An Introduction to Sustainable Building: Risks and Opportunities BCBEC Presentation May 25, 2006 May...

An Introduction to An Introduction to Sustainable Building: Risks Sustainable Building: Risks

and Opportunitiesand OpportunitiesBCBEC PresentationBCBEC Presentation

May 25, 2006May 25, 2006

Ujjval K. Vyas, Ph.D., Esq., LEED APUjjval K. Vyas, Ph.D., Esq., LEED AP

Foran Glennon Palandech & Ponzi P.C.Foran Glennon Palandech & Ponzi P.C.

Ujjval K. Vyas, Ph.D., J.D.Ujjval K. Vyas, Ph.D., J.D.

IntroductionIntroduction

Confluence of four factors leading to success of Confluence of four factors leading to success of sustainable building movementsustainable building movement Design professionals, especially architects, involved Design professionals, especially architects, involved

in activist-like support for sustainabilityin activist-like support for sustainability Economic changes and studies showing viability of Economic changes and studies showing viability of

sustainabilitysustainability Political changes resulting in the elimination of Political changes resulting in the elimination of

sustainability as “hot button” issuesustainability as “hot button” issue Technological changes to make sustainability viableTechnological changes to make sustainability viable



EconomicsEconomics Intangible goodwill advantagesIntangible goodwill advantages Tangible higher asset valuation, higher resale value, Tangible higher asset valuation, higher resale value,

reduced operation and maintenance costs and reduced operation and maintenance costs and reduced exposure to energy price volatilityreduced exposure to energy price volatility

Benchmarking and plausible studies to show cost Benchmarking and plausible studies to show cost benefit outcomesbenefit outcomes

Especially important for long-term real estate asset Especially important for long-term real estate asset holders: universities, schools, government buildings, holders: universities, schools, government buildings, hospitals, industrial/manufacturing facilities, non-hospitals, industrial/manufacturing facilities, non-profits, REITs, investment portfolios, etc.profits, REITs, investment portfolios, etc.



Sustainability does not equal energy concerns Sustainability does not equal energy concerns alone, but energy is the most important factor in alone, but energy is the most important factor in determining economic viabilitydetermining economic viability

Claims about increased worker productivity and Claims about increased worker productivity and performance in sustainable buildings are performance in sustainable buildings are questionablequestionable

Claims about indoor air quality and decreased Claims about indoor air quality and decreased health problems may prove plausiblehealth problems may prove plausible



Life-cycle cost analysis is the lynch-pin of Life-cycle cost analysis is the lynch-pin of the sustainability questionthe sustainability question Energy modeling is at the core of the life-cycle Energy modeling is at the core of the life-cycle

cost analysiscost analysis Design professionals who produce the models Design professionals who produce the models

may face increased exposure due to the large may face increased exposure due to the large potential damages if the performance failspotential damages if the performance fails

Increased marginal cost can be minimized by Increased marginal cost can be minimized by seeking sustainable attributes from the outsetseeking sustainable attributes from the outset



Political context no longer creates barriers to Political context no longer creates barriers to sustainabilitysustainability Geo-politics and national securityGeo-politics and national security ““Conservative” agenda of fiscal responsibility and Conservative” agenda of fiscal responsibility and

decreased taxation comport with putting up more decreased taxation comport with putting up more efficient public and private buildingsefficient public and private buildings

““Liberal” agenda of decreasing taxation of natural Liberal” agenda of decreasing taxation of natural resources and minimizing human intervention through resources and minimizing human intervention through resource harvesting comports with sustainable resource harvesting comports with sustainable buildingbuilding

Decreased dependence on fossil fuels common to Decreased dependence on fossil fuels common to both sidesboth sides


Law and EconomicsLaw and Economics

Legal risk and business risk are Legal risk and business risk are inextricably tied together for all members inextricably tied together for all members of the building industryof the building industry

New marketplace configurations often New marketplace configurations often present hidden legal or business riskspresent hidden legal or business risks

These risks differ depending on the parties These risks differ depending on the parties or entities involvedor entities involved


OwnersOwners Sustainability/LEED advantages:Sustainability/LEED advantages:

Marketing/market differentiationMarketing/market differentiation• This will last only until LEED becomes a common best This will last only until LEED becomes a common best

practicepractice Reduced costs to maintain and operateReduced costs to maintain and operate

• This is the most important economic issue for owners This is the most important economic issue for owners holding the asset for the long term holding the asset for the long term

Increased asset valueIncreased asset value• Decreased risk for investment trusts or REITs to purchaseDecreased risk for investment trusts or REITs to purchase• Decreased exposure to energy-price volatilityDecreased exposure to energy-price volatility

Decreased litigation associated with constructionDecreased litigation associated with construction Possible community or political advantagesPossible community or political advantages Tax incentives; other equity or debt sourcesTax incentives; other equity or debt sources Permitting incentivesPermitting incentives


