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2014
Jul 14

Real Estate Group Newsletter – Summer 2014

Summer 2014


Leader Certification Program Green Lease is Ready to Roll
Tamara Partridge, CPA

Today, many tenants are “thinking green.” Compliance with sustainability standards can affect occupancy rates and, in turn, a property’s financial leverage capacity. The U.S. Department of Energy’s Better Buildings Alliance and the Institute for Market Transformation have just launched the “Green Lease Leader” certification program to recognize commercial landlords and brokerage teams that successfully implement new or existing environmentally-friendly leases.

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The Green Lease Leader designation can help the commercial real estate industry respond to market pressures to improve sustainability by providing a reliable method for landlords to signal their willingness to participate in such initiatives.

A New Standard
Green Leasing has been a topic of discussion, and even execution, for some years now. Yet, a “Green Lease” remains to be clearly defined. As a result, landlords have struggled with the language to include in their leases to attract sustainability-minded tenants.

The Green Lease Leader program fills the gaps by setting a new standard with a uniform definition for a “Green Lease.” To satisfy the qualifications of a Green Lease, a lease must include a tenant cost recovery clause that can be used for energy-efficiency-related capital improvements.

In other words, the lease should expand the list of operating expenses to include capital expenses intended to save energy. A Green Lease will require at least three of the following:

  • A provision requiring tenant disclosure of utility data to facilitate whole-building energy benchmarking;
  • Minimum standards and/or tenant improvement specifications for energy efficiency (for example, “Tenant will install only ENERGY STAR appliances”);
  • Sustainable operations and maintenance rules and regulations covering restricted HVAC weekend operating hours, the provision of janitorial services during daytime hours, and the prohibition of tenant space heaters;
  • Submetering of tenant spaces or separate metering of tenant plug load and equipment, including data centers (ideally, tenants will be billed according to actual use, not on a pro rata basis); or
  • A landlord agreement to incorporate energy management best practices in building operations, such as regular benchmarking, energy audits or commissioning of building systems.

Note that a commercial landlord must have a Green-Leased portfolio that exceeds 50,000 gross square feet to qualify for the designation.  However, even if your company has not yet been able to meet the requirements, you can still sign and submit the Green Lease Pledge. By signing and submitting the pledge, a company is added to the Green Lease Library which recognizes their commitment to green leasing.

The Application Process
The 2015 application cycle is scheduled to open this fall. Applicants must pay a $250 fee and submit at least two signed and executed Green Leases (submitted leases may be redacted to protect sensitive or proprietary information).

The application also requires a narrative description of the landlord’s internal Green Leasing initiative. The narrative portion will be scored based on the Green Leasing–related accomplishments. For example, developing a model Green Lease as an internal resource will earn four points, while holding meetings with decision-making executives to discuss incorporating green clauses into leases will earn two points. Developing and distributing a “Green Tenant Guide” scores three points.

A Green Lease Leader must earn 15 points. Ten will originate from the leases, with each approved lease worth five points. A minimum of five points is required from the narrative portion.

Going Green to Get Green
Going green may not be easy, but it can pay off. Adopting the changes required to get the Green Lease Leader designation could reduce costs, improve tenant satisfaction and provide a marketing boost. For assistance on attaining the Green Lease Leader designation, contact Tamara Partridge at tpartridge@orba.com or call her at 312.670.7444.


What to Expect When You Are Expecting Construction Litigation
Jeff Newman, CPA, JD

Delays in construction projects can lead to a cascade of negative financial repercussions for both owners and their contractors. The parties may even wind up in court.

Calculating damages in these cases can prove especially tricky when an owner causes the delay. Why? Because a significant portion of a contractor’s costs will need to be allocated among multiple projects. Fortunately, a qualified financial expert can help.

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Two Overheard Allocations
A delayed contractor will likely seek damages to cover some of its overhead costs, but construction companies rarely segregate overhead by project. Two types of overhead costs will require cost segregation or job-specific allocations:

1. Extended Field/Jobsite Overhead This overhead classification consists of costs which are necessary to support the work at the jobsite and, therefore, are directly chargeable to the project. These costs represent indirect expenses associated with the project and can increase because of delays. Such items can include but are not limited to the following:

  • Field office and equipment rental;
  • Project managers, supervisors and office workers;
  • Field office vehicles;
  • Field office utilities (including electricity, water and sewer usage); and
  • Supplies.

Contractual damages for these costs are based on the assumption that the original contract price included only the jobsite overhead costs necessary to support the project for the expected project completion timeline.

Determining a reasonable method to allocate the costs to various jobsites or projects can be challenging when employees (such as supervisors) work on multiple jobsites, meaning their time must be allocated. Cost allocation is also necessary when a delay creates the need for additional supervision, equipment, reporting, quality control and scheduling.

2. Indirect Overhead Items These claims are a contractor’s “cost of doing business” and are frequently among the most contentious points of construction litigation. Disagreements often stem from the fact that such items cannot be directly charged to a specific project. Examples include:

  • Salaries (for company officers, estimators, accounting staff and others not assigned to a specific project);
  • General and administrative costs;
  • Insurance; and
  • Taxes.

Unlike jobsite overhead, indirect overhead items generally are not directly increased by a project delay. However, slowdowns can impede the contractor’s ability to generate revenue. As a result, project delays negatively impact profitability and lead to reduced margins.

Much of litigation revolves around the appropriate cost allocation method formula. Several approaches have been used, including the Eichleay formula, Carteret formula, direct allocation method and fixed percentage approach. The Eichleay formula is probably the most common method. Under this method, a contractor must establish that 1) a compensable delay occurred; 2) the construction company was working on standby; and 3) the business could not take on other projects.

Additional Contractor Damages
Depending on the circumstances, a contractor may pursue several other types of damages, including productivity losses and damages for escalation. Although a contractor typically assumes the risks related to the costs of labor, equipment and materials during the course of a project, contractors could be entitled to damages that result from increased production times that result from such delays.

For example, a construction company might postpone a materials purchase because of the delay. If the materials cost more when purchased later, the owner could be liable for the difference in costs.

If, on the other hand, the contractor went ahead and bought the materials within the original period, it could seek damages to reimburse it for storage costs incurred because of the delay. In addition, the construction company could demand compensation for costs associated with idle labor and equipment.

On the upside, courts expect damaged parties to make reasonable efforts to mitigate their losses. So, a contractor’s damages may be limited to the extent that managers failed to take steps to minimize damages once they knew about the delay.

What Can Owners Recover?
In construction cases where delays are caused by contractors, architects or other parties, owners can usually recover either liquidated damages or actual damages. Construction contracts often include a liquidated damages provision that is triggered by certain types of contract breaches, such as a contractor’s failure to complete its work on time. If a specified breach occurs, the construction company must pay the owner liquidated damages at an agreed-upon daily or weekly rate, generally from the contractual date for completion until the date of actual completion.

Alternatively, an owner can recover actual damages. Such damages might include the loss of use and revenue, increased financing costs, increased costs for other contractors, and additional administrative costs.

Do Not Delay
The list of damages a contractor may seek following a construction project delay can seem daunting. If you need help determining a reasonable estimate of liquidated damages to include in your contracts, or for more information on preparing for construction litigation, contact Jeff Newman at jnewman@orba.com or call him at 312.670.7444.


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