Commercial and multifamily residential property owners throughout Colorado will have to contend with aggressive new energy reduction mandates—and the onerous costs and deadlines that come with them.
Last November, after a years-long public engagement process, the City and County of Denver adopted a new ordinance and accompanying rules and regulations called the High Performance Existing Buildings Program. More commonly known as “Energize Denver,” this new program requires owners of buildings with gross square footage of 25,000 or more to benchmark their annual energy usage and to meet annual Energy Use Intensity (EUI) performance requirements. Every covered building must demonstrate that it is achieving interim EUI targets in 2024 and 2027 depending on use type, with an ending EUI target in 2030. Smaller buildings are not subject to benchmarking or energy reduction requirements but may be subject to requirements regarding lighting and clean energy.
Similarly, on Aug. 17, 2023, the Colorado Air Quality Control Commission (AQCC) approved rigorous new benchmarking and energy performance known collectively as Regulation 28. These requirements will apply to buildings statewide and require building owners to reduce energy use attributable to covered buildings in an amount equal to 7% or 13% by 2026 and equal to 20% or 29% by 2030, with the percentages dependent upon the path of compliance. Covered buildings include those that contain 50,000 square feet or more (excluding single-family homes, duplexes and triplexes, storage facilities, standalone parking garages, airplane hangars, and buildings in which more than half the space is used for manufacturing, industrial or agricultural purposes). The standards will impact an estimated 8,000 structures throughout the state, comprised almost entirely of commercial, multifamily residential and public buildings. The program is part of the state’s overall roadmap to reduce emissions by 50% prior to 2030.
Therefore, whether your property is located in Denver or elsewhere in the state, it will need to comply with these new energy reduction programs.
While reducing the environmental impact of our built environment is an important long-term objective, many in the real estate industry are concerned about the enormous costs and aggressive timeline required for compliance with Energize Denver and Regulation 28. Industry experts have estimated the total cost of compliance with Regulation 28 alone at well north of $3.1 billion, or an average cost of $387,500 per each of the 8,000 covered buildings.
Opposition from the Real Estate Industry
Commercial real estate owners unsuccessfully fought implementation of the new standards, citing unique financial stresses over the last few years ranging from high vacancy rates and increasing foreclosures to high interest rates and continued inflation. The Colorado Real Estate Alliance argued that Regulation 28 will result in higher costs, building abandonment and prolific noncompliance in the real estate market. “The proposed new rule being advanced by AQCC is inflexible and arbitrary and could have the effect of moving the building sector from a position of financial challenge to financial crisis,” the group said in a fact sheet on Regulation 28.
Although Regulation 28 offers some flexibility and leniency for affordable housing, market-rate apartment buildings will be saddled with increased costs that landlords will likely pass on to tenants through higher rents, according to CREA. This could inflame an already difficult affordability problem in the state. Similar concerns have been raised about Energize Denver.
Moreover, office landlords are already suffering in a post-COVID environment as tenants downsize or abandon properties altogether. This added strain could be enough to push many buildings into foreclosure.
Finally, many buildings may find it difficult to comply with Energize Denver and Regulation 28 due to the specific uses in the building, the age of the building, unique building characteristics and a general shortage in skilled trades. For example, hospitals are among the most energy-intensive uses, and they will have to implement extraordinary renovations and upgrades to comply with the coming EUI performance targets. And even if all 8,000 building owners promptly move forward with implementation, it would require that about 1,200 buildings per year (e.g., 95 buildings per month, 22 per week or three per day) be modified before 2030 when there may not be enough contractors and laborers to perform the work.
Alternative Compliance Options
Energize Denver and Regulation 28 both allow some flexibility for building owners and a variety of pathways to alternative compliance, including target adjustments for specific uses, renewable energy credits and electrification adjustments. The deadline to submit a request for an Energize Denver target adjustment for 2024 is Oct. 1, 2023, and the deadline for 2025 is Dec. 31, 2024. Owners can also apply for financing, grants, tax credits and other incentives related to retrofitting and upgrading energy systems.
Buyers and Tenants Beware
Brownstein is already seeing the effects of Energize Denver and Regulation 28 filter into the market. Buyers and tenants are asking questions of property owners about compliance with these programs and plans for meeting the upcoming EUI performance targets. Buyers and tenants should include these matters in their typical diligence activities and may consider retaining a consultant to audit the property’s compliance, requiring representations and warranties from the property owner or both. Landlords and tenants will need to negotiate terms in their leases regarding whether costs of compliance and capital improvements to the property will be passed through to the tenant, and parties to current leases should consider whether to have counsel review their lease with these concepts in mind before a dispute arises.
Requirements for Sellers
On the flip side, sellers should be aware that both Energize Denver and Regulation 28 contain broad disclosure requirements that property owners must comply with when selling a property. These disclosure requirements can kick in as early as when the seller begins marketing the property for sale. Sellers should work with experienced brokers and counsel to ensure they are complying with these requirements in their marketing materials, letters of intent, and purchase and sale agreements.
Anecdotally, we have encountered properties with errors in their benchmarking reports, property use classification, reported square footage and the calculation of their EUI targets. Property owners should retain a qualified consultant to review these records and information to ensure they are accurate prior to the EUI target years and before listing their property for sale.