After a series of delays, California has implemented new energy disclosure legislation requiring nonresidential building owners to disclose energy information to parties to transactions as well as to the California Energy Commission (CEC). As of January 1, 2014, building owners must comply with California’s new energy use disclosure program whenever selling, leasing or financing a nonresidential building in excess of 10,000 square feet. Starting on July 1, 2014, the disclosure requirements will also apply to buildings between 5,000 and 10,000 square feet. Buildings less than 5,000 square feet are not subject to the disclosure requirements.
In 2007, California sought to increase energy efficiency and reduce energy consumption via a new energy use disclosure program for nonresidential buildings. Initial legislation was scheduled to go into effect in January 2010, but enforcement of the program was delayed. The CEC has now adopted final implementing regulations, which dictate the January 2014 start date. The California Nonresidential Building Energy Use Disclosure Program implements regulations set forth in California Code of Regulations, title 20, sections 1680 through 1684. The regulations implement Assembly Bill 1103 (codified at Public Resources Code section 25402.10), and apply where an entire nonresidential building is to be sold, leased or financed. The regulations require nonresidential building owners to benchmark the building’s energy use with the Environmental Protection Agency’s (EPA) ENERGY STAR® Portfolio Manager system, which generates an efficiency rating for the building, and then disclose the energy report to prospective buyers, lessees and lenders.
Energy benchmarking is a process used to measure and compare energy metrics so that a building’s energy efficiency level can be compared to similar buildings. The process helps owners assess energy use and performance, and disclosure of such metrics provides buyers, lessees and lenders key information about a building’s energy efficiency. California is not the first to institute energy benchmarking legislation – many national, regional and local regulations have mandated benchmarking and disclosure in certain situations. Indeed, California’s law is in some ways analogous to a New York City regulation, Local Law 84, which requires full public disclosure of commercial building energy use data.
Compliance with California’s law requires owners of nonresidential buildings to open or update accounts with the ENERGY STAR® Portfolio Manager system at least 30 days before required disclosures. (See Frequently Asked Questions at http://www.energy.ca.gov/ab1103/.) Consequently, as soon as a building is listed for sale or lease, or it is subject to new financing or refinancing, the building owner should create an ENERGY STAR® Portfolio Manager account. The building owner should then contact each utility servicing the building to determine the procedure to obtain energy use data. When requested by the owner, utilities and energy providers must release the building’s most recent 12 months of energy use data for the entire building to the Portfolio Manager account.
Once a building owner obtains the usage data from utilities and service providers, the owner should then generate a Data Verification Checklist in the Portfolio Manager and disclose it to a prospective buyer or lessee at least 24 hours before the sales contract or lease is executed. Disclosures must be submitted to prospective lenders no later than submittal of the loan application. The Data Verification Checklist discloses, among other items, the building’s ENERGY STAR® score. The Checklist expires 30 days after it is generated. As such, the Checklist must also be submitted to the CEC within 30 days of producing the report. (Disclosures are to be submitted to the CEC via email to AB1103report@energy.ca.gov.)
It is advisable to draft transactional documents to reference AB 1103 and the required Data Verification Checklist, and the buyer should acknowledge and agree in writing that it received from the seller the required documents reflecting an ENERGY STAR® score as required by the regulations.
The legislation applies to the following building types: Assembly (A), Business (B), Educational (E), Institutional – Assisted Living (I-1, R-1), Institutional – Nonambulatory (I-2), Mercantile (M), Residential – Transient (R-1), Storage (S), and Utility – Parking Garage (U). Where a property is comprised of multiple buildings, such as a shopping center, the building owner has the option to benchmark each individual building or combine the square footage into a single checklist. Further, the CEC recently clarified the applicability of the legislation to mixed use buildings, providing that if a portion of a building is residential, the owner is not mandated to disclose energy performance data. The regulations do, however, apply to hotels (R-1 buildings) and assisted living facilities (I-1 buildings). Thus, if a building contains a mixture of nonresidential and R-1 or I-1 use, for instance, the owner is required to comply with the regulations.
Building owners may supplement the information provided with other sources, such as the ASTM International checklist E2797-11 (2011) (Standard Practice for Building Energy Performance Assessment for a Building Involved in a Real Estate Transaction). The regulations further provide that if energy use data cannot be acquired, for instance because the Portfolio Manager is not operational when needed, building owners may use a reasonable approximation to replace the missing data and avoid delays in the transaction. If a building owner has only partial data, he or she can use the data from one tenant for another, or use partial annual data from a single tenant to represent the entire building.
Notably, neither the statute nor regulations currently provide for specific noncompliance penalties. The CEC, however, may investigate noncompliance allegations and seek civil and administrative orders compelling compliance or obtaining injunctive relief, as well as negotiate settlements that may include penalty payments. Further, transactions will be subject to applicable statutes regarding the disclosure of material facts.