Electricity, gas and other utility bills represent a meaningful portion of a property’s operating cost — up to 20% of the rent amount. Operating costs — utility bills pegged to the building’s efficiency and consumption patterns — are conditions affecting the decisions of prudent prospective buyers, tenants and mortgage lenders about a property, well within the realm of material facts. Thus, energy use data is a consideration to agents, as well as owners and tenants.
But simply measuring the bulk amount of electricity, natural gas or other resources a building uses over a period of time doesn’t actually reveal much about the building’s comparative advantage relative to competing properties. Is the amount consumed per square foot large or small, compared to a similar building used in a similar manner?
With energy benchmarking, a property’s energy consumption is not just measured, but given context by comparison with the performance of buildings of a similar size, type and use.
Energy benchmarking rules became law in 2007 under California’s Assembly Bill (AB) 1103. Benchmarking mandates owners of commercial properties to disclose specific energy data on their buildings to prospective buyers, tenants, lenders and the California Energy Commission (CEC). [20 Calif. Code of Regulations §§1680-1684]
For commercial property owners and agents to comply with the energy benchmarking disclosure requirements, the CEC’s Nonresidential Building Energy Use Disclosure Program provides procedures called benchmarking.
The disclosure program is part of a larger scheme to curb greenhouse gas emissions in California by encouraging efficient consumption of energy and resources. Energy disclosures also coincide with a much needed push to increase transparency in the commercial real estate sector, mirrored by the 2015 commercial agency law disclosures brokers now provide to all owners and users.
The energy disclosure mandate applies to nonresidential properties larger than 5,000 square feet of gross floor area (GFA). GFA is the square footage of all interior floor space within a building’s outermost exterior walls, called the building envelope. GFA is more than just leasable floor space; it includes stairwells, storage, mechanical areas and similar enclosed areas.
Properties with between 5,000 and 10,000 square feet GFA are not mandated to make benchmarking disclosures until July 1, 2016.
Also, if a building is less than 12 months old it is exempt from AB 1103 energy disclosure requirements. It has insufficient energy use history to create a disclosure report.
Commercial buildings subject to compliance include buildings of the following occupancy types:
- Assembly (A);
- Business (B);
- Education (E);
- Institutional – Assisted Living (I-1, R-1);
- Institutional – Nonambulatory (I-2) (hospitals);
- Mercantile (M);
- Residential – Transient (R-1) (for example, a hotel);
- Storage (S); and
- Utility – Parking Garage (U). [20 CCR §§1681(i), 1682; 24 CCR §302.1]
A property’s occupancy type is found on the building occupancy permit.
Commercial property owners are required, and their agents duty-bound, to disclose their property’s energy usage to:
- prospective buyers, at least 24 hours before accepting or countering a written proposal to enter into a purchase agreement [20 CCR §1681(k)];
- prospective and existing tenants negotiating to enter into or renew a lease for an entire building (single tenant property), at least 24 hours before accepting or countering a written proposal to enter into a lease agreement [20 CCR §1681(l)]; and
- mortgage lenders at the time a loan application is submitted for financing to encumber the entire parcel. [20 CCR §1681(m); 20 CCR §1683(a)]
Thus, for multi-tenant buildings no disclosure is mandated when negotiating to enter or renew a lease with an individual tenant, but required when selling or applying for a mortgage.
The energy disclosures used by agents under the Nonresidential Building Energy Use Disclosure Program are generated through the Environmental Protection Agency (EPA)’s ENERGY STAR® Portfolio Manager tool. [See Card 5 for more information on the Portfolio Manager tool.]
The disclosure document itself is called the Data Verification Checklist (DVC). The DVC is produced using an online program called Portfolio Manager.
With Portfolio Manager, the owner creates the DVC automatically using:
- owner-provided property profile information, characteristics of the entire property, hours of operations, number of employees and major equipment for each use the property contains; and
- utility-provided energy consumption data.
Once the DVC report is created, the property owner or their agent may download, print and timely hand it to a prospective buyer, tenant or lender in compliance with disclosure mandates.
