The Bond Mandated by the DC Green Building Act Does Not Exist, so the Solution is ..
Legislation proposes a binding pledge and $3 million fine
Legislation was introduced yesterday before the District of Columbia Council that will allow applicants for a building permit to sign “a binding pledge that within 2 years of receipt of the certificate of occupancy the applicant will fulfill or exceed the current edition of the LEED standard for commercial and institutional buildings at the certified level.”
Despite that the “binding pledge” carries with it a potential fine of $3 Million, the Green Building Compliance, Technical Corrections and Clarification Amendment Act of 2011, as introduced by Councilmember Mary M. Cheh, is being widely supported by environmental groups and the business community.
The current law
The DC Green Building Act, today, in relevant part, it provides,
“On or before January 1, 2012, all applicants for construction governed by section 4 [i.e., all new construction and substantial renovation of non residential buildings larger than 50,000 square feet] shall provide a bond, .. “.
Earlier this year, a housekeeping amendment introduced at the request of the Mayor, substituted “bond” for “performance bond” throughout the Act.
The Act further provides,
“.. in lieu of the bond required by this section, the Mayor may accept an irrevocable letter of credit from a financial institution authorized to do business in the District or evidence of cash deposited in an escrow account in a financial institution in the District in the name of the licensee and the District.”
That is, in lieu of the bond, a letter of credit or cash may be posted. So, alternatives to posting a bond exist today (although neither of these alternatives are ideal and in point of fact, for those larger projects that will have a $3 Million bond requirement, the alternatives are not commercial reasonable for most builders). Note the dollar amount of the bond is a formula of between 3% of the total cost of a building (for buildings of 150,000 square feet or less) through 4% (for a building of 250,000 square feet), with a maximum bond of $3 Million.
The problem
The bond prescribed by the DC Green Building Act does not exist. While technically correct, such “a bond” could be posted for a credit worthy applicant for construction, the required surety bond is not readily available in the marketplace.
However, some have argued that it is not yet January 1, 2012 (the effective date of the section of the law requiring a bond). No insurance product existed in the marketplace prior to 1898, when the first liability car insurance policy written in the U.S. was issued. The invention of the automobile in the late nineteenth century created a need and an opportunity for insurance to protect motorists from the potentially enormous financial loss from operating a car. It is suggested that despite protestations the insurance industry would respond to the opportunity with specific surety instruments that will satisfy the DC bond requirement.
Arguably, there are today a variety of surety bonds in use in the construction marketplace, including “performance bonds” where the obligation states that the construction company will complete the project as described in the construction contract (including completing a project that is required by the construction contract to be LEED certified). The federal government also requires such a performance bond as do many state and local governments and school districts, that each require LEED certification.
What may be unique about the DC Act, beyond that the obligation is to the DC government and not the project owner which is no different than a performance bond to secure a public works agreement that are common in construction (including in DC), is the inartful wording that mandates forfeiture of the entire bond for a failure to achieve LEED certification. Specifically, the DC law provides, “all or part of the bond shall be forfeited to the District and deposited in the Green Building Fund if the building fails to meet the verification requirements ..”
Councilmember Chen explains, “because of uncertainty and lack of specificity in the current law, surety providers have been hesitant to issue bonds, thus compromising the ability of the District to enforce Green Building requirements.”
The proposed solution
The Councilmember, went on to say, “we have developed an alternative to the bond requirement that is sensitive to the needs of developers while presenting a very strong deterrent toward non-compliance.”
Under the amended law, a building permit applicant that submits the first building construction permit for a project (i.e., excluding razing, shoring and foundation permits) beginning January 1, 2012, must “prior to receipt of a certificate of occupancy” sign a binding pledge stating that they will provide evidence that “the applicant will fulfill or exceed the current edition of the LEED standard for commercial and institutional buildings at the certified level” within two years of receipt of the certificate of occupancy.
If “the project does not provide evidence that it has fulfilled or exceeded” the LEED requirement under the law, the Mayor shall “levy a fine against the applicant.” The fine will be calculated at $7.50 per square foot of gross floor space for buildings of less than 100,000 square feet and $10.00 per square foot for buildings of at least 100,000 square feet of gross floor space. The fine would be capped at $3,000,000, which is also the limit for a bond under current law.
Additionally, the amended law provides for an ongoing fine, ..”Beginning 4 years after receipt of the certificate of occupancy, the applicant shall pay a monthly fine of $0.02 per square foot to the District for failure to provide evidence that it has fulfilled or exceeded..” the LEED requirement under the law.
Which begs the question, is DC government proposing “excessive fines” that will be grossly disproportional to the gravity of the building code offense, in violation of the Eight Amendment to the U.S. Constitution? By way of comparison, in Baltimore City the failure to obtain LEED certification is a code violation with the possibility of an administrative penalty being assessed of up to $1,000 a day.
The bond, letter of credit, and cash all remain options as financial securities under the law, but none would be required if an applicant chooses the binding pledge option. Also of note, as provided in the pending bill, the option of posting a bond will only become effective as an alternative after issuance of (long awaited) regulations promulgated by the Mayor.
A harbinger of things to come
The Green Building Compliance, Technical Corrections and Clarification Amendment Act of 2011, is being widely heralded as a good solution to an unintended consequence of the District of Columbia’s mandatory green building law, as enacted in 2006.
The legislation is not yet law. It will only take effect after enactment by the DC Council, approval by the Mayor, and following the 30 day period of Congressional review as provided in the District of Columbia Home Rule Act.
Facing the possibility of a $3 Million fine for noncompliance in DC, this legislation is a harbinger that the time is now to modify contract language in all construction industry agreements to apportion the risk for failure to achieve green building requirements.
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