OwnersOwners

Sustainability/LEED risks:Sustainability/LEED risks: Certification failureCertification failure

• Statutory issuesStatutory issues• Lending issuesLending issues• Marketing or third-party representation of certification issuesMarketing or third-party representation of certification issues• Surety issues; especially latent defect exposuresSurety issues; especially latent defect exposures

Performance failurePerformance failure• Contractor scope or design professional Contractor scope or design professional

Increased initial costsIncreased initial costs• Certification or sustainability not always the most Certification or sustainability not always the most

economically sustainable optioneconomically sustainable option


OwnersOwners

Defraying or transferring riskDefraying or transferring risk ContractsContracts

• Make sure RFQ, RFP and subsequent contracts Make sure RFQ, RFP and subsequent contracts make clear the certification to be obtainedmake clear the certification to be obtained

• Make sure that the GC or CM, at risk or otherwise, Make sure that the GC or CM, at risk or otherwise, requires the subcontractors to provide necessary requires the subcontractors to provide necessary documentation in support of certificationdocumentation in support of certification


OwnersOwners

Defraying or transferring riskDefraying or transferring risk Experienced contractor and designerExperienced contractor and designer

• LEED accreditation not the most important LEED accreditation not the most important attributeattribute

Construction delivery methodConstruction delivery method• Design-buildDesign-build• Design-build with owner’s representativeDesign-build with owner’s representative


OwnersOwners

Should owners seek LEED certification or a Should owners seek LEED certification or a sustainable building?sustainable building? In terms of economics, the energy reduction and In terms of economics, the energy reduction and

management portion of the LEED certification is the management portion of the LEED certification is the most significant and objectively ascertainablemost significant and objectively ascertainable

Other attributes of LEED provide less tangible Other attributes of LEED provide less tangible benefits to the ownerbenefits to the owner

LEED certification is most advantageous where the LEED certification is most advantageous where the intangible benefits play an important role in the overall intangible benefits play an important role in the overall viability of the projectviability of the project


ContractorsContractors

Sustainability/LEED advantages for Sustainability/LEED advantages for contractors:contractors: Market differentiation and competitive Market differentiation and competitive

advantages in a changing marketplaceadvantages in a changing marketplace Intangible good willIntangible good will Decreased litigationDecreased litigation



Sustainability/LEED risks:Sustainability/LEED risks: Certification failureCertification failure

• Is contractor responsible for certification by Is contractor responsible for certification by contract?contract?

• Incomplete control over necessary documents for Incomplete control over necessary documents for certificationcertification

• Hidden performance specifications arise from Hidden performance specifications arise from LEED letter template signatures by contractorsLEED letter template signatures by contractors

Performance failures due to other contractorsPerformance failures due to other contractors



Defraying or transferring riskDefraying or transferring risk ContractsContracts

• Ensure that the contract specifications and the Ensure that the contract specifications and the possible performance specifications in LEED possible performance specifications in LEED documents are either in agreement or require documents are either in agreement or require additional compensation for providing performance additional compensation for providing performance warrantieswarranties

• Ensure that contracts downstream indemnify for Ensure that contracts downstream indemnify for losses resulting from failure to certify or failure to losses resulting from failure to certify or failure to provide required documentationprovide required documentation



Defraying or transferring riskDefraying or transferring risk Select subcontractors who are experienced Select subcontractors who are experienced

and familiar with LEED issuesand familiar with LEED issues Select alternative project delivery methods Select alternative project delivery methods

that provide greater control over the whole that provide greater control over the whole projectproject

Pay attention to the construction experience Pay attention to the construction experience and financial viability of the owner to avoid and financial viability of the owner to avoid mismatched expectations, especially with mismatched expectations, especially with non-profitsnon-profits



Should contractors develop LEED capabilities?Should contractors develop LEED capabilities? Yes, if they want to be responsive to the changing Yes, if they want to be responsive to the changing

marketplacemarketplace Yes, if they want to penetrate new marketsYes, if they want to penetrate new markets No, if their particular niche is generally unaffected—No, if their particular niche is generally unaffected—

civil engineering works for examplecivil engineering works for example Yes, if some segment of their project areas will be Yes, if some segment of their project areas will be

affected affected Maybe not, if they are already have capabilities Maybe not, if they are already have capabilities

beyond LEED, such as performance contracting or beyond LEED, such as performance contracting or EPC contracting.EPC contracting.


