If landmark energy legislation is signed into law this year, the impact on commercial real estate could be a burden or a boon, depending on your point of view. With the American Clean Energy and Security Act of 2009 sponsored by Henry Waxman (D–Calif.) and Edward Markey (D–Mass.) clearing the U.S. House of Representatives on June 26, the potential for passage is gathering steam. The U.S. Senate is poised to take up the bill when it returns to work after Labor Day.
“Jones Lang LaSalle supports government measures that encourage companies to maximize the energy efficiency of their facilities, and that enhance transparency and consistency in the measurement and reporting of energy use and greenhouse gas emissions,” said Dan Probst, chairman of energy and sustainability services for Chicago-based brokerage Jones Lang LaSalle, in a prepared statement. “Moreover, the bill as it currently stands offers financial incentives for energy retrofits to help owners achieve sustainable goals.”
Setting aside the most controversial element of the bill for a moment — cap and trade — there are three key provisions that would directly affect commercial real estate. They include building code, energy labeling, and financial incentives to help defray the cost of energy retrofits.
According to Probst, a direct impact of the bill on commercial real estate is the establishment of a national building code that would mandate energy improvements in existing buildings. At the start of 2018, buildings would need to use 5% less energy than the baseline energy consumption established in 2005, with additional 5% efficiency improvements every three years culminating in a 25% improvement by January 2030.
How those codes would be enforced is not yet clear. Earlier versions of the energy bill would have made it unlawful to “occupy, permit to occupy or convey a building that that does not comply with the new codes,” according to the National Multi Housing Council (NMHC).
A last-minute amendment to the legislation, however, removed those references and replaced them with a requirement that the Secretary of Energy establish violations and penalties through rule making within three years of enactment. “This means the threat of federal fines is still very real,” according to NMHC.
Energy labels for buildings
The proposed Building Energy Performance Labeling Program would direct the Environmental Protection Agency to develop an energy performance labeling program for buildings such as EnergyStar. The “disclosure/labeling” provision would be limited to new construction following enactment of the bill, and could require property owners to disclose the energy scores or performance ratings of their properties.
Probst points to a recent law in California that mandates buildings that are being transacted, or bought and sold, report their energy consumption using the EPA EnergyStar program. Likewise the federal legislation, he says, contemplates a standard that would measure the energy use or overall sustainability of a building.
“The biggest thing that we’re in favor of is this whole notion of public reporting,” says Probst. Whatever penalties survive a final version of the energy bill Probst maintains that the market will become the biggest deterrent to non-compliance by penalizing owners that don’t improve their building’s energy efficiency.
Carrots and sticks
Paying for the energy retrofit upgrades that would garner a commercial real estate owner a respectable energy label or bring an existing building up to the new code will undoubtedly require capital.
To that end, the bill would set up the Retrofit for Energy and Environmental Performance (REEP) program, which would support retrofitting initiatives and potentially offer credit enhancements, interest rate subsidies, and initial capital for public revolving loan funds, according to the U.S. Green Building Council.
The most hotly debated portion of the bill, known as cap and trade, calls for a 17% reduction of carbon emissions across the U.S. by 2020. Large emitters of greenhouse gas such as utility companies and certain manufacturers would be required to buy carbon offsets for each ton of carbon emitted in the prior year.
The price tag to the economy has had many politicians and groups up in arms. A recent analysis by the Congressional Budget Office (CBO) stated that the cost of the climate legislation for the average American household would come to $175 per year by 2020.
In stark contrast, opponents of the energy bill cite research conducted by the Heritage Foundation, which found that a household of four would actually pay $1,870 over the same period.
In addition, say critics, the CBO analysis did not take into account the fact that manufacturing and coal-producing states would be harder hit than states whose electricity is produced by nuclear or hydro-powered plants.
Still Probst maintains that commercial buildings are unlikely to produce enough carbon emissions to be subject to cap and trade. “The implication for building owners is that if you’re in an area where there are coal-fired utilities that are subject to cap and trade, it’s likely to cost you some money.”