Law \ Legal

The supply of homes for sale is on the uptick, the White House releases a plan to improve the permitting process for infrastructure projects, cryptocurrency opens the door to a new class of property owners, and more.

• Though the number of active listings is still down 67% from pre-pandemic levels, the supply of homes for sale is finally showing signs of improvement. (Diana Olick, CNBC)
• Large corporations and institutional investors are flocking to buy digital real estate, with parcels being bought faster than they can be created. (Dan Patterson, CBS News)
• London-based company, Admix, has been purchasing real estate in various Metaverse platforms and leasing them to companies interested in becoming involved in the online virtual space. (Nate Berg, Fast Company)
• The European Commission is gearing up to propose a new legislative package designed to increase the use of renewables and energy savings, while recognizing the CO2-reducing potential of the building sector. (Sustainability Times)
• The White House released a plan that entails improving the permitting process for infrastructure projects, while maintaining rigorous environmental reviews. (Rachel Frazin, The Hill)
• Companies such as Lofty AI are looking to use blockchain technology to create a new form of digital ownership and investment in real estate. (David Ingram, NBC News)
• As companies continue investing billions of dollars in the Metaverse, it will attract increased scrutiny from global regulators and policy makers. (Robert Howard, David Wright and Craig de Ridder, Gravel2Gavel)

Over the last several years, the proptech movement has become entrenched in the lexicon of the real estate industry as developers use the term as a catch-all term for using technology in the construction of new commercial buildings and begin planning for Smart Cities. The various technologies incorporate wireless sensors, broadband service and other cloud-based applications to reduce energy costs, improve transportation and enhance security.

At the same time, the introduction of these technologies increases the likelihood that property owners will need to incorporate an extra layer (or two) of due diligence when incorporating these services. Not only do many Internet of Things (IoT) devices use wireless spectrum to communicate with other devices, but recent actions by the Federal government have led to the prohibition of certain equipment manufactured in China. The Federal Communications Commission (FCC) has primary responsibility over devices that use wireless spectrum and also implements federal policy with respect to devices that may implicate national security concerns.

With that in mind, here are a few considerations for real estate developers to keep in mind when incorporating the newest technologies into their plans.

5G Rollout Can Provide New Revenue Opportunities.
One of the keys to developing the IoT ecosphere is building out a reliable network that integrates wireless technologies. Over the past several years, wireless carriers and product developers have been busy building wireless networks and products that are based on 5G technology. Networks built to operate on a 5G-based platform will provide substantially higher speeds with less delay (latency) between points. While most readers are aware of the term “5G” from the never-ending mobile phone advertisements, device manufactures have begun to utilize 5G technology for commercial applications as well.

For real estate developers, wide-scale implementation of 5G technology raises exciting new business opportunities. First, because the newer 5G wireless networks are using higher spectrum bands, the distance between cell sites must be substantially less than with prior wireless technologies. As a result, there will be greater demand for leasing space on buildings for new antennas, especially in urban areas.

Second, because the majority of 5G networks rely on the higher spectrum bands with reduced propagation characteristics, there will be greater difficulty in receiving 5G signals inside of buildings. As such, many property owners are now negotiating Distributed Antenna System (DAS) agreements with the major wireless providers, which offers a potential new revenue stream. These DAS agreements permit wireless service companies to install micro-repeaters or nodes within large buildings and campuses to ensure that their customers continue to receive service. In the future, these systems will serve as the platform for IoT devices to provide a variety of “smart” services, including environmental sensing, remote monitoring for maintenance purposes, and other artificial intelligence applications.

Devices Using Spectrum Must Comply with Federal Regulations.
This explosion of connected IoT devices will be possible only if the devices do not cause interference to each other. Most IoT devices are designed to either emit or receive radio frequency (RF) energy to carry out their duties. These devices must be designed to operate in accordance with technical standards to ensure that unintended interference is not created through their operation. These devices must also be tested before they are sold to the public.

In the United States, the FCC has the primary responsibility to develop and implement these procedures. These procedures include requirements for manufactures to (i) test their RF devices before marketing or sales occur, (ii) label their RF devices with identifying information, and (iii) provide compliance information in user manuals or other documents so that consumers will know how to resolve interference issues or contact the manufacturer.

