Wed, 07/22/2009 - 11:19
The paradigm shift for California’s commercial property owners to meet minimum energy usage and high performance green standards is occurring at a tremendously fast pace. Assembly Bill 1103 will be implemented statewide starting in January 2010. AB 1103 will require an owner or operator of a nonresidential property to disclose their respective building’s ENERGYSTAR® performance rating for the most recent 12 months to a “prospective buyer, lessee of the entire building, or a lender that would finance the entire building.”1
Under the guidance of California’s energy utilities, AB 1103 instructs the energy utilities to first obtain written authorization from nonresidential building owners or operators, and then to upload energy consumption data for these buildings to ENERGYSTAR® Portfolio Manager.2
What does a bill like AB 1103 mean for you as a property owner?
Once AB 1103 takes affect, the green building market will gain more leverage and velocity. Just like a building’s CAP Rate is used as an investment benchmark to compare its un-leveraged return to other competition; a property’s energy ratings will give the commercial market a clearer indication of a building’s energy efficiency or lack thereof. In essence, this AB 1103 labeling process will put the transaction market on notice if a building they are buying, leasing, or financing has systems that are outdated, obsolete, or have room for improvement.
On top of this, a building’s energy efficiency and environmental impacts are becoming more important factors for buyers, tenants, & lenders alike when considering a commercial transaction. In short, the demand for these buildings is increasing! From a transactional perspective, green and high performance buildings are starting to command a “green premium” in the rental and occupancy markets. As tenant demand for green buildings increases, more pressure will be placed on commercial property owners to meet the green space demands of the tenants.
Consider the below facts from a Costar study on ENERGYSTAR® and LEED rated buildings:
• ENERGYSTAR® Rated Buildings achieve approximately a $4 per square foot annual rental premium compared to their peer buildings
• LEED (Leadership in Energy and Environmental Design) certified buildings have approximately 5% higher occupancy rates than their peers.
According to the same Costar report, there are 118,000 commercial buildings in Los Angeles, and at this point only 1 in 1,000 is considered green or high performance.3 Many mid to large sized tenants now require green provisions in their leases. These provisions are changing the landscape of the office leasing market as well. Landlords should be cognizant that tenants are incorporating the following green building practices into their corporate governance; General Sustainability, Site Selection, Energy Efficiency, Water Utilization, and Waste Management. In some cases, tenants will only lease buildings that are LEED (Leadership in Energy and Environmental Design) certified or ENERGYSTAR® rated.
It should be noted that a green lease is a very important component of the green building industry and landlords should understand the benefits and challenges up front. The California Sustainability Alliance has recently released a comprehensive report entitled; “Greening California’s Leased Office Space: Challenges and Opportunities”. This report can be downloaded off of their website at www.sustainca.org/.
Strategies for a Landlord to get ahead of the green wave:
Landlords have many cost effective options and incentives when it comes to making a building more energy efficient and green.
The first step is to have a qualified energy auditor perform an audit on your building, and on the past 12 months of your utility bills. These audits will typically identify the problem areas and inefficiencies of the building and offer solutions and strategies to improve energy efficiency.
Ideally, your project manager will have experience in understanding where the incentives are for energy efficiency upgrades and what the financial benefits and payback periods (return on investment) are for each of the energy efficiency components (i.e. renewable energy, window covers, lighting monitors, etc.). The auditors’ proposal should include a cost and payback period for each of these components and they should guide the process and make recommendations on a variety of contractors to utilize.
It is important that the project manager also understand the benefits of obtaining LEED and/or ENERGYSTAR® certifications on your building, and knows what the difference is between the two. Keep in mind that green building certifications such as LEED do not only refer to energy efficiency, but also address whole building components like, Water Efficiency, Indoor Environmental Quality, and Materials and Resources.
While there is still much confusion on the Landlord side about the benefits of green buildings, it is clear that many of these green solutions are financially viable and in some cases have payback periods of only 2 to 3 years.
AB 1103 and the green building industry are here to stay. There is no better time to make your building more marketable and begin the process and paddle ahead of the proverbial “green” wave then right now.
Other important “green” legislation that building owners should be fully aware of include:
• CA AB32,
• CA S-20-04,
• CA SB 375,
• AB1103,
• AB811,
• The new ASHRAE Building Energy Labeling program,
• The new LA ordinance that requires existing city buildings to achieve LEED EB Silver rating,
• The new climate bill that passed the House vote on June 26th.
For more information please contact Jeff Gould via email at Jeff.Gould@svn.com or at (818) 876-7116.
About the Author:
Jeff Gould serves as a Senior Advisor with Sperry Van Ness. Since joining Sperry Van Ness Jeff has closed more than $91 million in transactions and consistently ranks amongst the firm’s top 50 advisors, nationwide. Jeff specializes in the sales, financial analysis, and leasing of commercial properties throughout the Northern Los Angeles and Ventura County, California markets. Throughout his career, he has built his positive reputation on ethics and strong client representation.
Jeff is one of the few brokers in the country that has earned his LEED AP designation through the US Green Building Council. LEED stands for "Leadership in Energy and Environmental Design" and is the premier green building certification and rating system in the country. Jeff is helping his clients understand the benefits of green buildings and how they can have a positive impact not only on the environment but also a property's bottom line.
Jeff graduated from the University of Southern California (USC) where he earned a Bachelor of Science Degree in Business Administration with an emphasis in Real Estate Finance. He is a licensed California Real Estate broker and is almost completed with his Certified Commercial Investment Member (CCIM) Designation. He is also highly involved in the Green Building industry where he is the Chairman of the Green Building Task Force for The Valley Green Team and an active contributing member of the US Green Building Council's Los Angeles Chapter.
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1 Assembly Bill 1103 [Saldana 2007], p.2.
2 Greening California’s Leased Office Space: Challenges and Opportunities, By California Sustainability Alliance, Dated May 5, 2009
3 Green Buildings in Today’s Economy, By Costar Presentation, Dated June 17, 2009
