E3224 Brings Building Energy Performance into Commercial Property Due Diligence
In an exciting development for anyone involved in Property Condition Assessments, an ASTM Task Group just finalized the new E 3224 Building Energy Performance & Improvement (BEPIE) Standard Guide. Market developments, along with a growing focus by regulatory agencies, is driving more scrutiny by purchasers on a building’s energy efficiency as an investment consideration. The new standard is noteworthy in that it represents the first time that the industry has a consensus-based approach for addressing the growing demand for assessing building energy performance in the context of commercial real estate transactions. Here are five things you should know about this new standard:
- GOVERNMENT ENERGY DISCLOSURE REQUIREMENTS SHED LIGHT ON BUILDING ENERGY PERFORMANCE AS ANOTHER DUE DILIGENCE CONSIDERATION.
A growing number of states and municipalities now have building energy disclosure requirements. As such, it is more and more likely that routine property acquisition due diligence will expand to include a building’s energy efficiency profile, particularly if it is located in an area with disclosure requirements already on the books. In those areas of the country where building energy disclosure regulations exist, PCA consultants will provide a valuable service to their prospective purchaser clients by advising them that such public disclosure exists, and that such information may impact the building’s valuation and competitive position in the marketplace.
According to Anthony Buonicore, Chair of the ASTM Building Energy Performance Task Group and Chairman of Sustainable Real Estate Solutions, Inc.:
“There is no question about the growing importance of energy efficiency and sustainability in the commercial real estate industry. Energy costs can represent a significant portion of a building’s total operating expense. Therefore, measures to save energy can have a significant impact on the bottom line. Today there are 24 cities, two counties and three states that have already passed building energy performance legislation. The goal of this legislation is obvious: reward energy efficient buildings and penalize those that under-perform.”
- ENERGY-EFFICIENT PROPERTIES VIEWED MORE FAVORABLY BY THE MARKET.
More than 20 years ago, the first version of LEED (Leadership in Energy and Environmental Design) certification was adopted by the U.S. Green Building Council—a rating system for environmentally sound buildings. After two decades, nearly 100,000 commercial buildings now have LEED certification worldwide. Data on this universe of properties demonstrates that sustainable buildings have competitive advantages over less efficient ones. EPA’s ENERGY STAR certification specifically identifies buildings that are more energy efficient than 75 percent of their peers. Today, there are more than 34,000 ENERGY STAR-certified buildings. The new E 3324 standard provides a methodology for a professional to identify if a building is under-performing (or using more energy) compared to similar buildings, and if so, identify measures that might improve performance and the probable cost of such measures. If a building is an energy under-performer as compared to its peers, the probable cost to improve energy performance will likely be viewed as another “deficiency” in purchase price negotiations with the seller. Moreover, any associated price reduction may be used by the purchaser for post-acquisition energy improvements.
- LENDERS CONSIDERING ENERGY ASSESSMENT IN UNDERWRITING.
In addition to building owners and investors, lenders financing property transactions also are increasingly becoming interested in understanding a building’s energy performance. Lenders have always had a keen interest to understand any factors that can impact the value of their collateral and the creditworthiness of their borrower. A building’s energy performance may impact both. Energy efficient buildings have lower energy costs that can increase cash flow which will improve the affordability of loans or mortgages, and reduce repayment risk. Recent studies on CMBS loans have even suggested that energy efficient buildings may experience a lower risk of default. Moreover, energy inefficient buildings may be more difficult to rent or sell, and are at higher risk of obsolescence. Thus, due diligence professionals supporting commercial real estate lenders will likely also see more demand for energy assessments as a standard part of due diligence.
- MOST DATA FOR A BEPIE IS ALREADY PART OF A STANDARD PCA.
Existing PCAs following the ASTM E2018 standard do not currently address a building’s energy performance, and it was this shortcoming that was the principal driving force for development of the new E3224 BEPIE Standard Guide. The BEPIE screening assessment is designed to be a cost-effective and valuable adjunct to a PCA mainly because most of the information needed to conduct a BEPIE screening assessment is already collected in the standard PCA. This essentially minimizes the incremental cost of conducting a BEPIE at a time when the market is demanding pre-acquisition due diligence to be as streamlined and cost-efficient as possible.
- THE PRINCIPAL FOCUS OF BEPIE IS ON CONDUCTING A SCREENING ASSESSMENT.
Conducting a BEPIE under ASTM E 3224 includes the following four components in the scope of work:
- Collecting building and energy-consuming equipment information, including whole building energy consumption;
- Weather-normalizing the building’s energy consumption;
- Benchmarking the building’s energy consumption by comparing it to the energy consumption of peer buildings in the same geographic area and climate zone; and
- Determining if the building’s energy consumption meets, is greater than (“under-performing”) or is less than the energy consumption of peer buildings.
If the professional determines that a building’s energy consumption is “under-performing,” then the next steps involve identifying, based upon PCA field survey findings, potential energy efficiency measures to improve the building’s performance (at least to the level of its peers), as well as an estimate of the cost associated with these energy efficiency measures.
“Sound business considerations, coupled with growing regulatory requirements for building energy performance disclosure, are driving prospective purchasers of commercial real estate to include an assessment of energy performance in their property due diligence. As commercial real estate owners, investors and lenders gain valuable insight to potential impacts and risks associated with a building’s energy performance, it becomes increasingly likely that they will request their due diligence consultants to incorporate the ASTM E3224-19 BEPIE into the PCA,” Buonicore observed.
FOR MORE INFORMATION
Join our January 29th webinar when Anthony Buonicore will cover the background for E3224, its practical application as part of a PCA, and the opportunity it offers firms who are able to include energy assessments into their scopes of work.
- The regulatory and business driving forces behind building’s energy performance assessment
- The steps in conducting a BEPIE pre-acquisition screening assessment
- The data requirements for a BEPIE
- How BEPIE results can be integrated into a PCA
- Why this is a new business opportunity for property due diligence consultants
- The benefit to commercial real estate owners, investors and lenders
A copy of the E3224 BEPIE Standard Guide may be obtained from ASTM here.
The standard is expected to be available in mid-January 2020.