Retail Goes Green

The building industry realized sometime ago that 'going green' was good for business. In a time when organic food production and sustainable living are becoming more desirable, the benefits of obtaining Leadership in Energy and Environmental Design ('LEED') certification, developed by the U.S. Green Building Council ('USGBC'), may increase property values, attract tenants, and enhance marketability, among others things. Yet, while the office and industrial development industry have jumped on this green wave, retail construction represents only 1.5% of the projects registered with the USGBC for green building status. To incorporate this powerful segment of the building industry into the certification program, the USGBC recently introduced two pilot programs tailored to retail development to entice greater participation and to further assess its overall implementation. Building on two existing LEED certification standards, the retail pilot programs have adopted language to incorporate considerations specific to retail development.

Trends and Incentives in Building Green

One of the first retail projects to obtain LEED certification was an 80,000 square-foot Giant Eagle supermarket in Brunswick Town Center, OH in 2004. According to green building media and business journals, 'green' techniques implemented by this project reportedly included: 1) installing more than 50 skylights with electrical lighting sensors that adjust the use of electric light based on the natural light generated by skylights; 2) installing water-saving equipment expected to save more than 100,000 gallons per year; 3) establishing green housekeeping practices with environmentally friendly cleaning products; and 4) constructing a white, reflective roof and increased insulation to allow the building to cool and heat more efficiently. Giant Eagle reportedly expects its green initiatives to provide savings up to $1 million over the course of the building's life. In September 2007, Hannaford Bros. Co. announced its plans for a state-of-the-art green supermarket in Bangor, ME. In New Jersey, PNC bank has developed 11 LEED-certified retail branches and plans to construct 90 more in the eastern United States. Walmart has also moved in the direction of sustainable building, introducing in 2005 a superstore in McKinney, TX, that uses alternate energy sources like wind and solar energy to generate electricity. Similar steps have been taken by Staples, Target, Whole Foods, and Starbucks.

As more developers strive for LEED certification, incentives for retailers to develop a green profile are growing. San Francisco now provides priority, 'top of the pile' processing for large development projects promising to achieve LEED certification. In some cities, developers are reading up on green building protocols in anticipation of ordinances coming into effect requiring LEED certification for large commercial projects. In December 2006, Washington, DC, became the first major city in the United States to require that privately funded projects achieve LEED certification. In 2007, Boston followed suit by adopting LEED certification standards as part of its large project review process (although not requiring actual certification). Large-scale retailers such as The Stop & Shop Supermarket Company ('Stop & Shop'), which is no stranger to green building practices and has used sustainable building practices for years, are becoming increasingly more efficient in developing sustainable sites, and are setting the standard for their competition to follow suit. Building green may do more for these companies than offset costs; it may give them a competitive edge in markets where consumers are starting to choose products from environmentally conscious venues. Incentives that make going green all the more attractive to prospective retailers include tax breaks (in 2005, Nevada passed a law providing a 50% property-tax abatement for 10 years to projects that achieved a LEED Silver rating), renewable energy incentives (the 2005 Energy Policy Act, as amended, offers a 30% federal tax credit to solar systems placed in service through the end of 2008), and the opportunity for retailers to market themselves as good corporate citizens.

The LEED Certification Process

LEED certification is a point-based system. Through a four-tiered program (Certified, Silver, Gold, and Platinum), project applicants striving for green building status register online on the USGBC Web site at the initial phases of the project, and then apply LEED criteria during the construction of the project. Designed originally for commercial and industrial buildings, USGBC expanded its LEED programs to cover the renovation of existing buildings as well as the construction of health care facilities, schools, laboratory facilities, residential buildings, neighborhood developments, and now retail projects. Applicants achieve points by molding project developments to satisfy green building criteria broken down into categories such as water efficiency, energy and atmosphere, materials and resources, indoor environmental quality, and innovation and design. LEED certification is awarded depending on the final tally of points earned.

