Guest commentary: New ASTM energy standard to impact commercial real estate transactions

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By MARK J. BENNETT, Dolan Media Newswires

[email protected]

 The growth of renewable energy in the U.S. has been subject to inconsistent public policy at both the federal and state levels. This lack of predictability creates difficulty for investors looking for long-term stability, which is needed to justify the often significant capital investments associated with most renewable energy systems.

Despite this uncertainty, one renewable energy that continues to show steady progress is an area often not even seen as a renewable energy resource: energy efficiency.

Advantages and laws

Often referred to as the “most efficient” source of renewable energy, energy efficiency projects typically have returns on investment (ROI) and payback periods much more attractive than “traditional” renewable energy projects, such as those involving wind and solar technology.

Although energy efficiency is often viewed as a “black sheep” in the renewable energy market – because it is not as visually appealing as a gleaming solar array or a pastoral wind farm – it is rapidly emerging as the most cost-effective energy conservation measure.

Enhancing energy efficiency also will reduce our country’s dependence on foreign oil, thereby enhancing energy security. This means energy efficiency is able to achieve the public policy objective of reducing atmospheric carbon emissions, arguably at a much lower cost and faster delivery than traditional renewable energy projects.

Commercial real estate, consumes approximately 36 percent of all electricity produced in the US. Accordingly, policy-makers have begun to focus on the promotion of building-based energy efficiency as a policy area that can yield short-term results; is highly capital-efficient; and, in light of the labor intensity often associated with energy efficiency projects, can drive economic development and job creation.

To support policies focused on driving energy efficiency, various laws in the form of building energy performance labeling, benchmarking, and disclosure law and regulation are now being implemented in jurisdictions around the county.

These laws typically require a building owner to disclose the building’s energy use and benchmark it against a relevant peer group on a periodic basis (typically annually) or at the time of a sale, lease, or financing. California; Washington; Austin, Texas; District of Columbia; New York City; Seattle; and, most recently, San Francisco have adopted such laws, and many other cities and states are actively considering similar approaches. (The best resource to follow this trend is www.buildingrating.org, which tracks this issue on a global basis.)

Disclosing the energy consumption of a building and benchmarking it against its relevant peer buildings at both national- and local-market levels requires the collection of accurate and representative building energy-use data.

Until the adoption of the new ASTM International, formerly known as the American Society for Testing and Materials (ASTM) Building Energy Performance Assessment (BEPA), no standardized methodology appropriate for commercial real estate existed to collect and analyze building energy-use data.

The new ASTM standard is designed to facilitate and standardize the way building energy-use information is gathered and analyzed in the regulatory compliance and transactional due diligence process.

 How to measure energy efficiency

In view of this clear need to standardize the methodology for building energy-use data collection and analysis, ASTM published the BEPA standard in February 2011 after more than two years of effort by a dedicated ASTM task group.

The group was made up of more than 220 professionals, including architects, attorneys, bankers, educators, energy-efficient equipment and software providers, engineers, owners and managers, professional associations and real estate investors.

The methodology developed allows for data to be collected and analyzed on a technically sound, consistent, transparent, practical and reasonable basis. Additional information on the standard can be found at www.astm.org/?Standards/?E2797.htm.

The collection of energy-related information is not a simple process. For example, there is no standard period of time over which energy-use information should be collected, nor have occupancy, weather or building upgrades entered into the equation. Such issues often create confusion in the marketplace and have thus driven the need for standardization.

The BEPA standard has significant implications for building owners and tenants in the many cities that are beginning to enact green building requirements. The collection and dissemination of energy information and its subsequent use raises a number of legal issues for building owners and their tenants.

Attorneys need to be aware of these issues as they will vary by jurisdiction. Among these issues are:

• Access to relevant data from tenant spaces;             

• The privacy and confidentiality of the data collected; and

• The implications of false or misleading disclosures of energy performance in the context of commercial real estate transactions.

Given the economic and regulatory pressure to incorporate energy consumption history into the due diligence process associated with the sale, leasing, and financing of commercial real estate, it appears likely that routine use of the BEPA standard will likely accelerate.

Typical transaction participants, including the attorney, consultant and lender, will play important roles in advising their clients (buyer or seller) of the risks uncovered during this task, often referred to as Green Building Due Diligence (GBDD).

Environmental professionals have begun to bundle a BEPA review with a traditional Phase One Environmental Assessment or Property Condition Assessment. Lending institutions have begun to look at GBDD, as a means of identifying energy risk in terms of its impact on both property valuation and regulatory compliance. Banks also can identify opportunities to fund energy efficiency investments.

Given its relatively low subsidy requirements, it is likely that energy efficiency will continue to be favored by policy makers focused on renewable energy.

As commercial real estate stakeholders seek more energy efficient property, as well as to comply with emerging energy disclosure laws, the ASTM BEPA standard will provide a broadly accepted tool to facilitate incorporation of these issues at a transactional level.

Editor’s note: Bennett is senior counsel and leader of the climate change team at Miller, Canfield, Paddock and Stone in Troy, Mich., and is chairman of the ASTM BEPA Standard -E2797-11 Legal Issues Sub-Committee. This article first appeared in Michigan Lawyers Weekly, our sister publication.