Additionally, the FCC has implemented a rigorous enforcement regime that monitors the marketplace and investigates complaints of interference or non-compliance with its rules. In recent years, it has launched industry-wide investigations into non-compliant LED lighting and conducted investigations of retail establishments to ensure that products are properly tested and labeled. With the growing use of connected devices, it is likely that these enforcement efforts will be enhanced, as evidenced most recently by the proposed increase in the 2023 budget of the FCC’s Enforcement Bureau.

As a result, real estate property owners and contractors should take steps to confirm that RF devices installed at their sites are compliant with FCC regulations. Terms and conditions should be integrated into contracts to require all products to conform with FCC regulations, and the parties should establish remediation and indemnification procedures in the event that such conditions are not satisfied.

Certain Manufacturers Are Prohibited for Federal Grant Programs and Buildings.
Finally, it is important to note that the FCC has also been tasked with identifying devices that may raise national security concerns. In response to requirements set forth in the National Defense Authorization Act for Fiscal Year 2019 and the Secure and Trusted Communications Networks Act of 2019, the FCC developed a list of “covered equipment and services” that “pose an unacceptable risk to the national security of the United States or the security and safety of United States persons.”

Federal agencies are prohibited from using federal funds to purchase, or issue grants to purchase, the covered equipment or services, and the FCC is in the process of implementing a $2 billion program to remove and replace existing covered equipment and service owned by telecommunications carriers. These requirements are also incorporated into the Federal Acquisition Regulation (FAR), which requires federal contractors to certify compliance.

* * *

The introduction of innovative technology into building projects will help differentiate proposals and add new revenue streams. At the same time, property owners and builders responsible for implementing these plans should adopt rigorous due diligence procedures to ensure that products and services comply with federal regulations intended to the protect the public from interference and national security concerns.

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Smart Building and Smarter Protocols: Mitigating IoT Cybersecurity Risks in Commercial Real Estate

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Smart Technology in Commercial Real Estate

From our homes to our workplaces, the deployment of smart technology is becoming increasingly prevalent. The Wall Street Journal notes that smart-building-related companies raised $2.88 billion in venture capital in 2021. In previous posts, we’ve discussed the increased use of smart technology in commercial real estate, the importance of a thorough and rigorous research and evaluation process, and various factors to consider in contracts for smart technology. These evaluation and contract processes are vital for developing security guardrails to which smart technology suppliers must adhere. A rigorous, security-centric approach to smart home technology can help protect real estate companies from catastrophic PR and financial fallout from a security incident such as the Mirai malware attack in 2016 that targeted insecure Internet of Things (IoT) devices. The average cost of data breach incidents increases with each year and, in 2021, the average cost of a data breach incident was $4.24 million. More than ever, companies must not only be aware of the cybersecurity risks of these technologies but take the necessary steps to address their vulnerabilities.

Increased Vulnerability
As IoT connectivity increases, cybersecurity risks increase exponentially. Each smart item that increases the convenience of the building—such as cameras that recognize an employee’s face and hail elevators for them, air quality monitors, speakers, doors, and security systems—presents a security vulnerability point in the building’s cybersecurity environment. Each connectivity point is one that hackers can target. Remember that hackers only need one point of entry: Hackers stole 40 million credit and debit card numbers from Target by targeting Target’s HVAC contractor in one of the biggest known corporate breaches in U.S. history.

Increased Sensitivity
The increase in smart technology poses unique privacy and security concerns. What data is being collected, how much, and for how long? Is the smart technology solution collecting personal contact information, and is the solution sharing that data with third parties? Are devices with cameras collecting, storing and sharing images? If so, for how long will the recorded images be stored, and where? Will employees have access to that data? How will the company handle images of children or other sensitive recordings? If voice recognition is involved, is the device “always listening” and storing and sharing conversations? Individuals are increasingly aware of reductions to their privacy; however, consumers and employees still have expectations of privacy in their homes and offices. It is imperative that companies know what data is being collected and develop internal controls to manage the data while also requiring suppliers to adhere to rigorous privacy standards.

Companies must also make sure they collect data that needs to be collected. Too often, a company’s attitude about data collection can be summed up as follows: Collect it all now and figure out what to do with it later. This approach is the wrong one. On the one hand, analysis of the data may yield important insights about user behavior. On the other hand, data that is collected must also be protected and processed in accordance with a compliant privacy policy. Collecting “too much” data may mean a company loses sight of everything it is collecting. When companies do not know what they have, they do not know what needs protecting. And the overlooked, forgotten data is often less protected. When hackers strike and consumers are harmed, “we did not know we had that” is not the answer lawmakers, end users or regulators will accept.

