California Commercial Building Owners and Landlords Soon To Be Required To Report And Disclose Energy Use During Lease, Lending and Sale Transactions

In 2009 the legislature enacted a law requiring that, during lease of the entire building, lending, or sale transactions for nonresidential buildings, owners must disclose “energy ratings’ developed by the U.S. Environmental Protection Agency. A sliding schedule of compliance is required, with the largest buildings starting in July 2012. Beginning July 2013 all size buildings will be required to comply. Commercial property owners may want to consult with an experienced Sacramento or Yolo Real Estate attorney regarding these transactions.

Under the new law, beginning in 2009 utility companies have been required to keep energy consumption records in a format compatible with the EPA’s Energy Star Portfolio Manager database. The law requires owners to use the data to benchmark the building’s energy use using the U.S. EPA Portfolio Manager system in advance of certain financial transactions, and to disclose statements of the building’s energy usage to potential buyers, lessees, and lenders.

The California Energy commission published proposed regulations last August which established the following schedule:

July 1, 2012: disclosure by owners of buildings larger than 50,000 square feet;

January 1, 2013: disclosure by owners of buildings larger than 10,000 square feet, but less than 50,000;

July 1, 2013: disclosure by owners of buildings less than 10,000 square feet.

The steps required by covered nonresidential property owners is as follows:

1. At least 30 days before entering a contract to sell, lease or borrow against the entire property, the owner must register with the EPA’s Energy Star Portfolio Manager.

2. The owner must then instruct their utility providers to upload their data on the building’s energy use to the owner’s account at the website.

3. The building owner must then use the Portfolio Manager account to generate a “Statement of Energy Performance” for the building, and a “California Energy Performance Report.” This will provide the EPA’s benchmarking data and ratings for the most recent 12-month period for the subject building.

In addition to creating a database of commercial building energy use in California, this new law will provide buyers and renters (of whole buildings) with energy consumption statistics for comparison with competing properties. In the case of triple-net leased properties, this will require disclosure of information regarding tenants use of the property, which may face some resistance. While commercial leases generally require tenants to conform to all laws, landlords will want to consult their leasing attorney regarding including requirements of disclosure in the lease. Building owners may also want to more aggressively manage their building’s energy use, as a better grade can argue for a better price in the commercial real estate market. While the regulations are currently in draft form, their ultimate adoption is inevitable and owners must take notice.