Green Building is the Bomb Diggity

If you have not already felt the impact of emerging green laws and policies aimed at enhancing the energy efficiency of buildings, fear not: you soon will. As of January 2011, green laws, executive orders, ordinances, and incentives affecting buildings had been implemented in at least 45 states, 58 counties, 384 cities and towns, and dozens of federal agencies and education districts.

The increased emphasis on greening new and existing buildings is due to several interrelated factors, including high energy prices, increased focus on reducing dependence on fossil fuels, and the benefits of an environmentally friendly public profile.

If you own or lease real estate, or plan to construct new buildings or acquire or renovate existing buildings, green laws should be in the front of your mind. You’ll need to understand applicable developments to comply with new requirements and, if desired, take advantage of available incentives.

So.  This post discusses (1) how these laws and policies incentivize green practices in buildings; (2) the costs and benefits associated with green buildings; (3) why the next trend in green law will likely focus on energy audits and retrofitting for existing buildings; and (4) why you should not wait to consider greening your real estate.

Incorporating Green Practices

Initially, green laws, policies, and incentives applied only to new and significantly renovated government buildings. They later expanded to include new commercial buildings and major renovations of existing nongovernmental buildings. More recently, some jurisdictions have expanded mandates to require nongovernmental owners of existing buildings to evaluate and even retrofit their structures to improve energy efficiency.

Traditionally, governments used local building codes to control the construction and occupancy of buildings. These codes outline the minimum standards to ensure the protection of public health, safety, and welfare. Although the minimum standards increase over time, building codes do not mandate or encourage any standard above these minimums.

The green building movement aspired to improve these minimum standards by introducing more environmentally conscious design and construction elements. In the early 1990s, the movement achieved national momentum, primarily through the Energy Star and the Leadership in Energy and Environmental Design (LEED) programs.  Energy Star and LEED largely are compatible; the principal difference is that Energy Star focuses solely on energy efficiency, and LEED more broadly emphasizes building design and operation.

Energy Star Certification

The EPA and the Department of Energy (DOE) jointly administer Energy Star to promote energy efficiency and greenhouse gas reduction. Over the past two decades, the program has expanded to improving energy performance in almost every type of building.  In 1995, the program began to offer the Energy Star label to new homes that were generally twenty to thirty percent more efficient than the DOE’s national model energy code (now part of the International Energy Conservation Code). Currently more than one million new homes have been Energy Star qualified, together saving an estimated $270 million in utility bills annually.

LEED Certification

The nonprofit US Green Building Council (USGBC) developed LEED to promote sustainability. Introduced in the mid
1990s, LEED is now the most widely recognized program in the national and international green building community. Between 2008 and 2009, ten states enacted laws requiring that large new government buildings receive LEED or equivalent certification.

The certification programs provide building owners with a framework for implementing a wide variety of green building elements to enhance their structure’s design, construction, operations and maintenance. The LEED building elements are grouped into five main areas: sustainable site development; water savings; energy efficiency; materials selection; and indoor environmental quality. Each owner may choose its own unique blend of design elements to achieve LEED certification.

LEED certification is granted if the building achieves a certain number of points based on the number and degree of LEED elements incorporated into its design. The four levels of LEED certification are Certification (40–49 points), Silver (50–59 points), Gold (60–79 points), and Platinum (80–110 points).

Costs and Benefits of Green Buildings

The primary costs of green building occur upfront: the expenses of construction and certification. These costs are significantly outweighed by benefits of greening a building.

Costs

The costs of incorporating green building elements into a structure vary widely because of the broad range of possible design elements. Standard return on investment can be calculated for certain elements, like enhancements relating to water and energy efficiency. However, other elements are more difficult to evaluate, like adding bicycle racks or increasing daylight or views from interior building spaces.

The costs of obtaining certification under Energy Star or LEED typically falls under three categories: (1) application and registration fees; (2) consultants’ and architects’ additional fees to manage the process; and (3) extra design, research, commissioning, or energy modeling costs required for certification.