Design ProfessionalsDesign Professionals

Sustainability/LEED advantages:Sustainability/LEED advantages: May increase role of architect/design professional in May increase role of architect/design professional in

the construction processthe construction process Intangible increase in “self worth,” especially for the Intangible increase in “self worth,” especially for the

disproportionate number of architects involved in disproportionate number of architects involved in LEED LEED

If design professionals accept greater risk, such as If design professionals accept greater risk, such as architect led design-build, LEED may be an entrée to architect led design-build, LEED may be an entrée to recapturing a greater share of control over building recapturing a greater share of control over building constructionconstruction

Possible increase in revenues for providing oversight Possible increase in revenues for providing oversight of LEED certification process via AIA B-214of LEED certification process via AIA B-214


Design professionalsDesign professionals Sustainability/LEED risks:Sustainability/LEED risks:

Certification failureCertification failure• Design defectsDesign defects• AIA B-214 and definition of “professional services” as leading AIA B-214 and definition of “professional services” as leading

to possible exclusion by carrierto possible exclusion by carrier• Longer tail for liability since certification may not obtain until Longer tail for liability since certification may not obtain until

long after project is completelong after project is complete WarrantiesWarranties

• Provision of hidden warranties in signing LEED letter Provision of hidden warranties in signing LEED letter templates required for certificationtemplates required for certification

• Warranty language vitiates E & O coverage for design Warranty language vitiates E & O coverage for design professionalsprofessionals

Standard of CareStandard of Care• Voluntary and involuntary increase in standard of careVoluntary and involuntary increase in standard of care



Defraying or transferring riskDefraying or transferring risk Consider carefully if the design professional should take on any Consider carefully if the design professional should take on any

contractual responsibility for certification via AIA B-214 or contractual responsibility for certification via AIA B-214 or otherwiseotherwise

Any design professional sub-consultants should indemnify for Any design professional sub-consultants should indemnify for losses associated with failure of LEED certificationlosses associated with failure of LEED certification

Do not voluntarily increase the standard of care through hopeful Do not voluntarily increase the standard of care through hopeful language; increased standard of care may create coverage and language; increased standard of care may create coverage and defense issuesdefense issues

Do not sign LEED letter templates without adding language to Do not sign LEED letter templates without adding language to underlying contract which defines the signatures provided on the underlying contract which defines the signatures provided on the letter templates as only a professional opinion and disclaim any letter templates as only a professional opinion and disclaim any warranty implicationswarranty implications



Should design professionals act as the Should design professionals act as the primary entity for acquiring LEED primary entity for acquiring LEED certification?certification? UnclearUnclear

• Design professionals do not provide the kinds of Design professionals do not provide the kinds of warranties of performance that the owner is warranties of performance that the owner is seeking; only contractors commonly provide this seeking; only contractors commonly provide this guaranteeguarantee


Project delivery selectionProject delivery selection Design-build as preferred methodDesign-build as preferred method

The integrated process that is at the core of LEED The integrated process that is at the core of LEED already mimics the design-build model of decreased already mimics the design-build model of decreased adversarial interaction in the construction processadversarial interaction in the construction process

Single point responsibility means the owner can get Single point responsibility means the owner can get the kinds of warranties desired without fear of complex the kinds of warranties desired without fear of complex multiparty litigationmultiparty litigation

Single entity has control of the process and the Single entity has control of the process and the required documentation through privity chainrequired documentation through privity chain

Insurance issues are no longer bifurcated into CGL Insurance issues are no longer bifurcated into CGL and E&O coverage areasand E&O coverage areas

Any concerns on the part of the owner for independent Any concerns on the part of the owner for independent oversight can be solved by engaging an owner oversight can be solved by engaging an owner representativerepresentative


Marketplace ChangesMarketplace Changes Increased presence of contractors in shepherding LEED Increased presence of contractors in shepherding LEED

certification and provision of LEED guidance to ownerscertification and provision of LEED guidance to owners Competition between Green Globes and USGBC may create Competition between Green Globes and USGBC may create

instability for owner decision-makinginstability for owner decision-making Savvy owners may expect sustainability services without a Savvy owners may expect sustainability services without a

premium from design professionalspremium from design professionals The transformation of buildings from lowest cost and short-term The transformation of buildings from lowest cost and short-term

to high-performance may increase the marginalization of to high-performance may increase the marginalization of architectural designersarchitectural designers

Real state bubble may hurt or help sustainability; will have to wait Real state bubble may hurt or help sustainability; will have to wait and seeand see

Design professional firms not responding to the market demand Design professional firms not responding to the market demand for sustainability will be at a serious competitive disadvantagefor sustainability will be at a serious competitive disadvantage

On the other hand, firms pursuing sustainability will have a On the other hand, firms pursuing sustainability will have a distinct market advantagedistinct market advantage


Final thoughtFinal thought

Sustainability, in its many guises, is here to stay Sustainability, in its many guises, is here to stay The firms that manage this opportunity and the The firms that manage this opportunity and the

attendant risks will increase their share of the attendant risks will increase their share of the marketmarket

Like the firms that said CAD was a fad, firms Like the firms that said CAD was a fad, firms ignoring sustainability do so at their perilignoring sustainability do so at their peril

The risks, like most of the other risks in the The risks, like most of the other risks in the building process, can be managed but require building process, can be managed but require active engagement active engagement

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