Green Building Risk Assessment: Necessary for Today’s Real Estate Deal Due Diligence

January 4, 2017

The next building you buy, finance or develop may be “green.” As the use of green building standards like LEED® or ENERGY STAR® has become commonplace, human health standards such as WELL Building Standard™ have emerged, micro-grids and rooftop solar arrays have proliferated and green leases have become more common, the nature of deal due diligence has changed.

Lenders and building purchasers need to modernize their due diligence procedures to reflect the new reality. Building developers and owners need to understand the concerns buyers and lenders may have so they can take appropriate steps to avoid any issues.

Most of the real estate industry has not updated its due diligence to comprehensively reflect the “green” changes of the last decade. Buyers need to know whether they can replace the roof without paying for business interruption because the rooftop solar must be temporarily removed. Lenders need to know whether a building is committed to tap into a new district heating system when the life of the current boiler ends. Sellers need to document the accuracy of their representations in obtaining LEED status, particularly if there is any risk that major tenants could leave if that status was lost.

We have represented nonprofit green building standard developers for almost two decades. Moreover, we represent numerous energy companies that are working with building owners to use their rooftops for energy production. If our building-owner clients or their lenders run into problems with these programs, it will harm not only them, but also these beneficial programs, because others will be less eager to engage. Consequently, it is important that everyone involved in green buildings understand how to manage green building risks.

The good news is that the risks involved in these types of matters are far less than the company-breaking risks of the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA) and hazardous substances. More good news is that the risks are easily manageable in the due diligence process. With a better understanding of green risk, building purchasers and their lenders can avoid costly problems and project disruption. Sellers can anticipate their concerns and prepare proper documentation.

We’ve prepared a list of the top five green issues to watch for in due diligence and risk assessment for green buildings.

For those who are interested, we will be drilling down into some of the issues with buying or financing green buildings and the best ways to successfully manage these issues. Please mark your calendar for February 15, from 12 to 2 p.m. (ET), for a webinar discussion of green risk assessment. More details will follow.