New Energy Benchmarking Law for California Borrowers

by Ervin Cohen & Jessup LLP

In the increasingly competitive lending market, how does a lender separate itself from the herd? By informing borrowers about new mandatory disclosure regulations and potentially saving them money in complying with such regulations.

The California Energy Commission recently developed regulations designed to promote energy efficiency. These new regulations require most non-residential building owners in California to benchmark a building’s energy use before the financing, refinancing, sale or lease of the entire building. Energy benchmarking is an energy management tool used to determine the energy efficiency of a building and give a lender, a commercial property owner or a buyer of commercial property insights as to how well the building is performing. The rating is similar to the miles per gallon rating of a car in that it discloses the energy efficiency of a building.

As of January 1, 2014, owners of almost any type of nonresidential building with a total gross floor area of more than 10,000 square feet must comply with certain disclosures regarding the building’s energy consumption at the time of financing. As of July 1, 2014, this requirement will change and such disclosures will be mandatory for most nonresidential buildings with a total gross floor area of more than 5,000 square feet. This means that by the summer, almost every California borrower seeking a real estate secured loan will be subject to the State’s new energy disclosure requirements.

Given the recent enactment of the regulations, many borrowers are likely unaware that they are subject to the law and further, of what they must do to comply. Commercial lenders can assist borrowers in this respect by asking the following questions, noting that a “yes” to all three questions means the borrower is subject to the new energy disclosure requirements.

  1. Is the borrower’s ENTIRE nonresidential building the subject of a loan transaction?
  2. Does the borrower’s building have a total gross floor area of more than 5,000 square feet (more than 10,000 square feet if prior to July 1, 2014)?
  3. Is the borrower’s building classified as one of the following occupancy types: A (Assembly), B (Business), E (Education), I-1 and I-2 (Institutional), M (Mercantile), R-1 (Transient-Residential), S (Storage) or U (Parking Garage)?

Your borrower answered yes to all three questions. Now what? Since borrowers are always seeking a trouble-free and affordable loan program, it may be attractive to borrowers if their lender can facilitate compliance with the law through the broker, mortgage banker or otherwise. This could save the borrower both time and money on the front end, not to mention frustration on the backend if and when noncompliance results in a penalty (although at this time the law doesn’t set forth any specific penalties or consequences for failing to provide the disclosures, it is conceivable that noncompliance could give rise to monetary penalties or allow lenders to terminate or perhaps even rescind transactions). Below is a short outline of the compliance procedure:

  1. Borrower creates a new account on the ENERGY STAR Portfolio Manager website here.
  2. Borrower contacts its utility providers to confirm procedures for providing energy use data.
  3. Borrower benchmarks its building’s energy use via Portfolio Manager at least 30 days prior to the signing date of your subject transaction (e.g. the submittal of the loan application) to allow enough time for generation of the Data Verification Checklist.
  4. Borrower produces a Data Verification Checklist report in Portfolio Manager.
  5. Borrower discloses the Data Verification Checklist to its prospective lender by no later than submission of the loan application.
  6. Borrower submits the Data Verification Checklist to the California Energy Commission here within thirty (30) days of producing the report.

Issues concerning energy benchmarking can get tricky as this is a new area of the law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ervin Cohen & Jessup LLP | Attorney Advertising

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