Green Building Law Blog : Green Building Lawyer & Attorney : Shari Shapiro: Calliope Communications, LLC

I covered the messy breakdown of the Carousel/Destiny USA project in Syracuse on Monday.  In short, the Destiny USA project was selected as a green "demonstration" project under the 2004 Green Bonds program.  $255 million in tax exempt bonds were issued on behalf of the project, the revenue of which was supposed to be used to implement the green features of the project.  As of now, none of the green features have been implemented, and the developer has intimated that even if the project is fully built out, the green features will not be included.  The IRS will have to decide whether to rescind the tax exempt status of the bonds for failing to meet the green requirements.

I have written at length about creating effective green incentives and regulations (see my Regulating Green Series here).  For me, the most interesting part of this debacle is what it reveals about a major green incentive program.  The Green Bonds program was developed as a part of the America Jobs Creation Act of 2004.  In theory, the program was intended to: 

 finance environmentally friendly development. The objective is to reclaim contaminated industrial and commercial land (brown fields), and encourage energy conservation and the use of renewable energy sources.

Although the goals of the Green Bonds program were clearly noble, as I see it the program was doomed from the start. No market rate project in 2005 could have met all of these requirements.  Thus, the proponents of the projects had reason to overstate the green components of their projects to access $2 billion in tax free capital for the projects. 

According to the IRS Guidance (available here) $2 billion in AAA tax exempt bonds were authorized by the Federal government to be awarded to four demonstration projects.  To qualify for the bonds, the four projects in aggregate had to:

1. Reduce energy consumption by more that 150 megawatts annually compared to conventional generation;
2. Reduce daily sulfur dioxide emissions by at least 10 tons compared to coal generated power;
3. Expand by 75% the domestic solar PV market in the United States as compared to the expansion of that market from 2001-2002, which was 14.424 megawatts (which means an aggregate increase of approximately 11 megawatts, or an average of almost 4 megawatts of PV power per projects);
4. Use at least 25 megawatts of fuel cell energy generation.

In addition, each project had to be at least 1,000,000 square feet or 20 acres and: 

1. At least 75% of the square footage had to be LEED certified;
2. The wood had to be certified under the Sustainable Forestry Initiative or the American Farm Tree System;
3. Reclaim a brownfield site

Beyond the green features, the projects also had to create at least 1000 construction jobs and 1,500 full time equivalent jobs. 

In addition to the requirements of the Green Bonds, the Destiny USA project entered into a Memorandum of Understanding with the EPA (available here and summary below from Syracuse.com) committing to: 

1. Using green building design, construction and operation principles to obtain the highest levels of certification from the U.S. Green Building Council's Leadership in Energy and Environmental Design
   program;
2. Retrofitting more than 100 construction vehicles with diesel particulate filters and using clean fuel, which will reduce emissions by nearly 85 percent;
3. Implementing techniques to reduce idling of vehicles during construction
4. Becoming partners in EPA's Energy Star and WaterSense programs,
   which require the use of energy- and water-efficient appliances;
5. Using over 3,000 tons of coal ash in place of using newly-manufactured Portland Cement, which will reduce greenhouse gases by over 3,000 tons.
    

As a policy measure, the green bonds were destined to be ineffective.  For a green incentive to be truly beneficial, it needs to set out goals that stretch its recipients to higher levels of sustainability, but not so pie-in-the-sky that they create an incentive to greenwash their projects.  This is a tough balance to strike.  Doing so requires that the regulatory bodies have a good understanding of the state of the green market that they are looking to incentivize. It is not enough to throw public money at any project claiming to be green.  The result is projects like Destiny USA, which give a bad name to green building and public financing of green projects. 

By contrast, good investment in green projects can bring real benefits.  I analyzed the investment of ARRA funds in green projects.  Per public dollar, these investments were among the most efficient ways of creating jobs of all of the ARRA money spent. (See my analysis here).  As Congress debates the value of continuing public investment in green projects and renewable energy, the debate must not only be about whether, but how, the support will be crafted and implemented.  The road to green is paved with good intentions. 

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The foundation for a rash of legal actions arising out of a failed green project have been laid. 

According to the Syracuse Post-Standard, the Carousel Center shopping mall was supposed to be a showcase of green features. To fund the project, the Carousel Center developers secured:

$228 million in federally authorized, tax-exempt “green bonds” to help finance the first phase of Congel’s expansion of the mall into an entertainment and tourism center to be called Destiny USA.

Unfortunately, six years later, those green features are no where to be found:

There is no 45-megawatt electricity generating plant running on “biofuel” made from soybean oil and recycled cooking grease. If there were, it would be the largest such plant in the nation and consume more than one-third of the total U.S. biodiesel supply.

