Redevelopers Beware – San Francisco’s Green Building Ordinance is LEED® on Acid*

San Francisco’s new LEED-driven legislation could have significant consequences for the city’s real estate development community.

Once upon a time there was a voluntary, market-driven green building rating system called LEED®. In accordance with the intent of its drafters at the U.S. Green Building Council (“USGBC”), it allowed developers to evaluate the suitability and feasibility of pursuing a third-party green building certification for a particular project based on a standard set of prerequisites and credits and then make an informed rational decision about whether or not follow the green brick road and design and develop accordingly. Along comes one municipality after another, from Boston to Los Angeles, that decides that a voluntary market-based incentive to build certified green buildings is not enough and so they enact ordinances that mandate that private buildings be LEED certified, LEED “certifiable” or meet the “intent of LEED.” While many in the building industry cringed at the thought of mandatory LEED regulations for many reasons, they had little idea that it could actually get worse. Case in point: San Francisco’s mandate of LEED on acid for redevelopment projects.

Given the lack of vacant land in San Francisco, much of the new construction in the City in recent years has been, and will continue in the future to involve, redevelopment, where buildings that are no longer the highest and best use for a particular property are demolished to make way for a more efficient use of the land. Such redevelopment could involve “like-kind for like-kind”, such as replacement of a dilapidated 50,000-square-foot office building with a new 100,000-square-foot office building, or could involve a repositioning of the land such as replacement of a small retail building or assemblage of small buildings with a new mixed-use office, hotel and retail building.

While there are many established planning policy reasons that favor redeveloping property in the urban core with either more intense or more appropriate uses than currently exist, you now get penalized for doing so in the City of San Francisco.

Pursuant to Section 1304C.0.5 of Ordinance No. 180-08, which is the ordinance that establishes minimum LEED ratings or GreenPoints required for buildings in the City:

“Applications subject to this section, whereby construction of a new building is proposed within five years of the demolition of a building on the site, where such demolition occurred after the effective date of this ordinance, shall be subject to the following requirements:

“1304C.0.5.1.1 . . . Where the building demolished was not an historical resource, the required points shall be increased by 10 percent of the total required of the applicable LEED certification requirements absent a demolition. For projects opting to be GreenPoint Rated . . . 20 additional points must be achieved where the building demolished was not an historical resource.” (emphasis added).

The applicable LEED certification requirements for large commercial buildings (Group B or M occupancy, over 25,000 square feet or a high rise building) are LEED Certified in 2008, LEED Silver in 2009 and LEED Gold in 2012. The actual required number of points depends on the LEED rating system that is being used. For example, if the project is using LEED for New Construction, the USGBC’s point requirements per category are Certified 26-32, Silver 33-38, Gold 39-51, and Platinum 52-69. If the project is using LEED for Core & Shell, the USGBC’s point requirements per category are Certified 23-27, Silver 28-33, Gold 34-44, and Platinum 45-61. Because 2009 will soon be upon us, let’s take LEED Silver as our example and assume a developer desired to redevelop a parcel housing an underutilized dilapidated office building with a new office building.

Assuming the new building is a speculative office building whereby LEED for Core & Shell would be the appropriate rating system, the minimum LEED points that would be required by the ordinance based on a LEED Silver minimum of 28 points, plus the 10 percent kicker, would be 31 points. That compares to 28 points if the project did not involve demolition. While 3 points make not sound like a lot, there are certainly people who have designed and developed green buildings, some of whom have missed a desired certification level by a point or two, that will attest to the fact that 3 additional points can a big deal for a given project. Those 3 extra points could be particularly challenging if the developer was already intending to rely on achieving the following now ordinance-required credits to meet the USGBC’s minimum point threshold and must find the additional points in other credits: Credit WE1.1 (50 percent reduction in use of potable water for landscaping); Credit WE3.1 (30 percent reduction in potable water use); and Credit MR2.2 (diversion of 75 percent of construction debris from landfill).

There thankfully appears to be at least a modicum of land planning logic in the ordinance whereby the required 10 percent point increase is reduced to 8 percent if the redevelopment is of a non-historic building that will increase commercial occupant loads and residential unit count by 300 percent, and the 10 percent point increase is reduced to 6 percent if such occupant loads and unit count increase by 400 percent. This lesser penalty or requirement presumably recognizes the benefit of higher density and intensity of use in advancing many sustainable development principles such as conserving land, promoting community livability, transportation efficiency and walkability. While notable, a better approach would have been to eliminate the 10 percent additional point requirement altogether if the proposed new building would increase occupant loads or density to higher levels. On top of it being good urban planning policy to encourage densification, as a practical reality developers may be compelled to upsize the project from an intensity standpoint as required by the project economics or market demand. If so, penalizing the project with extra LEED point or GreenPoint requirements would not affect developer behavior in deciding whether to renovate versus redevelop.

