • covenants with "green building" provisions covering exterior landscape, surface drainage (such as parking lot run off), building systems (from blinds to lighting), water consumption, trash and common area
  • compliance with specific tasks or services, each based on green building certification designations (such as LEED, Green Globes and Energy Star)
  • remedies or consequences for a breach (self-help is common!)
  • use of specific cleaning products or building materials
  • requirements on common area renovations or reconstruction
  • requirements on new improvements to future tenant space
  • special "use" provisions covering common area AND tenant space
  • operating expenses (including shared costs)
  • required capital improvements
  • allocation of carbon offset credits
  • landlord’s right of entry into tenant space should be expansive
  • building or project rules and regulations could contain unique provisions
  • record keeping
  • indemnification and hold harmless
  • compliance with laws 

If you’re not paying attention to these provisions, you can bet that the tenant is doings so.  And if you become the owner of the building, the tenants AND governmental regulators will be all over you.

  • What will you add to this list?

I’ll add to this list in the future.

Please post your comments and suggestions 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.

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 . . . .