A Green Building Bonding Opportunity

When I think about opportunities and risks in the green building industry, I immediately think of the Washington, D.C. Green Building Act.

The Act requires that starting January 1, 2012, all new construction greater than 50,000 square feet be LEED certified.  Parties applying for LEED certification submit documentation to the non-profit Green Building Certification Institute to document green attributes of a building.  The fundamental flaw – and opportunity – lies in the Act’s enforcement mechanism: one party must post a bond (“LEED bond”) guaranteeing that the project becomes LEED certified. The bonds can be as much as $3 million depending on the size of the project.

For the risk-taking surety, creating a LEED bond may present a business opportunity. These LEED bonds are not readily available in the surety market. The adventurous surety will have to work through a number of issues before creating this new product:

• Which party is best suited to apply for LEED bonds? LEED certification requires that the design team create an appropriate building design.  LEED certification also requires that the construction team build the structure properly and select the correct materials. Most importantly, LEED certification requires that the developer provide the financial support to obtain the level of certification. With multiple parties contributing to LEED certification, which party should apply for a LEED bond?

• Has the project team successfully obtained LEED certification in the past? Like any new process, attaining LEED certification can involve a steep learning curve. The inexperienced party may find themselves sorting through reams of paper and having repeated conversations with the Green Building Certification Institute about specific LEED points. During the underwriting process, a surety should consider whether the party has enough experience with LEED projects to ensure certification is obtained.

• Can the project achieve the requisite level of LEED certification? A project seeking LEED certification may run into problems when applying for specific points. Even worse, if a project does not satisfy necessary prerequisites, then certification will never be obtainable. A surety evaluating a LEED bond request may want to consider evaluating a project’s likelihood of success in seeking certification.

LEED certification is a fairly new development for the construction industry. The rating system first launched in 2000. As the rating system becomes more widely adopted, design professionals, contractors and sureties will become more comfortable with the inherent risks. However, for a surety willing to accept additional risks now, an opportunity exists in LEED bonds.