As green building becomes the preferred construction model of state, local, and federal governments, owners, developers, and contractors are presented with numerous business opportunities. Green building is construction that is environmentally friendly and minimizes the use of energy and water. As issues surrounding climate change and environmental preservation have come to the forefront, construction opportunities have shifted towards green building.
In general, green building promotes a safer, healthier and a more sustainable way of life. It reduces energy use, water use, solid waste and greenhouse gas emissions. Notwithstanding these benefits, green building can be an expensive and demanding process. Building owners and developers may have to invest additional money to maintain structures, and the process of achieving green building status may take time. Yet green building can be a strong marketing tool for owners and developers. Ultimately, for many, the benefits associated with green building outweigh the costs.
Green building appears to be a solution for many of the environmental effects arising from human activity. With that, it is vital that owners, developers, and contractors are aware of the legal issues implicated by green building.
Tax breaks and profitability from green building often motivate participants to obtain Leadership in Energy and Environmental Design (LEED) certification, or other certifications. The LEED rating system, developed by the U.S. Green Building Council (USGBC), contains four levels of certification: certified, silver, gold and platinum. To attain certification, the LEED rating system takes design, materials, operation of buildings, the skill level and experience of contractors, and other factors into consideration. The levels of certification are based on a point system indicating how climate friendly each building is. The length of the certification process and likelihood of success may be uncertain, which should be considered when owners/developers enter into contracts with contractors.
To qualify for tax incentives, green building participants must meet one of the above LEED certification levels. Tax incentives may include a range of financial incentives and federal government tax credits and deductions. For example, in Ohio, LEED silver certification allows owners to receive tax exemptions that reduce taxable income by the expenses incurred during green building.
Usually, owners, developers, and contractors pursue green building projects with the intention of attaining LEED certification, receiving tax benefits, and/or making a profit. The questions that arise from these intentions are, what happens when certification standards are not met and an owner/developer cannot qualify for a tax benefit? Or, what happens when a contractor does not receive payment upon completion of a green building project that does not achieve LEED certification? Unfortunately, there is no clear answer.
Potential legal issues may arise for owners/developers where the failure of a building to satisfy a specified certification level can produce negative financial consequences. For example, a project where green qualities are a part of the tax incentives used to finance the project. Potential legal issues, for contractors, may arise when retainage funds are not released at the completion of a project.
To avoid any of these issues, owners/developers and contractors should clearly define expectations when deciding to enter into green building agreements. Doing so will help prevent litigation or other conflict. Owners/developers and contractors should focus on drafting and negotiating contracts for green building projects that address the LEED certification process. Additionally, owners/developers and contractors should address who becomes responsible if the project fails to achieve LEED certification and a participant does not receive tax benefits. Owners/developers should also understand that certain tax benefits are not required but are allowed. Therefore, favorable real property tax treatment is not guaranteed. By addressing these issues initially, green project participants can alleviate the risk of becoming involved in adversarial proceedings.
Parties involved in green building initiatives should thoroughly understand the process of achieving LEED certification. Moreover, parties should know that a favorable outcome is not guaranteed, and should have an agreement that specifies how potential legal issues will be resolved.
Taft’s construction attorneys can help you with questions around LEED certification for successful, profitable construction projects.