If you own a commercial building in California, you may be required to comply with new energy disclosure requirements the next time you want to sell, finance, or lease your entire building – and you should start preparing now.

On July 11, 2012, the California Energy Commission adopted regulations for the Nonresidential Building Energy Use Disclosure Program (“Regulations”).  The Regulations require commercial building owners in California to benchmark and disclose their building’s energy use data and rating before selling the building, as well as before financing or leasing the entire building.  The benchmarking process is implemented through the U.S. Environmental Protection Agency’s Energy Star Portfolio Manager System (“Portfolio Manager”), a free online system that allows the owner of a building to input information, which Portfolio Manager then uses to create documents the owner must provide to a prospective buyer, lender, or tenant.  The Regulations apply to all kinds of nonresidential buildings—including offices, retail stores, restaurants, theaters, and industrial buildings, just to name a few—and are meant to help prospective owners, lenders, and tenants predict future energy costs of the building, as well as encourage building owners to take steps to increase their building’s energy efficiency. Energy use disclosures required in other countries have been shown to raise awareness about energy efficiency and have caused owners of poorly-performing buildings to make improvements.

The Process

If you’re contemplating selling, financing, or leasing your entire building, you need to start thinking about complying with the Regulations now, as owners must open an account with Portfolio Manager 30 days before the disclosure is required.

After opening an account with Portfolio Manager, the first step is to input all of the required information, which includes the owner’s personal information, all sources of the building’s energy use data for the past 12 months (for example, active or inactive utility meters, onsite generation, distinct thermal energy, and fuel serving the building), and various characteristics of the building, such as its address, year of construction, and use.  Owners will have to request that their utility and energy service providers release the most recent 12 months of the energy use data for the entire building directly to Portfolio Manager, and the Regulations require utility companies to release that information to Portfolio Manager within 30 days after the owner’s request.  Alternatively, the owner can input that energy use data manually. If information is missing but the owner has used reasonable efforts to ascertain it, then the owner is permitted to approximate the information, as long as he or she identifies the information as an approximation and bases it on the best information available to the owner.

Once Portfolio Manager has all of the required information, it creates the following four documents, which the owner must give to the prospective buyer, lender, or tenant:

1. Disclosure Summary Sheet, which details the contents of the disclosures;
2. Statement of Energy Performance, which supplies data about the building’s energy performance, and, if available, the building’s energy performance rating;
3. Data Checklist, which summarizes the building’s physical and operating characteristics; and
4. Facility Summary, which summarizes the space and energy usage of a building and compares such energy use to the national median.

The disclosures must be made as soon as practicable before (a) the execution of a sales contract, (b) the submittal of a loan application, or (c) the execution of a lease.  Owners should also note that although there is not a continuing obligation on the part of the owner to update the initial disclosures as the deal moves along, the Statement of Energy Performance, the Data Checklist, and the Facility Summary expire 30 days after they are generated.  Therefore, owners should be aware that if a deal falls through more than 30 days after the owner initially obtained the documents, he or she will have to regenerate the required disclosures to provide to the next potential buyer, lender, or tenant.

As of now, no penalties are set forth in the Regulations for non-compliance (nor are there any remedies for buyers, lenders, or tenants who don’t get the required disclosures).  However, there is no telling what will happen in the future, and prudent owners should proceed as though compliance with these Regulations is compulsory.

Schedule for Compliance

The Regulations will be implemented in three phases as follows:

• January 1, 2013, owners of nonresidential buildings greater than 50,000 gross square feet will be required to comply;
• July 1, 2013, owners of nonresidential buildings measuring more than 10,000 gross square feet and up to 50,000 gross square feet will be required to comply; and
• January 1, 2014, owners of nonresidential buildings measuring more than 5,000 gross square feet and up to 10,000 gross square feet will be required to comply.

Owners of building smaller than 5,000 square feet are not required to comply with the Regulations.

Performance Ratings

Going through the process required to comply with the Regulations may also tell building owners their building’s Energy Star performance rating, a measurement that compares buildings on a scale of 1-100 (adjusted to take into account some of building’s characteristics, operations, and climate).  If a building achieves a rating of 75 or above (indicating top performance), the owner can apply for an Energy Star plaque, which can be exhibited publicly, provided the data used to calculate the rating was certified by a professional engineer.  Several studies have been done on the impact of Energy Star ratings on buildings.  The studies concluded that Energy Star labeling increases the value of commercial buildings, leading to premiums on rents and sale prices as high as 25% according to one study.  Further, occupancy rates were shown to be about 7% higher in buildings with Energy Star ratings versus buildings without the ratings.  Essentially, a higher rating means the building has lower energy/operating costs, which may make a building more attractive to potential buyers and tenants and lead to a better deal for the owner.