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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2010

In Full Disclosure

Clients could see an impact as governments mandate sharing energy-use information

In recent years, the commercial real estate community has paid increased attention to buildings' energy use. In fact, some institutional investors and lenders now evaluate a building's energy usage as part of their standard due diligence. In addition, there is a nationwide trend toward greater transparency of energy usage, especially in light of increasing energy costs.

Certain benefits of energy-efficient buildings are irrefutable. These buildings typically have lower operating costs, greater occupancy and rental rates, and higher sales prices than non-green buildings. Purchasers, tenants and financiers of commercial properties likely will pay more attention to these important realities in the coming months and years.

"Certain benefits of energy-efficient buildings are irrefutable."

Commercial mortgage brokers can help their clients understand these benefits, how to address a building's energy use as part of their due diligence and whether legislation exists in their city or state about disclosing a building's energy use.

D.C., California lead way

Several states and municipalities have enacted laws mandating the disclosure of a building's energy use to interested parties or the general public. Washington, D.C., and California have led the nation in energy-efficiency and environmental protection.

With its Green Building Act of 2006, Washington, D.C., was the first major city to enact such legislation in an effort to reduce new and existing buildings' environmental impact. The act was one of the early pieces of legislation that required buildings to achieve the criteria of the U.S. Green Building Council's Leadership in Energy and Environmental Design rating system. The legislation required eventual disclosure of a property's energy use. Further, beginning in 2012, buildings' energy data will be published in a public, online database.

In 2007, California passed Assembly Bill No. 1103, which will require disclosure of a property's energy rating and energy-use records from the previous 12 months to any prospective purchaser, tenant or financier. The requirement applies to all nonresidential commercial properties.

Utility companies have been collecting usage data since at least Jan. 1, 2009. The California disclosure requirement was set to take effect this past Jan. 1, but the implementation date was postponed until the California Energy Commission drafts a new compliance schedule. A firm start date has not been confirmed as of press time; updates are available on the commission's Web site, energy.ca.gov/ab1103.

Typically, for nonresidential buildings, energy data must be reported in a format suitable for entry into the ENERGY STAR Portfolio Manager, an online tool developed in collaboration between the Environmental Protection Agency (EPA) and the Department of Energy. The program rates buildings on a scale from 1 to 99. Buildings in the top quartile are eligible to receive the EPA's ENERGY STAR label to communicate their energy-efficiency to the public.

Similar legislation exists or is pending in New York City, Washington state and Austin, Texas. Consider how long it will be before mandatory energy-usage disclosure becomes a reality for all municipalities and states. These laws increase the market's awareness of a building's energy performance. Ultimately, a tenant could select an ENERGY STAR-rated building over one with a lower score.

Proactive measures

Commercial mortgage brokers can help their clients prepare for potential mandatory energy-use disclosures in their cities or states. When these clients compare deals, they should know one may have better long-term value than another, similarly priced property if it is more energy-efficient.

To be proactive, property-owners may wish to consider energy-efficiency improvements for their buildings or investment portfolios.

The first step is to do a preliminary analysis of a building's energy usage, followed by an energy audit. A good energy-audit report will reveal some relatively inexpensive improvements that likely will have a positive impact on the utility bills.

Another proactive step is to include energy or green-building due diligence when making future purchase decisions. Buyers can consult a reputable due-diligence consultant with experience in energy-auditing and sustainability services. The American Society of Testing and Materials is developing a stand-ard practice for conducting due diligence on buildings' energy performance. A draft form is expected this year.

Most large U.S. banks also now recognize the importance of tracking energy and sustainability within their loan portfolios and in their business practices. Many have recently created positions such as "director of sustainability" or "corporate sustainability officer." Some also are beginning to evaluate their loan portfolios in light of proposed federal carbon cap-and-trade legislation to determine their exposure and risk.

Future loan underwriting may account for a property's energy-efficiency, giving preferable ratings to green buildings. As an example, the commercial green-building underwriting standard is now available from the American National Standards Institute.

Ultimately, improving their commercial buildings' energy-efficiency likely will give property-owners a market advantage. Decreased energy usage can contribute to increased value over time, whereas excessive energy use may cause below-market growth in rents, which can affect a property's pro forma, valuation and eventual financing.

Further, it may be harder to find tenants for less energy-efficient buildings, especially those with triple-net leases. In the future, demand likely will decrease for outdated, less-efficient buildings.

Commercial mortgage brokers and other real estate professionals should expect emphasis to soon be placed on a building's energy-efficiency during loan underwriting, as lenders may ultimately use it as they evaluate the asset's value. This practice may not gain full traction until after the current markets and economy stabilize. But it likely will be in place by the time commercial real estate values begin to climb.


 


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