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Financial risks of building green start with decision to build


Financial risks in constructing green buildings start with the decision to go green and the additional costs that entails, observers say.

“In most people's minds,” a green structure amounts to an additional cost of 3% to 5%, said Dan Knise, president and CEO of Ames & Gough, a McLean, Va.-based insurance broker and risk management consulting firm.

“It really comes down to whether or not you can meet the requirements of your construction contract,” which will “specify what has to be done and the scope of work” it says must be accomplished, said Rod Taylor, Windermere, Fla.-based managing director of Aon Corp.'s environmental services group.

From the owner's point of view, said Keith Jurss, Chicago-based senior vp of professional liability for the national construction practice of Willis North America Inc., “if the building that they're trying to construct in green technology doesn't meet the requirements that they've established, if it doesn't achieve the energy efficiency” that had been expected, “there could be a financial loss to them.”

Experts say several financial risks are associated with the Washington-based U.S. Green Building Council's Leadership in Energy and Environmental Design program, which sets standards for environmental performance.

Mr. Knise said the problem with LEED certification is owners do not know if a building qualifies for LEED until after it is completed. What if the financing is based on the LEED certification “and you don't get it? Now, you lose that tax credit,” he said.

Another “very real” financial risk is that “many tenants, particularly in more forward-thinking companies,” including law and architecture firms, want to be in a LEED-certified building because it is part of their commitment to be environmentally responsible,” Mr. Knise said.


“Therefore, if you don’t meet that certification, are you going to lose tenants” and have a less successful building as a result? he asked.

Furthermore, many locales now have tax credits available if buildings reach a certain LEED certification, a factor considered in the project financing, he said.

Tax credits were among issues in a Southern Builders Inc. vs. Shaw Development L.L.C. According to a counter complaint filed in state court in Princess Ann, Md., in 2009, among other allegations, Bonita Springs, Fla.-based property owner Shaw Development alleged that it lost a $635,000 tax credit because the builder failed to achieve a silver LEED certification. The case was settled out of court for an undisclosed amount, Mr. Knise said.

There also are a variety of local and state incentives, “not all of which are tax credits,” Mr. Knise said. In Pittsburgh, for example, firms that construct LEED-certified buildings receive a “density” bonus that allows them to rise 20% higher and include 20% more floor area than other buildings in their zoning districts.

Mr. Jurss said even if the building initially achieves certain energy efficiency, such as with a platinum LEED certification, there is the question whether the building’s energy efficiency systems are “really continuing to operate at the level of efficiency they did when they were originally put in.” Otherwise, it could mean added maintenance costs.

Although many expect sustainable buildings to have reduced utility costs, a building could LEED certification but not be any more energy efficient, Mr. Knise said.

Another financial risk is if the contract specifies using certain materials that are not available, substitutions are required and could be more expensive, Mr. Taylor said.