An Introduction to Sustainable Building: Risks and Opportunities

1. An Introduction to Sustainable Building:  Risks and Opportunities BCBEC Presentation May 25, 2006 Ujjval K. Vyas, Ph.D., Esq., LEED APForan Glennon Palandech & Ponzi P.C.

2. Introduction • Confluence of four factors leading to success of sustainable building movement • Design professionals, especially architects, involved in activist-like support for sustainability • Economic changes and studies showing viability of sustainability • Political changes resulting in the elimination of sustainability as “hot button” issue • Technological changes to make sustainability viable Ujjval K. Vyas, Ph.D., J.D.

3. Introduction • Economics • Intangible goodwill advantages • Tangible higher asset valuation, higher resale value, reduced operation and maintenance costs and reduced exposure to energy price volatility • Benchmarking and plausible studies to show cost benefit outcomes • Especially important for long-term real estate asset holders: universities, schools, government buildings, hospitals, industrial/manufacturing facilities, non-profits, REITs, investment portfolios, etc. Ujjval K. Vyas, Ph.D., J.D.

4. Introduction • Sustainability does not equal energy concerns alone, but energy is the most important factor in determining economic viability • Claims about increased worker productivity and performance in sustainable buildings are questionable • Claims about indoor air quality and decreased health problems may prove plausible Ujjval K. Vyas, Ph.D., J.D.

5. Introduction • Life-cycle cost analysis is the lynch-pin of the sustainability question • Energy modeling is at the core of the life-cycle cost analysis • Design professionals who produce the models may face increased exposure due to the large potential damages if the performance fails • Increased marginal cost can be minimized by seeking sustainable attributes from the outset Ujjval K. Vyas, Ph.D., J.D.

6. Introduction • Political context no longer creates barriers to sustainability • Geo-politics and national security • “Conservative” agenda of fiscal responsibility and decreased taxation comport with putting up more efficient public and private buildings • “Liberal” agenda of decreasing taxation of natural resources and minimizing human intervention through resource harvesting comports with sustainable building • Decreased dependence on fossil fuels common to both sides Ujjval K. Vyas, Ph.D., J.D.

7. Law and Economics • Legal risk and business risk are inextricably tied together for all members of the building industry • New marketplace configurations often present hidden legal or business risks • These risks differ depending on the parties or entities involved Ujjval K. Vyas, Ph.D., J.D.

8. Owners • Sustainability/LEED advantages: • Marketing/market differentiation • This will last only until LEED becomes a common best practice • Reduced costs to maintain and operate • This is the most important economic issue for owners holding the asset for the long term • Increased asset value • Decreased risk for investment trusts or REITs to purchase • Decreased exposure to energy-price volatility • Decreased litigation associated with construction • Possible community or political advantages • Tax incentives; other equity or debt sources • Permitting incentives Ujjval K. Vyas, Ph.D., J.D.

9. Owners • Sustainability/LEED risks: • Certification failure • Statutory issues • Lending issues • Marketing or third-party representation of certification issues • Surety issues; especially latent defect exposures • Performance failure • Contractor scope or design professional • Increased initial costs • Certification or sustainability not always the most economically sustainable option Ujjval K. Vyas, Ph.D., J.D.

10. Owners • Defraying or transferring risk • Contracts • Make sure RFQ, RFP and subsequent contracts make clear the certification to be obtained • Make sure that the GC or CM, at risk or otherwise, requires the subcontractors to provide necessary documentation in support of certification Ujjval K. Vyas, Ph.D., J.D.

11. Owners • Defraying or transferring risk • Experienced contractor and designer • LEED accreditation not the most important attribute • Construction delivery method • Design-build • Design-build with owner’s representative Ujjval K. Vyas, Ph.D., J.D.

12. Owners • Should owners seek LEED certification or a sustainable building? • In terms of economics, the energy reduction and management portion of the LEED certification is the most significant and objectively ascertainable • Other attributes of LEED provide less tangible benefits to the owner • LEED certification is most advantageous where the intangible benefits play an important role in the overall viability of the project Ujjval K. Vyas, Ph.D., J.D.

13. Contractors • Sustainability/LEED advantages for contractors: • Market differentiation and competitive advantages in a changing marketplace • Intangible good will • Decreased litigation Ujjval K. Vyas, Ph.D., J.D.

