Lenders Need to Understand Green Building Risks

January 27, 2017

During the recession, one of our developer clients advised us that he was fending off foreclosure on his high-rise by using the bank’s failure to include the source of the building’s air conditioning in its lien. The high-rise used an energy-efficient system that was located off-premises in another building that he owned. Without air conditioning, the high-rise, with its inoperable windows, was unusable, and within a few days in that state’s unfiltered humidity, it would probably fill with mold.

As ecodistricts and new energy districts are created in cities throughout the U.S., an increasing number of shared, off-site utility systems also are being created. By contract or by ordinance, buildings may have obligations to utilize these systems instead of replacing existing building boilers or units. When a building is no longer relying on its own asset for heating or cooling, but buying these as services, does this change the building’s value?

During the process of foreclosure, it is not uncommon for a building to go dark for some period of time. With a conventional utility provider, the electrical bill is self-regulating — if no one is using electricity in the building, the bill is much smaller and the lender’s maintenance cost is low. If, however, the roof-mounted solar unit is based on a “take or pay” contract to support its financing, the lender may be put to the test of paying a substantial and probably unrecoverable sum while waiting to resell the building. The lender may lose the rooftop provider, together with a potentially valuable market advantage of relatively inexpensive energy, and incur a reduction in building value.

Although these examples are based on energy assets, similar concerns can arise in connection with offsite water sources, storm water discharge rights, monitoring contracts and other green building attributes. In the end, it is not so much that these attributes are complex or even difficult to address — they are not. They are simply easy to overlook.

As a benefit of attending our Green Building Risk Assessment Webinar on Feb. 15, 2017, at 12 p.m. (ET), we will provide you with a due diligence checklist and a glossary of green building terms to aid in your due diligence program. We’ll send details on the program next week.

Whether you are a purchaser of real estate assets who wants to refine your green building risk assessment, a real estate lender who wants to make sure you are capturing all of the relevant value of your security, or a seller who wants to ensure a smooth closing, you should be familiar with all aspects of modern, green building risk assessment. If you have not yet done so, please download our short memo: Five Top Issues of Green Building Risk Assessment.