Seller Beware: Does Your Building Make The Grade?

Deadline Approaches for Disclosure of Energy Efficiency Rating of Commercial Buildings

One of the ongoing challenges in making the case for “green building” has been to monetize the value of high-efficiency features, such as reduced energy consumption. In a “light-bulb” moment, the California Legislature enacted Assembly Bill 1103 (“AB 1103”) in its 2007 legislative session as a means to assure that a building’s energy efficiency is a factor in certain sale, lease and loan transactions. Specifically, AB 1103 requires disclosure of energy-usage data of commercial buildings utilizing the U.S. Environmental Protection Agency’s Energy Star Portfolio Manager program (“EPA Portfolio Manager”). The thinking behind this new “statistic” is to quantify the benefits of energy-efficiency upgrades by providing a standardized metric for energy performance in the marketplace. With implementing regulations in process, the question is what will be required of building owners as the deadline for compliance approaches?

AB 1103 set a deadline of January 1, 2010 for owners selling, leasing or financing an entire non-residential building to disclose both the energy consumption data for the most recent 12 months and the building’s Energy Star rating under the EPA Portfolio Manager. That deadline was extended by Assembly Bill 531, which delayed the commencement date for an indefinite period to allow the California Energy Commission (“CEC”) to formulate regulations governing implementation of the disclosure requirement.

The CEC staff recently unveiled its latest version of the draft regulations (“Draft Regulations”), the last step prior to formal rulemaking. The Draft Regulations phase in the disclosure requirement based on building size. As of January 1st of next year, the disclosure must be made to a prospective buyer, lessee or lender of any entire non-residential building measuring 50,000 square feet or more in floor area and of any building solely occupied by the owner. The disclosure mandate will kick in as of January 1, 2012 for non-residential buildings ranging in size from 10,000 to 50,000 square feet, while all remaining buildings must adhere to the requirement effective July 1, 2012.

The Draft Regulations pinpoint the time frame for delivery of the disclosure information as at or before the time that the owner presents a sales contract, a lease or a loan application for the relevant transaction involving the entire building. Building owners are required to open an account at the EPA Portfolio Manager website and to provide relevant building data (such as building type, size and location). Not less than thirty days before a disclosure is required, the building owner must request the release of energy use data for the prior twelve months from the relevant utility to the building owner’s EPA Portfolio Manager account. Utilities are required to comply within fifteen days. Based on that data, a Statement of Energy Performance and the Energy Star rating will be generated.

A controversial element of the Draft Regulations is the proposed introduction of a new California rating system, the California Building Performance Rating. Among CEC’s justifications for a separate California rating is that the Energy Star program does not apply to buildings less than 5,000 square feet in size and excludes certain types of commercial buildings altogether. AB 1103 did not include such a feature. It remains to be seen whether that aspect of the Draft Regulations will survive the formal rulemaking process.

Both rating systems operate on a curve. Specifically, the Energy Star rating ranges from 1 to 100 with 50 being the average rating of properties nationwide, adjusted for climate, building size, type of use, hours of operation and similar factors, but not for building age. Buildings in the top 25% of buildings in their class on a national basis qualify for recognition as Energy Star Buildings. The proposed California Building Performance Rating would grade buildings in comparison to other similar types of buildings in California from “A” (most energy efficient) to “G” (least energy efficient) based upon the EPA Portfolio Manager information.

The rating system approach not only allows an “apples-to-apples” comparison of like buildings as part of the due diligence process, but also raises the bar for energy-efficiency performance over time as more buildings are upgraded and average performance nationwide and statewide improves. From a buyer’s or investor’s perspective, the energy efficiency rating provides a clue as to whether the energy consumption portion of a building’s operating costs will be low compared to like buildings or, alternatively, whether existing inefficiencies provide an opportunity to decrease operating costs and increase property value by investing in capital improvements.

So what will this new emphasis on energy-efficiency mean for non-residential building owners? In any transaction involving the entire building, the due diligence items will include the AB 1103 disclosures. With that in mind, well in advance of a building lease, transfer or financing, the owner should ascertain the Energy Star rating and consider an energy audit to evaluate the building’s performance and to identify the nature and costs of potential energy-efficiency upgrades that may translate into a competitive edge.