The DVC report presents a vivid picture of energy operating costs for the prospective user. It is delivered to them by the owner’s agent at the outset of negotiations, if not included in the package prepared by the owner’s agent to market the property.
All of the following building information is summarized on the DVC:
- property name and address;
- date of checklist creation;
- owner and primary contact name, telephone number and email address;
- ENERGY STAR® Performance Score, if available;
- primary property function (such as office);
- year built;
- occupancy and energy consumption characteristics for the whole property and each separate use within the property; and
- data summarizing total building energy consumption as well as usage data for each individual energy type (electric, gas, etc.).
To create a DVC, Portfolio Manager requires a minimum of 12 months of energy consumption data on the property for the benchmarking process. This data is provided in one of three ways.
The commercial property owner or agent may:
- manually input energy use data using utility bills for each meter in use on the property;
- upload a spreadsheet or other data file with energy consumption data for all meters; or
- request data from utilities.
When requested of the utilities, they automatically transmit consumption data from their records to Portfolio Manager using a meter or account number for the property.
The final option, the most efficient, is not available everywhere. Only the largest utilities have the data delivery infrastructure to automatically provide energy data to Portfolio Manager for benchmarking purposes.
Portfolio Manager allows commercial property owners or their agents to create an online profile of a property. Owners enter energy consumption data and characteristics such as building size, age, and the types of uses conducted on the property. Portfolio Manager then determines an energy use intensity (EUI) figure, comprised of the amount of energy used per square foot of a building’s interior.
Since Portfolio Manager is a nationwide database with hundreds of thousands of property profiles, the system is able to compare a building’s EUI to buildings with similar characteristics across the country. This provides a picture of the relative efficiency of a commercial building’s energy consumption patterns, allowing owners and property managers to target improvements. Agents market the energy efficiency advantages of listed properties to prospective buyers and tenants.
A word of caution for agents marketing a commercial property for sale or lease: A DVC created with Portfolio Manager is not valid for use as a disclosure until the online account for the property has been set up for 30 days. Once created, the property profile needs to be updated every 30 days. If not, the information is obsolete and unusable for disclosures.
The first step for creating a DVC is for the property owner or agent to register for a Portfolio Manager account. On registration, the user creates a profile for the property to be benchmarked. This may be done by the property owner or their agent on the owner’s behalf, preferably at the time the property is listed – if the agent’s intent is to make timely disclosures. [20 CCR §1684(a)]
The downloaded DVC is to be delivered to a prospective buyer or tenant no later than 24 hours prior to entering into a binding agreement to sell or lease the entire property. For disclosure to a lender, it is delivered on submission of an application for mortgage financing.
Once the DVC is created, the property owner or agent is also required to submit a copy to the CEC within 30 days. DVCs may be submitted electronically to AB1103@energy.ca.gov. [20 CCR §1683(a)(1)-(3)]
Energy efficiency and utility charges are material to a buyer or tenant’s evaluation of a property’s value. Thus, risk mitigation practice requires energy disclosures — like any property information affecting the value of a property — be made as early as possible in negotiations leading to a binding agreement to sell or lease.
One catch does exist: the DVC expires 30 days after it is created. Thus, when disclosures are delivered at the commencement of negotiations — as is prudent when the owner intends to deal — and negotiations unexpectedly continue for more than the 30-day life of the DVC given to the buyer or tenant, the property owner or broker needs to:
- generate a fresh DVC; and
- deliver the DVC to the prospective buyer or tenant at least 24 hours prior to finally entering into a binding agreement.
Once a binding agreement to sell or lease is entered into (or application for financing is accepted), no further energy disclosures are required.
Energy consumption data is privileged information between a utility user and their energy service provider. Absent legislative compulsion, utilities are not obligated to release customer data to third parties without the customer’s permission, which the utility customer may not agree to grant.