Regulatory Compliance
All companies collecting personally identifiable information must abide by state, federal, and international laws regarding data privacy. This regulatory framework is made even more challenging due to the fact that these laws are in a constant state of change. In the U.S., states are increasingly passing data privacy laws that both create consumer rights and impose security and assessment requirements on businesses. Companies in regulated industries (such as financial services) must contend with heightened security protocol requirements and additional data privacy laws. Regulations may put responsibility on companies to protect themselves from breaches, whether accidental or not. Companies should ensure contracts with vendors require vendors to address security concerns as part of a holistic approach to protecting the enterprise and its end users.

Recommendations
This array of vulnerabilities, sensitivities and responsibilities may seem daunting, but property owners can greatly mitigate their risks through robust security provisions in contracts and by refining internal operational protocols.

Contractual: To the extent that smart technologies and services are outsourced to third parties, contracts should account for how the supplier will protect any data collected, processed, stored, and shared. Contracts should also limit the collecting, processing, storing, and sharing of data to what is necessary. Make sure the contracts allocate the risks for any potential security breaches. Contracts should also outline the measures the supplier must take following a data security incident. Consider including audit rights to perform a review of the supplier’s systems before and after any incidents. Contractual commitments may mean that the supplier is held liable in the case of a data breach due to flaws in its technology, services or security protocols.

Operational: In addition to contractual precautions, companies can implement operational changes to better protect themselves against any potential data security incidents. Companies should limit the devices processing sensitive information and limiting the access each connected technology has to strictly necessary information. Devices processing sensitive information should also be moved or isolated to separate networks with increased security controls. Safeguard access to sensitive systems and applications using multifactor authentication and limit those with highly privileged access. Companies should revisit and update any security protocols they have in place. Consider hiring personnel with data security expertise and train employees on protocols and ensure they understand the policies. Implementing these operational components can supplement risk mitigation provisions in contracts.

Smart buildings and homes will continue to take over our skylines, for though smart technologies bring with them increased information security risks, they also allow for operational efficiencies and personal convenience that leaseholders and occupants alike will be unwilling to relinquish once gained. Implementing and utilizing these innovative technologies and services requires a careful strategy in order to mitigate those security risks. Ultimately, smart technologies are here to stay, and those who take the necessary steps now stand to reap the benefits for years to come.

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Clean hydrogen has the potential to play a significant role in the energy transition by serving as a carbon-free form of energy storage and heat production. In real estate, hydrogen could provide heating, replace or supplement natural gas in many applications, or store excess rooftop solar power. The United Kingdom, United States and Japan are all homes to pilot projects attempting to scale out hydrogen for use in communities.

As we have discussed previously, many cities have recently passed ordinances banning the inclusion of natural gas infrastructure in new commercial and residential buildings. These bans can create headaches for real estate developers and inject uncertainty into development plans.

Real estate developers are divided on the impacts and costs of natural gas bans. Some developers adopted electric-only approaches before the natural gas bans were passed and view electrification as the best approach despite its imperfections. These developers believe that while green hydrogen may be one path toward net zero, it is better to focus on proven solutions (electrification), rather than delay while waiting on future solutions, such as wide-scale use of clean hydrogen.

Other developers working toward net zero view gas bans as unnecessary restrictions on their ability to make long-term green infrastructure choices. The U.S. electrical grid is not yet able to fulfill electricity demand through renewables alone and cannot yet meet the energy demand of 100% electrification. Should the grid fail, as the Texas ERCOT grid did in 2021, building operators, users and residents who are not on the natural gas network could be left without heat. Rather than rely on 100% electrification, these developers believe it is better to use natural gas now, with a longer-term plan to transition to carbon-free alternative fuel sources, like hydrogen, once those sources are more readily available.

In addition to their impact on development plans, while municipal gas bans are intended to combat climate change, they may actually impede adoption of clean hydrogen. Gas bans may inhibit growth of a near-term clean hydrogen market and make it harder for real estate developers to eventually transition to hydrogen.