Benefits

Companies can derive a number of other benefits from following the design elements of LEED or similar programs, even if certification is not sought or achieved. These benefits include financial incentives, increased asset valuation, and lower operating expenses, expedited construction procedures, and positive public perception.

Financial Incentives

Some jurisdictions provide financial incentives for attaining LEED or similar certification and, in some cases, even for incorporating green elements from those programs without achieving formal certification. Incentives may include rebated or reduced permit fees or application costs, reduced or waived taxes, or zoning allowances to permit larger buildings than otherwise allowed.

Increased Asset Valuation and Lower Operating Expenses

According to USGBC, an up-front investment in green building design yields life-cycle savings of ten times the initial investment amount, and typically affords improved air quality, more access to natural light, and other benefits over conventional buildings. When compared to conventional buildings in the same market, surveys cited by USGBC show that green buildings tend to have a higher valuation, leasing rates, and resale prices.

Valuation may be further impacted in the future as energy audit and efficiency information becomes increasingly public. As discussed below, jurisdictions are starting to require building owners to perform energy audits and make the results public. In response, ASTM International recently released ASTM E2797, a standard to provide a uniform means of collecting, compiling, analyzing, and reporting building energy performance data for lenders, buyers, and tenants.

Expedited Construction Procedures

Companies that achieve LEED or equivalent certification, particularly at the higher levels, can go through the various stages of the development process on an expedited basis. This can translate to reduced construction and carrying costs and to the faster receipt of income from the building’s sale or rental. For example, Los Angeles and San Francisco offer expedited plan review and permitting for projects seeking LEED certification.

Positive Public Perception

Designing and constructing a building with green principles provides an opportunity for public relations and advertising. Local media and governments, and green certification organizations like USGBC, frequently highlight these developments, including through awards or features on Web sites or in print.

Energy Audits and Retrofitting for Existing Buildings

The next wave of green laws and policies is expected to incentivize and even require that existing buildings be evaluated and retrofitted to improve energy efficiency. Some jurisdictions already require that energy audits be prepared for existing large buildings.

An energy audit surveys a building’s features and mechanical systems to assess overall energy usage and to identify and price out both inefficiencies and measures to improve them. Following the path of other green building requirements, the early mandates of retrofit initiatives applied to government buildings but they are beginning to be applied to commercial and other categories.

Local Government Initiatives

Only a few leading jurisdictions have mandated energy audit and retrofitting for private buildings, such as New York City (NYC) and San Francisco. However, these initiatives are expected to become more commonplace and increasingly mandatory in coming years.

In December 2009, NYC enacted the Greener, Greater Buildings Plan, which requires large private buildings and certain city buildings to track, assess, and publicly report their energy and water use. The audit report must identify the costs and savings associated with all reasonable efficiency and retrofit measures; although retrofits are not (yet) required, building owners must retro commission (or “tune-up”) existing systems to ensure efficiency. Buildings that are Energy Star or LEED certified are exempt from these requirements.

In December 2010, San Francisco adopted an ordinance requiring owners of non-residential buildings over 10,000 square feet to conduct an energy audit and submit a report every five years. That audit report must identify retrofitting or retro-commissioning alternatives that could pay for themselves in five years.

Why Companies Should Consider Greening Real Estate Now

The design, construction, and operation of buildings continue to green as a result of improved technology and industry practice, amended building codes, the influence of LEED and Energy Star and available benefits and incentives. Taken together, these factors continually set a higher “floor” for the performance of green buildings. At the same time, revised Energy Star and LEED standards continually raise the “ceiling” for sustainable green development by recognizing the most cutting-edge green elements. As this cycle continues, today’s cutting edge will become tomorrow’s standard practice.

When designing or renovating a building, you should consider the costs and benefits of green building elements and whether to seek Energy Star or LEED certification. Attaining such certification could exempt your company from, or at least delay its need to comply with, future energy audit or retrofit mandates.

By exploring these issues now, you may be able to take advantage of funding opportunities, tax credits, and other incentives to defray the costs associated with green building construction or retrofitting.

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