Point checklists are tailored to the type of project. For example, LEED criteria award a greater number of points for the use of recyclable materials during new construction of high-performance commercial and institutional projects, including office buildings, high-rise residential buildings, government buildings, recreational facilities, and manufacturing plants and laboratories. Points are further accumulated for new construction projects that divert 50% to 75% of construction waste materials from disposal. On the other hand, the LEED criteria for Existing Buildings include points for the removal of hazardous materials such as polychlorinated biphenyls ('PCBs') and/or asbestos from already existing buildings.

LEED Retail Pilot Programs

Consistent with this approach, the USGBC pilot programs for LEED in retail developments were created to address the unique challenges and opportunities of implementing green building strategies in retail projects by tailoring the point system and providing alternative compliance paths as needed. Intended to gather market feedback and assess major challenges in its practical implementation, the pilot programs cover both new construction projects as well as the renovation of commercial interiors for existing buildings.

The first of the retail pilots, LEED for Retail ' New Construction and Major Renovations ('LEED-NC'), is a modification of the LEED for New Construction Version 2.2 prerequisites and credits to green retail projects. Scheduled to commence in 2008, the LEED-NC pilot accounts for the needs of retail functions, including parking necessities, water usage, optimization of energy performance, and controllability of lighting and thermal systems. Such modifications are essential to make the application of LEED-NC standards harmonious with the retail operations and business expectations for the project. For example, the LEED-NC pilot makes accommodations for the use of specific retail-oriented equipment, knowing that certain retailers are differentiated from office and industrial projects in light of their need to power machinery such as commercial kitchens. One way the pilot tackles this issue is with energy consumption guidelines used as a base line for retail applicants broken down by retail type, according to common business practice. Likewise, the LEED-NC pilot provides alternatives for certain retailers who have found a conflict between meeting minimum parking requirements under zoning review, as well as the need to accommodate an expected flow of customers, and LEED certification criteria stressing minimal parking.

The second retail pilot, LEED for Retail ' Commercial Interiors ('LEED-CI'), is a modification of the LEED for Commercial Interiors Version 2.0 prerequisites and credits to green retail projects. Similar to the LEED-NC pilot, the LEED-CI pilot is tailored to be more accommodating to retail operations. In addition to breaking down guidelines for point categories by retail type, the LEED-CI pilot gives landlord applicants the opportunity to build points by picking long-term tenants. To 'Encourage choices that will conserve resources, reduce waste and reduce the environmental impacts of tenancy as they relate to materials, manufacturing and transport,' landlord applicants are encouraged to negotiate long-term leases ' not less than 10 years ' with prospective tenants. While tenant-based options and requirements raise additional concerns related to choosing viable tenants and negotiating 'green language' to be included in prospective lease agreements, they also provide retail landlord applicants with the option of building points in ways specific to retail development.

Considerations Specific to Retail in Obtaining LEED Certification

While various retailers have incorporated green building strategies into development sites on their own, until now, LEED certification has been an impractical proposition for most retail developers. In particular, LEED certification tends to focus on the development of one building at a time, making the approval process for retailers with roll-out portfolios particularly slow and costly. It is typical for retailers to construct dozens of new stores a year as part of roll-out portfolios, often with varying store design and construction practices. While this is standard retail practice, the LEED certification process is incompatible when each store requires individual review. Recognizing this problem as a strong disincentive for retail applicants, the USGBC retail pilot for New Construction includes language allowing LEED criteria to be dispersed among stores within a 'master plan,' permitting portfolio applicants to build points while keeping the overall project plan intact. Water efficiency, light pollution reduction, and maximization of open space comprise a few of the varied LEED criteria allowing for points to be 'shared' among sites. The success of these adjustments will be quantified best by the involvement of large retail participants in the pilot program and its success in certifying the introduction of multiple store locations within a master plan.