14. Contractors • Sustainability/LEED risks: • Certification failure • Is contractor responsible for certification by contract? • Incomplete control over necessary documents for certification • Hidden performance specifications arise from LEED letter template signatures by contractors • Performance failures due to other contractors Ujjval K. Vyas, Ph.D., J.D.

15. Contractors • Defraying or transferring risk • Contracts • Ensure that the contract specifications and the possible performance specifications in LEED documents are either in agreement or require additional compensation for providing performance warranties • Ensure that contracts downstream indemnify for losses resulting from failure to certify or failure to provide required documentation Ujjval K. Vyas, Ph.D., J.D.

16. Contractors • Defraying or transferring risk • Select subcontractors who are experienced and familiar with LEED issues • Select alternative project delivery methods that provide greater control over the whole project • Pay attention to the construction experience and financial viability of the owner to avoid mismatched expectations, especially with non-profits Ujjval K. Vyas, Ph.D., J.D.

17. Contractors • Should contractors develop LEED capabilities? • Yes, if they want to be responsive to the changing marketplace • Yes, if they want to penetrate new markets • No, if their particular niche is generally unaffected—civil engineering works for example • Yes, if some segment of their project areas will be affected • Maybe not, if they are already have capabilities beyond LEED, such as performance contracting or EPC contracting. Ujjval K. Vyas, Ph.D., J.D.

18. Design Professionals • Sustainability/LEED advantages: • May increase role of architect/design professional in the construction process • Intangible increase in “self worth,” especially for the disproportionate number of architects involved in LEED • If design professionals accept greater risk, such as architect led design-build, LEED may be an entrée to recapturing a greater share of control over building construction • Possible increase in revenues for providing oversight of LEED certification process via AIA B-214 Ujjval K. Vyas, Ph.D., J.D.

19. Design professionals • Sustainability/LEED risks: • Certification failure • Design defects • AIA B-214 and definition of “professional services” as leading to possible exclusion by carrier • Longer tail for liability since certification may not obtain until long after project is complete • Warranties • Provision of hidden warranties in signing LEED letter templates required for certification • Warranty language vitiates E & O coverage for design professionals • Standard of Care • Voluntary and involuntary increase in standard of care Ujjval K. Vyas, Ph.D., J.D.

20. Design Professionals • Defraying or transferring risk • Consider carefully if the design professional should take on any contractual responsibility for certification via AIA B-214 or otherwise • Any design professional sub-consultants should indemnify for losses associated with failure of LEED certification • Do not voluntarily increase the standard of care through hopeful language; increased standard of care may create coverage and defense issues • Do not sign LEED letter templates without adding language to underlying contract which defines the signatures provided on the letter templates as only a professional opinion and disclaim any warranty implications Ujjval K. Vyas, Ph.D., J.D.

21. Design Professionals • Should design professionals act as the primary entity for acquiring LEED certification? • Unclear • Design professionals do not provide the kinds of warranties of performance that the owner is seeking; only contractors commonly provide this guarantee Ujjval K. Vyas, Ph.D., J.D.

22. Project delivery selection • Design-build as preferred method • The integrated process that is at the core of LEED already mimics the design-build model of decreased adversarial interaction in the construction process • Single point responsibility means the owner can get the kinds of warranties desired without fear of complex multiparty litigation • Single entity has control of the process and the required documentation through privity chain • Insurance issues are no longer bifurcated into CGL and E&O coverage areas • Any concerns on the part of the owner for independent oversight can be solved by engaging an owner representative Ujjval K. Vyas, Ph.D., J.D.

23. Marketplace Changes • Increased presence of contractors in shepherding LEED certification and provision of LEED guidance to owners • Competition between Green Globes and USGBC may create instability for owner decision-making • Savvy owners may expect sustainability services without a premium from design professionals • The transformation of buildings from lowest cost and short-term to high-performance may increase the marginalization of architectural designers • Real state bubble may hurt or help sustainability; will have to wait and see • Design professional firms not responding to the market demand for sustainability will be at a serious competitive disadvantage • On the other hand, firms pursuing sustainability will have a distinct market advantage Ujjval K. Vyas, Ph.D., J.D.

24. Final thought • Sustainability, in its many guises, is here to stay • The firms that manage this opportunity and the attendant risks will increase their share of the market • Like the firms that said CAD was a fad, firms ignoring sustainability do so at their peril • The risks, like most of the other risks in the building process, can be managed but require active engagement Ujjval K. Vyas, Ph.D., J.D.