It should be noted that some observers have already added to the confusion of the ordinance and apparently misinterpreted these occupant and unit count provisions to mean they are an additional 6 to 8 percent “surcharge” on top of the 10 percent required LEED point increase which could result in up to an 18 percent required point increase when combined (see David C. Longinotti, “San Francisco’s Green Building Ordinance: All That Glitters…”, The Registry, August/September 2008). However, the higher occupant and unit count provisions are in fact intended to provide a benefit or reduction in the otherwise required 10 percent increase by dropping the required increase in points to 8 percent or 6 percent, accordingly, and do not operate as a “surcharge.” In response to Mr. Longinotti’s musing about why there are no corresponding provisions for occupant loads and density applicable to historic buildings, it is quite clear that the City obviously did not want to provide the same benefit or percentage point reduction if an historic building was involved in order to further discourage demolition of historic structures to an even greater extent than discouraging demolition of non-historic structures. That heightened City desire to discourage demolition of historic structures is also evident is how the 10 percent point increase is calculated for historic versus non-historic demolitions: for non-historic, “the required points shall be increased by 10 percent of the total required of the applicable LEED requirements absent a demolition”, whereas for historic “the required points shall be increased by 10 percent of the total available in the required LEED System” (Section 1304C.0.5.1.1).

Nonetheless, the fact remains that under the new ordinance, regardless of whether occupant loads or unit counts are increasing, a developer who redevelops a real estate asset in San Francisco will be held to a higher standard than a developer who develops a vacant parcel by having to pursue a greater number of rating system points. To add insult to injury, there is no correlation required in terms of the extra points required to comply with the mandated 10 percent increase and the goals sought to be advanced in rehabilitating rather that redeveloping buildings, namely preserving embodied energy and materials in existing buildings and reducing the consumption of energy and materials in constructing new building (see intent language in Ordinance Section 1(b)(xiv)). To wit, as a developer, one could pursue the extra required points from credits that have no direct relation to the goals of energy or material conservation (e.g. Core & Shell credits such as EQ Credit 8.2: Views outside for occupants of 90% of regularly occupied spaces; or SS Credit 5.1: Protect or restore habitat, etc.).

There are several other misgivings with San Francisco’s green building ordinance that are outside the scope of this article but that will challenge developers and insert additional risk management requirements into the design and project delivery process. While the ordinance may not be catastrophic to the development industry, it defies good planning logic in certain respects as it moves voluntary green building rating systems into a regulatory framework and puts them on acid for redevelopment projects.

*Paul D’Arelli is Co-Chair of Greenberg Traurig’s Green Building & Sustainability Group and works with other firm attorneys across many disciplines to manage the host of legal and risk management issues inherent in the implementation of a green building strategy, from entitlements and incentives, to design and construction contracts, project governance, leasing, and insurance. He is actively involved in several green building projects, including two LEED-ND pilot projects. You can contact him at darellip@gtlaw.com.

about gbNYC

gbNYC is a multi-disciplinary consulting and real estate services firm. In addition to representing office tenants and commercial buyers in leasing and acquisitions, we also provide innovative consulting solutions from a unique, green building perspective. We advise on green building financial incentives, comment on proposed green building marketing strategies, author white papers, treatises, and market analyses, organize seminars on the LEED process and professional accreditation, and provide advice and analysis on green building risk management and the overall state of green real estate, leasing, and construction, in New York City and beyond.

Our blog, the gbNYC+ journal of real estate, law, + sustainability, delivers consistent, original content - from a New York City perspective - on how technology, data, and sustainability are changing how we interact with our built environment. Subscribe below and receive new articles as they're published or connect with our social media presence to join our ongoing conversation about real estate and sustainability, in the Big Apple and beyond. Contact us at (201) 835-8530 or info@gbNYC.com for more information about our services and to discuss how we can assist you.

, , , , , , , , , ,

One Response to Redevelopers Beware – San Francisco’s Green Building Ordinance is LEED® on Acid*

  1. Leigh Budlong Tuesday, April 27, 2010 at 3:27 pm #

    Good article, thanks! If you are interested in speaking at an upcoming program, please contact me.

    Thanks,
    Leigh Budlong