Developers should also consider the effects LEED certification can have on choosing tenants and drafting lease provisions. The LEED'CI pilot considers both landlords obtaining certifications on their buildings and tenants seeking certifications on fit-outs. Landlords will likely want to use LEED certification as a marketing tool to attract prospective tenants, but will need to evaluate which tenants will best maintain or could potentially threaten existing certification. Tailoring lease provisions to require timely compliance for tenant fit-outs, or continued compliance for completed spaces will be an obvious concern for landlords. Likewise, tenants will seek similar guarantees from landlords in turn-key lease arrangements, and will look to landlords for guidance on preserving LEED status.

The USGBC pilot program for new retail construction commenced in November 2007, with the participation of certain large-scale retailers. One particular retailer's participation in the pilot will address the complexity of achieving certification for roll-out portfolios. Instead of presenting a roll-out portfolio for LEED certification, this retailer chose to develop plans for a 'prototype' store complete with LEED criteria for new construction, as a presentation piece for a portfolio with multiple stores. Variations between stores within the portfolio that would undoubtedly exist in construction are incorporated into the prototype rather than presented separately. This approach allows for one streamlined review for certification of a roll-out portfolio, but with the ability for USGBC to review the application of store-to-store distinctions in light of LEED criteria.

Conclusion

As LEED certification continues to accommodate retail building practices, there is good reason for more retailers and retail developers to incorporate sustainable practices into construction methods. While counseling clients on the development and leasing of retail or mixed-use projects, it is advisable to make them aware of the need to 'go green' either voluntarily, or in anticipation of recent governmental trends requiring and/or incentivising green building for retail projects. It is of course incumbent on any attorney representing a developer in its tenant leasing of a green project to make sure the tenants are obligated to comply with the green standards incorporated into the project. The results of the two LEED retail pilot programs will allow for better evaluation of the potential for retail development to incorporate LEED criteria, and find its place in the green building movement.

Ani E. Ajemian is an associate with Sherin and Lodgen LLP's Real Estate Department in Boston. Her practice focuses on environmental, real estate, and land use law.

The building industry realized sometime ago that 'going green' was good for business. In a time when organic food production and sustainable living are becoming more desirable, the benefits of obtaining Leadership in Energy and Environmental Design ('LEED') certification, developed by the U.S. Green Building Council ('USGBC'), may increase property values, attract tenants, and enhance marketability, among others things. Yet, while the office and industrial development industry have jumped on this green wave, retail construction represents only 1.5% of the projects registered with the USGBC for green building status. To incorporate this powerful segment of the building industry into the certification program, the USGBC recently introduced two pilot programs tailored to retail development to entice greater participation and to further assess its overall implementation. Building on two existing LEED certification standards, the retail pilot programs have adopted language to incorporate considerations specific to retail development.

Trends and Incentives in Building Green

One of the first retail projects to obtain LEED certification was an 80,000 square-foot Giant Eagle supermarket in Brunswick Town Center, OH in 2004. According to green building media and business journals, 'green' techniques implemented by this project reportedly included: 1) installing more than 50 skylights with electrical lighting sensors that adjust the use of electric light based on the natural light generated by skylights; 2) installing water-saving equipment expected to save more than 100,000 gallons per year; 3) establishing green housekeeping practices with environmentally friendly cleaning products; and 4) constructing a white, reflective roof and increased insulation to allow the building to cool and heat more efficiently. Giant Eagle reportedly expects its green initiatives to provide savings up to $1 million over the course of the building's life. In September 2007, Hannaford Bros. Co. announced its plans for a state-of-the-art green supermarket in Bangor, ME. In New Jersey, PNC bank has developed 11 LEED-certified retail branches and plans to construct 90 more in the eastern United States. Walmart has also moved in the direction of sustainable building, introducing in 2005 a superstore in McKinney, TX, that uses alternate energy sources like wind and solar energy to generate electricity. Similar steps have been taken by Staples, Target, Whole Foods, and Starbucks.