Cost of production is a major challenge to expanded use of clean hydrogen. Currently, clean hydrogen typically costs between $4 and $5/kg. Lower production costs are essential to widespread hydrogen adoption and the bipartisan Infrastructure Investment and Jobs Act established a program to drive the cost of clean hydrogen production to $2/kg by 2026. A near-term hydrogen market will help this goal: As producers compete to meet the market’s demand, it will incentivize development of cheaper hydrogen production technologies.

One potential near-term market is the blending of clean hydrogen into natural gas, which some natural gas companies are already exploring. In May 2021, for example, Italian gas transport group Snam demonstrated use of a 30% blend of natural gas and hydrogen to power furnaces at an Italian steelworks facility. Similarly, in January 2022, Enbridge Gas announced operations of a hydrogen blending project in Ontario, Canada. In Long Island, just six miles north of New York City (where a local gas ban was just passed), National Grid and the Town of Hempstead collaborated to launch the HyGrid Project, a revolutionary program that seeks to blend green hydrogen in existing natural gas pipelines to heat approximately 800 homes and fuel 10 municipal vehicles. Similar hydrogen-blending projects are being rolled out in California and Colorado.

Gas infrastructure also plays a role in long-term plans for the hydrogen transition. The goal for many gas companies, industries and real estate developers is to eventually transition existing natural gas infrastructure, to the extent possible, to either 100% hydrogen or to a combination of hydrogen and renewable natural gas. Snam, for instance, has a stated goal of transporting entirely decarbonized gas (hydrogen and biomethane) by 2050. A number of companies are conducting R&D on how to better retrofit existing gas pipelines for alternative fuels. Long term, repurposing existing natural gas infrastructure for hydrogen could help maintain the value of the U.S.’s current pipeline network and avoid the need to develop new hydrogen infrastructure.

In this context, it is easy to see how municipal gas bans might inhibit the hydrogen transition. If cities block real estate developers from including natural gas infrastructure, then they limit the customer base for gas companies that wish to sell natural gas/clean hydrogen blends. This may discourage utilities from constructing new infrastructure that could better accommodate hydrogen and natural gas mixtures, and ultimately limit the development of blending as a near-term hydrogen market.

The bans also make it harder for developers to build with an eye toward a future transition from natural gas to hydrogen and limit the potential development of green infrastructure. In a city without a gas ban, a developer could install hydrogen-compatible natural gas infrastructure, with the plan to transition to blended gas and ultimately 100% clean hydrogen once available. However, if a building does not have existing gas lines in place (such as buildings being built in cities with gas bans), the cost of retrofitting that building to accommodate hydrogen would be more expensive, and perhaps prohibitively so.

In short, municipal gas bans could have negative long-term impacts on hydrogen innovation and the energy transition at large. These bans may restrict efforts to establish a near-term hydrogen market and limit real estate developers’ ability to proactively plan for hydrogen infrastructure.

Jurisdictions and municipalities seeking to limit natural gas use in pursuit of climate goals should instead consider requiring new natural gas infrastructure to be compatible with hydrogen, look for ways to encourage the sale of gas/hydrogen blends, or incentivize companies to repurpose natural gas infrastructure to allow for the future adoption of hydrogen or other clean fuels.

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Businesses renovate office spaces at a historic pace, China plans to build a 3D-printed hydropower dam without human workers, the U.S. infrastructure package has thousands of projects underway, and more.

• Miami’s crypto-real estate boom has been challenging all conventional wisdoms as the price of crypto currencies like Bitcoin have surged, which could spill over into other popular real estate markets. (Peter Lane Taylor, Forbes)
• China is planning to build the world’s first 3D-printed hydropower dam in Tibet, with an AI-powered design and no human workers. (Matthew Loh, Business Insider)
• With the hybrid work model here to stay, businesses are having their offices renovated at a historic pace. (Joe Dyton, Connected Real Estate Magazine)
• New property technology is being piloted to reduce the carbon footprint of the federal government’s 300,000 buildings. (Nate Berg, Fast Company)
• Six months after the signing of the $1 trillion infrastructure package, the U.S. government relayed there are 4,300 projects underway. (CBS News)
• The metaverse continues to provide a new way of participating firsthand in virtual reality, mainly through digital storefronts, gaming, and entertainment, while also yielding real-world benefits. (Sean Finn, Forbes)