When Green Goes Bust

Bankruptcy and forclosures pose a few unique risks for green building. 

One complication is the significant tax credits and other public financing involved in green construction. This week, Shaw Development LLC, the developer of Captain's Galley development  in Maryland and the plaintiff in what has been termed the first green construction litigation, declared Chapter 11 bankruptcy.  Stephen DelPercio at Green Real Estate Law Journal argues that the contractor responsible for lost tax credits (if they could be shown to have led to the bankruptcy) could be responsible for significant consequential damages including

decrease in sales prices during the course of the automatic stay that is imposed over the property, any other sales that were lost due to the bankruptcy reorganization, and associated professional fees and other carrying costs that the owner/trustee incurred during the course of the stay.

In addition to this risk, bankruptcy of green projects may be complicated by their connection to the renewable energy markets.  For example, a development installs a solar array and arranges to sell its renewable energy credits (RECs) to a utility. The utility uses the REC purchase to fulfill its mandatory obligation to purchase alternative power. If the development goes bust and no power is produced, the utility and/or state/local government may come calling.

Finally, green projects often involve the utilization of high maintenance components, like vegetated roofs.  If these facilities are not properly maintained due to bankruptcy or foreclosure, third parties harmed by poor maintenance (collapsing roofs, for example) may have nothing but an insolvent party for recourse.

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Christopher G. Hill - January 14, 2009 10:37 AM

Thanks for the post Shari. While green building is here to stay, it is clearly a brave new world for bankruptcy, standard of care, etc. Also, third parties harmed may or may not have recourse.

Thanks for your insight!

Rich Cartlidge - January 14, 2009 10:41 AM

This post raises interesting questions about what is to happen not only with green buildings but buildings in general as the economy continues to slump. As construction financing dried up and builders were faced with contracts to deliver the units on time many developers began to cut corners. As developers were unable to sell all the units in their condominium projects it soon became apparent that the once lavish common areas such as swimming pools, weight rooms, and rooftop gardens which were to be financed through the HOA would not have enough funding and were left to fall into disrepair.
As investors from out of state began to swoop in with their vulture funds to purchase these distressed properties for pennies on the dollar they often did so without full knowledge of the legal liabilities there were acquiring under the Interstate Land Sales Act which makes any owner of 7 or more units who in turn resells them, liable as a developer. Just think about the problems there. An investment banking house with no construction knowledge being held responsible for a design flaw or cut corner in a building they now own....

MFGuide - January 14, 2009 3:35 PM

Depending on how the condo sales contract is structured, developers have the right to withdraw or curtail amenities. The advice used to be to spell everything out in the contract, but the advice we got circa 2005-06 was to be intentionally vague and disclaimer everything in the sales office/model.

With regard to PPAs, additional concerns include the bankruptcy of the building owner or the bankruptcy of the PPA sponsor (ie. owner of the actual solar array). Typically in LIHTC, the LP (equity partner) will create a SLP within the partnership agreement to remove the GP (developer/owner) in event of default/bankruptcy. This protects the flow of the tax credits to the investors without penalty if the GP disappears.

I don't yet know enough about PPAs to know what surety bond requirements there might be to ensure power delivery, but it seems like it can be accommodated within the existing construction law.

Puget Sound Energy v. Pacific Gas & Elec., 271 B.R. 628, 640 (N.D. Cal. 2002).

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