As more developers strive for LEED certification, incentives for retailers to develop a green profile are growing. San Francisco now provides priority, 'top of the pile' processing for large development projects promising to achieve LEED certification. In some cities, developers are reading up on green building protocols in anticipation of ordinances coming into effect requiring LEED certification for large commercial projects. In December 2006, Washington, DC, became the first major city in the United States to require that privately funded projects achieve LEED certification. In 2007, Boston followed suit by adopting LEED certification standards as part of its large project review process (although not requiring actual certification). Large-scale retailers such as The Stop & Shop Supermarket Company ('Stop & Shop'), which is no stranger to green building practices and has used sustainable building practices for years, are becoming increasingly more efficient in developing sustainable sites, and are setting the standard for their competition to follow suit. Building green may do more for these companies than offset costs; it may give them a competitive edge in markets where consumers are starting to choose products from environmentally conscious venues. Incentives that make going green all the more attractive to prospective retailers include tax breaks (in 2005, Nevada passed a law providing a 50% property-tax abatement for 10 years to projects that achieved a LEED Silver rating), renewable energy incentives (the 2005 Energy Policy Act, as amended, offers a 30% federal tax credit to solar systems placed in service through the end of 2008), and the opportunity for retailers to market themselves as good corporate citizens.

The LEED Certification Process

LEED certification is a point-based system. Through a four-tiered program (Certified, Silver, Gold, and Platinum), project applicants striving for green building status register online on the USGBC Web site at the initial phases of the project, and then apply LEED criteria during the construction of the project. Designed originally for commercial and industrial buildings, USGBC expanded its LEED programs to cover the renovation of existing buildings as well as the construction of health care facilities, schools, laboratory facilities, residential buildings, neighborhood developments, and now retail projects. Applicants achieve points by molding project developments to satisfy green building criteria broken down into categories such as water efficiency, energy and atmosphere, materials and resources, indoor environmental quality, and innovation and design. LEED certification is awarded depending on the final tally of points earned.

Point checklists are tailored to the type of project. For example, LEED criteria award a greater number of points for the use of recyclable materials during new construction of high-performance commercial and institutional projects, including office buildings, high-rise residential buildings, government buildings, recreational facilities, and manufacturing plants and laboratories. Points are further accumulated for new construction projects that divert 50% to 75% of construction waste materials from disposal. On the other hand, the LEED criteria for Existing Buildings include points for the removal of hazardous materials such as polychlorinated biphenyls ('PCBs') and/or asbestos from already existing buildings.

LEED Retail Pilot Programs

Consistent with this approach, the USGBC pilot programs for LEED in retail developments were created to address the unique challenges and opportunities of implementing green building strategies in retail projects by tailoring the point system and providing alternative compliance paths as needed. Intended to gather market feedback and assess major challenges in its practical implementation, the pilot programs cover both new construction projects as well as the renovation of commercial interiors for existing buildings.

The first of the retail pilots, LEED for Retail ' New Construction and Major Renovations ('LEED-NC'), is a modification of the LEED for New Construction Version 2.2 prerequisites and credits to green retail projects. Scheduled to commence in 2008, the LEED-NC pilot accounts for the needs of retail functions, including parking necessities, water usage, optimization of energy performance, and controllability of lighting and thermal systems. Such modifications are essential to make the application of LEED-NC standards harmonious with the retail operations and business expectations for the project. For example, the LEED-NC pilot makes accommodations for the use of specific retail-oriented equipment, knowing that certain retailers are differentiated from office and industrial projects in light of their need to power machinery such as commercial kitchens. One way the pilot tackles this issue is with energy consumption guidelines used as a base line for retail applicants broken down by retail type, according to common business practice. Likewise, the LEED-NC pilot provides alternatives for certain retailers who have found a conflict between meeting minimum parking requirements under zoning review, as well as the need to accommodate an expected flow of customers, and LEED certification criteria stressing minimal parking.