Several workarounds exist for tenant and utility interference. The first is to obtain a tenant’s written authorization for the release of their energy usage data by their utility to Portfolio Manager. This permits the utility to automatically upload metering information into Portfolio Manager at the property owner’s or their broker’s request.
A preemptive solution: have tenants agree to either authorize the release of utility data or provide energy consumption records themselves. This is achieved through the inclusion of an energy data release provision in the lease agreement or an addendum. When energy data is needed and the tenant has agreed to the release of energy data, the tenant on the owner’s request signs a supplemental authorization given to the utility (though some utilities have their own release forms). [See first tuesday Forms 552 §5.3 and 552-9]
Of course, requiring the release of energy data as a condition of a lease agreement only works for new or renegotiated leases which provide for tenant cooperation in the future.
When all efforts fail to get the information voluntarily from tenants and utilities, property owners and agents may resort to Portfolio Manager’s Missing Data Protocol feature. Missing Data Protocols provide an estimate of the energy consumed by an uncooperative tenant or utility based on the type of tenant activity and the size of the space.
Portfolio Manager uses real data for similar uses across the nation to extrapolate a workable substitute when tenants and utilities fail to cooperate. Figures estimated with a Missing Data Protocol are marked on the DVC, a concern to observant buyers, tenants and their agents.
Some utilities have taken the further step of offering aggregate energy data for multi-tenant buildings when some tenants refuse to release of utility data. Southern California Edison, for instance, will aggregate data based on a “15/15 rule”—that is, when a building has:
- more than 15 tenants; and
- no one tenant accounts for more than 15% of the building’s total energy consumption.
The DVC details energy consumption characteristics for each unique use within a building. To do this, the building owner or their agent uses Portfolio Manager to profile multiple uses according to the portion of GFA each user occupies.
Editor’s note — Recall that benchmarking and disclosures are only mandated when the entire property is offered for sale, lease or as security for financing. Thus, negotiations to lease only a portion of space within a multi-tenant property do not trigger energy use disclosures.
Portfolio Manager will prompt the building owner or manager to combine all similar uses. For example, Energy Star’s analysis has determined that office and restaurant tenants keeping similar hours use similar amounts of energy. The system will prompt the user to combine those uses.
If multiple tenants of the same type of use all keep the same operating hours, the property owner or broker will combine those tenants under one use profile as well —such as a general “Office, 8am-6pm” category. The owner or agent will list all meters associated with combined tenants under that category.
Although vacant space keeps no hours, it still consumes a minimal amount of energy. Vacant space needs to be accounted for under a separate use category if it accounts for more than 10% of the property’s GFA.
When a space has been occupied for less than 12 months, it is categorized with the current use, although data on present consumption patterns may only go back a few months.
Parking areas also consume energy, which Portfolio Manager estimates by size and degree of enclosure. With Portfolio Manager, the owner creates a separate sub-profile for the parking facility. Delivery of the sub-profile is part of the full energy usage disclosure presented on the DVC.
Enforcement of the benchmarking and disclosure requirement has been minimal so far, as the program is in its infancy. However, when a tenant or buyer files a complaint with the CEC for an owner’s failure to comply, the CEC will investigate and respond within a 30-day review period.
The CEC may initiate civil court proceedings to enforce compliance by court order or an injunction. Alternatively, the CEC may require the parties to the complaint to enter into a negotiated settlement. Noncompliant owners are subject to civil penalties up to $2,000. [CEC Nonresidential Building Energy Use Disclosure Program FAQ; Calif. Public Resources Code §25321]
Despite civil penalties and investigative procedures, statutes are silent on the issue of liability when an owner and their agent fail, through negligence or deceit, to provide the DVC as mandated.
Disputes will inevitably arise for failure to disclose energy reports. Litigation against owners and agents will determine whether the user can:
- delay closing a transaction until the disclosures are made;
- cancel for failure to timely disclose; or
- close the transaction and recover money (or close on a reduction in price or rent) for the cost of undisclosed energy inefficiencies.
Case law – judges – will eventually settle these issues, but not before the CEC has had a run at managing the regulations and enforcing compliance.