Nor are there 290,000 square feet of solar panels on the mall’s roofs and other surfaces, enough to blanket six football fields.

The fuel cells that were to make 7 megawatts of electricity, five times more than the nation’s largest existing commercial fuel-cell installation? Nowhere to be seen.
 

The construction landscape is littered with the bodies of failed projects, grandly envisioned in 2005 and all but abandoned in 2011.  The question--What becomes of the tax exempt status of the bonds? 

Loss of the tax exemption would require Congel to pay higher interest rates on the bonds to compensate investors, who would suddenly be required to pay income taxes on the interest they earned. The increased cost would depend on the interest rate spread between taxable and tax-exempt bonds at the time of the IRS ruling. In 2005, a Destiny USA executive estimated the tax exemption would save the developer about $120 million over the 30-year term of the bonds.

If the IRS chooses to rescind the tax exempt status of the bonds, there could be a flood of legal fallout.  A few possibilities: 

1. Investors, particularly institutional investors, now forced to pay taxes on their previously exempt bonds could sue Congel. 
2. Government entities, like the Syracuse Industrial Development Authority, could pursue Congel. Although the SIDA did not put up any money outright, it gave the project a 30 year tax abatement, presumably on the premise that completion of the project would bring economic development.  If the project would not have gone forward without the $228 million in green bonds, SIDA might have grounds for seeking its property taxes.
3. Citibank and Congel entered into a settlement under which Citibank agreed to disburse the remainder of the $$155 million construction loan on the project.  If the project is devalued by the impact of the tax issue, Congel may be in breach of whatever settlement he came to with Citibank.
4. According to the Post-Standard, the developer’s attorneys now say the promised conservation and technology goals will not be achieved with the current expansion and may never be achieved, even if future phases of Destiny are built. if the Federal government can prove that Congel fraudulently represented that the project would have the green features, this may be additional grounds for a suit.
   

However, Congel almost certainly protected himself and his development company behind a single purpose entity to develop the Carousel Center.  If, at the end of the day, the only asset the single purpose entity has is the partially completed Carousel/Destiny USA Center, investors, the government and the people of Syracuse may have been taken for a ride.

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Washington DC has one of the most progressive green building laws in the country.  Passed in December 2006, Washington mandates, among other things, that private buildings above 50,000 square feet submit a checklist of green features by 2009, and meet LEED NC 2.2 standards by 2012. To enforce the law, there is a bonding requirement for each project. 

Today's Washington Business Journal [subscription required, but you can get a synopsis of article here] reported that the surety industry is complaining that the enforcement mechanism is flawed: 

Under the new law, if a project does not meet the strict green requirements, the city would receive money from a performance bond that has to be posted for the project in an amount of up to 4 percent of the building costs, or $3 million. Those dollars would be paid into a new city green building fund aimed at helping implement the legislation.

But the bonding mandate has surety companies wondering which party in the project — whether the building owners, the contractors or the designers — must shell out for the performance bond, therefore bearing the risk of noncompliance.

Without support from the sureties, which finance bonds, it will be difficult for Washington to enforce its law because construction projects won't be able to acquire the required bonds.  If there is bond default, litigation will surely follow, funded either by the parties involved, or the surety guaranteeing the bond.  Alternatively, the surety industry may choose to sue Washington, as the HVAC industry associations did to Albuquerque in AHRI v. City of Albuquerque, to enjoin the legislation from taking effect due to the poor drafting of the legislation. 

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I have been reading here, there and everywhere that green is a safe haven in this time of economic turmoil.  Today's information about Pennsylvania's Energy Fund proves otherwise. 

In the summer, Pennsylvania passed a $650 million progressive Energy Bill, with financial incentives for solar, high performance buildings, energy efficiency and so forth.  See article here by the folks over at Red, Green and Blue.

Everything seemed to be progressing nicely, setting the stage for an increase in renewable energy in the Keystone State.  Unfortunately, much of the $650 million Energy Fund was supposed to come from a bond offering.  Today, Pennsylvania state officials announced they were putting off floating the bond because the bond market has dried up.  Pennsylvania is not alone.  Apparently, New York/New Jersey Port Authority tried to borrow $300 million, and they got no takers.

This is very bad news for the sustainability community.  First, lack of access to financing makes governmental incentives almost impossible to fund, taking away one of government's best tools to use market drivers to encourage sustainable practices.  Second, lack of government incentives reduces the market of renewable providers.  Third, in a moment of low gas prices, lack of government incentives makes renewables less cost competitive.  In short, it is a lose, lose, lose situation.  

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