The second retail pilot, LEED for Retail ' Commercial Interiors ('LEED-CI'), is a modification of the LEED for Commercial Interiors Version 2.0 prerequisites and credits to green retail projects. Similar to the LEED-NC pilot, the LEED-CI pilot is tailored to be more accommodating to retail operations. In addition to breaking down guidelines for point categories by retail type, the LEED-CI pilot gives landlord applicants the opportunity to build points by picking long-term tenants. To 'Encourage choices that will conserve resources, reduce waste and reduce the environmental impacts of tenancy as they relate to materials, manufacturing and transport,' landlord applicants are encouraged to negotiate long-term leases ' not less than 10 years ' with prospective tenants. While tenant-based options and requirements raise additional concerns related to choosing viable tenants and negotiating 'green language' to be included in prospective lease agreements, they also provide retail landlord applicants with the option of building points in ways specific to retail development.

Considerations Specific to Retail in Obtaining LEED Certification

While various retailers have incorporated green building strategies into development sites on their own, until now, LEED certification has been an impractical proposition for most retail developers. In particular, LEED certification tends to focus on the development of one building at a time, making the approval process for retailers with roll-out portfolios particularly slow and costly. It is typical for retailers to construct dozens of new stores a year as part of roll-out portfolios, often with varying store design and construction practices. While this is standard retail practice, the LEED certification process is incompatible when each store requires individual review. Recognizing this problem as a strong disincentive for retail applicants, the USGBC retail pilot for New Construction includes language allowing LEED criteria to be dispersed among stores within a 'master plan,' permitting portfolio applicants to build points while keeping the overall project plan intact. Water efficiency, light pollution reduction, and maximization of open space comprise a few of the varied LEED criteria allowing for points to be 'shared' among sites. The success of these adjustments will be quantified best by the involvement of large retail participants in the pilot program and its success in certifying the introduction of multiple store locations within a master plan.

Developers should also consider the effects LEED certification can have on choosing tenants and drafting lease provisions. The LEED'CI pilot considers both landlords obtaining certifications on their buildings and tenants seeking certifications on fit-outs. Landlords will likely want to use LEED certification as a marketing tool to attract prospective tenants, but will need to evaluate which tenants will best maintain or could potentially threaten existing certification. Tailoring lease provisions to require timely compliance for tenant fit-outs, or continued compliance for completed spaces will be an obvious concern for landlords. Likewise, tenants will seek similar guarantees from landlords in turn-key lease arrangements, and will look to landlords for guidance on preserving LEED status.

The USGBC pilot program for new retail construction commenced in November 2007, with the participation of certain large-scale retailers. One particular retailer's participation in the pilot will address the complexity of achieving certification for roll-out portfolios. Instead of presenting a roll-out portfolio for LEED certification, this retailer chose to develop plans for a 'prototype' store complete with LEED criteria for new construction, as a presentation piece for a portfolio with multiple stores. Variations between stores within the portfolio that would undoubtedly exist in construction are incorporated into the prototype rather than presented separately. This approach allows for one streamlined review for certification of a roll-out portfolio, but with the ability for USGBC to review the application of store-to-store distinctions in light of LEED criteria.

Conclusion

As LEED certification continues to accommodate retail building practices, there is good reason for more retailers and retail developers to incorporate sustainable practices into construction methods. While counseling clients on the development and leasing of retail or mixed-use projects, it is advisable to make them aware of the need to 'go green' either voluntarily, or in anticipation of recent governmental trends requiring and/or incentivising green building for retail projects. It is of course incumbent on any attorney representing a developer in its tenant leasing of a green project to make sure the tenants are obligated to comply with the green standards incorporated into the project. The results of the two LEED retail pilot programs will allow for better evaluation of the potential for retail development to incorporate LEED criteria, and find its place in the green building movement.

Ani E. Ajemian is an associate with Sherin and Lodgen LLP's Real Estate Department in Boston. Her practice focuses on environmental, real estate, and land use law.