The Nonresidential Energy Use Disclosure Program (also known as “AB 1103”), a new and far reaching mandatory energy use disclosure law for commercial properties, came into effect on January 1, 2014 for non-residential buildings 10,000 square feet and larger. Non-residential buildings 5,000 square feet and larger will required to comply with these regulations beginning on July 1, 2014.
This law requires that owners of commercial properties subject to the disclosure requirements provide the “Energy Star Benchmark Report”, which includes an Energy Star rating, for their building to a prospective purchaser, tenant or lender and the California Energy Commission no later than 24 hours prior to execution of a sales contract, execution of the lease agreement or submission of a loan application. The law requires the property owner to commence the compliance process at least thirty days prior to the sale, lease or loan is consummated.
For leases, the law only applies to single-tenant buildings, so if your building is occupied by more than one tenant, you are not subject to this law when signing new lease.
Compliance is easy, quick and streamlined, right? Absolutely not. Here are the steps:
- Register for a Portfolio Manager account and create a profile for the building on the Energy Star website. This means inputting extensive data on the building (i.e. year built, Percent occupied)
- Identify all the sources of energy use for the building (i.e. electricity, gas, etc.)
- Contact the applicable utility companies (i.e. DWP, The Gas Company) to confirm their procedures for providing energy use data (these vary from provider to provider).
- Submit a request to the applicable utility companies to upload the most recent twelve months of energy use data into the Portfolio Manager account on the Energy Star website. Some utility companies are not set up to do this and may instead provide the building owner with a spreadsheet, and the building owner must manually input the information onto the website. In addition, it’s not yet clear how long some utilities will take to provide the information.
- Generate a Data Verification Checklist report in the Portfolio Manager.
- Disclose the Data Verification Checklist to the potential purchaser, tenant or lender and the California Energy Commission.
The purpose of the law is to encourage buyers and tenants to more easily evaluate the energy efficiency of a potential building they are considering purchasing or leasing, as well as compare the energy efficiency of two or more potential buildings being considered. Sounds good, right? But the problem is in the details.
The system is fatally flawed in that it doesn’t adequately account for the occupant’s operation on the energy usage. The law attempts to do this by using hours of operation, number of employees and other similar data in its assessment. But the “current use” information is very non-specific. For example, all types of manufacturing operations are classified as “Manufacturing/Industrial Plant”. Let’s take two identical industrial buildings with identical energy efficiency. Building A is occupied by a company that does heavy manufacturing and uses an enormous amount of electricity in its operation. Building B is occupied by a garment cutting operation, which uses very little electricity. Building B will have a much better Energy Star Rating. That makes no sense.
If the building is currently occupied by a tenant, absent lease language to the contrary, that tenant can legally refuse to give their authorization for the release of the most recent year of information on their utility usage by the utility provider. In such a case, the law calls for the owner to “estimate” that information. There are no guidelines provided in how one is supposed to do that. Even if there were guidelines, this is a horribly inaccurate and subjective method. It is a “garbage in – garbage out” scenario, where an energy rating crafted with faulty data is essentially useless. This must be addressed in new leases by adding a provision requiring the tenant to provide such information to the landlord upon request.
Real estate transactions often need to be completed quickly, and in some cases an owner will have to change the optimum timing of a transaction to comply with this law. Let’s say a tenant in a building goes out of business suddenly and the owner unexpectedly gets a set of keys in the mail well before the scheduled lease expiration date. The law requires the owner to commence compliance with AB 1103 thirty prior to signing a new lease, so technically, the landlord will lose a month of rent even if he has a tenant lined up to lease the space immediately. Even if the landlord acts immediately, the report can’t be obtained until the utility company provides the records requested by the owner, which will take time.
Who wins? The energy consulting companies that building owners are going to have to hire to facilitate their compliance with AB 1103. Their solicitations have been filling my inbox. AB 1103 is a brand new, multi-million dollar source of revenue for these companies.
At the end of the day, the sound bite is good – who doesn’t like energy efficiency and transparency? But the law, as crafted, is about as useful as moving rocks from one pile to another. It’s going to cost an enormous amount of money and cause a lot of delays and wasted time. Which is just what business in California needs.