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

Steven Johnson, in his book Where Good Ideas Come From (read an excerpt here) explained that great ideas, the ones that transform the marketplace, are based on the “adjacent possible:”

The phrase captures both the limits and the creative potential of change and innovation. In the case of prebiotic chemistry, the adjacent possible defines all those molecular reactions that were directly achievable in the primordial soup. Sunflowers and mosquitoes and brains exist outside that circle of possibility. The adjacent possible is a kind of shadow future, hovering on the edges of the present state of things, a map of all the ways in which the present can reinvent itself.

Treehugger reports today that a cutting-edge green community, breaking ground both in its design and its site (it was gentrifying an historically lower income, African-American community) is facing foreclosure. The explanation, in part, is because the development skipped ahead of the adjacent possible:

This was a cutting edge design, by the greenest of cutting-edge architects. Most developers build the same thing over and over again so that they get to know their costs really accurately; when you are the first, you don't. You build in contingencies, and may even benefit from the fact that in a downturn, construction costs drop significantly, but green roofs, solar thermal hot water and other green features cost money. Purchasers are not often willing to pay their full value because they are thinking about investment and resale, and banks don't make it easy to get mortgages on the green goodies, so your margins on a green, innovative or different building are often smaller.

Move one square to the left, and you are a genius. Skip over a square, and you are a failure, ahead of your time. This seems to be one of the classic problems with the green movement. We try to skip over steps, assuming that the rest of society will make the leap with us. Not so. 

With respect to cap-and-trade, there has been significant argument that its advocacy skipped a vital step—linking cap-and-trade to where the American public is now. In the Daily Kos, Frank Luntz, the pollster and wordsmith, had this to say about bringing climate change into the adjacent possible:

Luntz's report, "The Language of a Clean Energy Economy," finds that the majority of the public across the political spectrum is convinced that global warming is happening and caused at least in part by humans. But, Luntz says, talking about the problem won't win support for the legislation that would solve it. Among both Democrats and Republicans polled by his firm, addressing climate change was the least important reason to support a cap-and-trade policy.

So what should environmentalists say instead? Luntz suggests less talk of dying polar bears and more emphasis on how legislation will create jobs, make the planet healthier and decrease US dependence on foreign oil.

In innovation, there are no skipped steps. Moving from the present to the adjacent possible is the only route to transformation, one step at a time. Many have argued that there is no time for incremental change, but moving along the continuum of the adjacent possible does not necessarily mean a lengthy timeframe. Rather, it means linking the next vision to the one we are already connected to. For example, the internet went from text based pages to picture to video to facebook in just over a decade.

Now let me bring this back to law. Laws, regulations and programs promoting green and energy efficient construction must build on the adjacent possible. When they do not, as in the IRS Bond Requirements for the Destiny USA Project (which mandated completely unattainable green features and job creation obligations), they are destined for failure. When they do, like the 1603 grant for solar power (great article on 1603 grant results here), they can spur a whole industry forward and radically reduce the price of solar panels. 

As of February 25, 2011, a total of 7,180 alternative energy projects were funded through the §1603 program, totally $6.4 Billion in Treasury funding...Whereas solar P.V. installations in 2010 grew by 114% over 2009, netting $757 Million in 1603 grants, industry analysts forecast that solar installation will grow by an even larger factor through 2011. Solar has been receiving more attention in recent months from consumers, industry analysts and property owners alike. This attention has raised awareness of the benefits to installing solar, resulting in a spike in ground mounted and rooftop P.V. installation. In 2011 and beyond, the authors are confident improved technology and increased economic incentives will meet with this awareness to result in a marked increase in the amount of cash grants dedicated to solar technology.

The most audacious ideas are those that build on what already works, and makes it better, faster and more impactful. The same is true for regulation. Move forward to the adjacent possible, one step at a time.

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Like the Destiny USA project in Syracuse (which is mired in a controversy over whether the tax exempt green bonds issued for the project should keep their tax exempt status despite the project's failure to incorporate any green features--more about that project is available here), the Georgetown Redevelopment Project in Redding, Connecticut was also selected as a demonstration project to qualify for green tax-exempt bonds under the America Jobs Creation Act of 2004.

According to my research, at least $14.5 million in tax exempt bonds were issued for the Georgetown project. For you bond junkies, the details of the bond offer was:

Georgetown Special Taxing District
Nov 16, 2006 $14,450,000
General Obligation Bonds, Series 2006A (book entry)
Dated Nov 22, 2006.
Due Oct 1, 2036.
First coupon Apr 1, 2007.
Callable Oct 1, 2016 at par.
Purchased through negotiation by Banc of America Securities LLC, as
follows:
Due Amount Cpn Reoffered Ins
10/1/36 $14,450,000 5.125% 5.125%
L.O.: Shipman & Goodwin, Hartford, CT.
F.A.: Lamont Financial Services Corp, Wayne, NJ. 
 

Like the Destiny USA project, the Georgetown project stalled, and is having difficulty meeting its bond obligations.

According to the Weston Forum, the deal to sell the site to a developer fell through in mid-2010:

With the advent of the country’s financial crisis in 2008, capitalizing the project became an issue. That, combined with the delay in state approvals, stalled the project, but the intersection work has since been funded and put out to bid.
 

 As of  July 9, 2010, according to Bond Buyer (subscription required) the Georgetown Special Taxing District in Connecticut received a forbearance on $1.5 million of tax anticipation notes after failing to pay them on time.

The district was unable to pay the notes on June 30 because it had not collected property taxes from a stalled mixed-use development. The project and district are located on a 51-acre tract in the town of Redding in affluent Fairfield County.

The forbearance gave the district two months to figure out what to do without defaulting on bond payments. The failure to make the payment by June 30 constitutes a technical default, according to disclosure documents.  It is not clear whether the bonds were paid, but if they were not, another set of green bonds has gone into default. 

Although the two projects are currently in the same boat financially, they are not equivalent projects.  Unlike the Destiny USA project, which was a large mall extension which was going to be fitted out with green features, the Georgetown Redevelopment Project was actually a thoughtful green project.  It was envisioned as a transit oriented, mixed use redevelopment of a 55 acre, contaminated wire mill site.  The master plan includes residential (including 40 units of affordable housing), commercial and light industrial uses, as well as a YMCA, performing arts center and public open space oriented around a transit station.  A powerpoint of the master plan and description of the project is available here.

The project would have encouraged transit use, created a mixed use community, redeveloped contaminated property and (theoretically) integrated green building and renewable energy features. This is exactly the sort of project which should be encouraged and supported.  

The fact that the Georgetown project has not come to fruition is a bad outcome for the Georgetown project in specific, and green bonded projects in general.  First, this is a good project.  Doing transit oriented, mixed use development is positive for communities and the environment.  So, the fact that it had difficulty meeting its financial obligations and may not come to fruition is disappointing.

On a more global level, projects like Georgetown and Destiny USA make bonds for green projects look risky, which may make financial institutions shy away from issuing and underwriting the bonds.  This will make getting financing for green projects harder than it already is.  Second, it makes the public sector more reluctant to support green projects if they fear that they will not be able to meet their financial obligations. 

To end this on a brighter note, it appears that public entities are continuing with the site and transit work on the Georgetown project continue to progress, even though a private developer is not currently doing the mixed-use component.

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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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