Nothing is Certain but Death and AB 1103 Compliance
Imagine this. You are finalizing due diligence for the purchase of a 50,000 square foot office building. Your team has put in hundreds of hours looking at cash flows, financial models and occupancy data. Your lawyers have picked over the leases and regulatory implications. Everything is ready to go through, and at the last minute you are held up because the building has no energy benchmark.
With the passage of California's AB 1103, this situation is a real possibility. AB 1103 is a new law requiring commercial buildings over 10,000 square feet (soon to be 5,000 square feet) to submit an energy benchmark to the State as part of any transaction. An energy benchmark is a high-level summary of how much energy a building uses, relative to comparable buildings.
You can find more info about AB 1103 here.
WegoWise recently teamed up with the Los Angeles Better Buildings Challenge and the law firm Greenberg Glusker Fields Ciaman & Machtinger on a webinar for commercial real estate professionals, informing about the AB 1103 law. As the resident energy geeks on the panel, our role was to explain the options for AB 1103 compliance, focusing on the process of collecting and submitting the necessary energy data. You can listen to the full audio here. This post is a summary of our presentation from that panel.
What does AB 1103 require?
AB1103 requires disclosure of energy data for any commercial real estate transaction. The law took effect in January 2014 for buildings over 10,000 square feet, and in July it will apply to buildings over 5,000 square feet. While energy benchmarking has become fairly common practice among larger commercial properties, AB1103 will make it universal. This means that thousands of property owners and managers will be confronted with the basics of energy tracking and benchmarking for the first time. How will they do it?
The concrete deliverable required for AB1103 compliance is a report from the US EPA's Energy Star program. This document, the Data Verification Checklist, ensures that the building is benchmarked and includes basic information about the building and high-level information about how the building uses energy. If enough data are available and the building falls into an eligible category, the document will include the Energy Star score, a number between 1 and 100 that indicates how efficient a building is compared to its peers (100 is the most efficient).
The system that generates the compliance documents for AB1103 is an online tool called Portfolio Manager. Created by the US EPA, this system has become widely accepted as an objective standard for energy efficiency.
There are three ways to get data into Portfolio Manager and create the required report. To understand the options, we will draw a comparison to everyone's favorite activity - filing taxes.
How to comply with AB 1103
When filing taxes, you collect information (financial data) and submit it to a government agency (IRS), receiving an official statement of compliance (tax return). Similarly, for energy benchmarking, you collect information (energy data and building characteristics), submit to a government agency (EPA) and receive a statement of compliance (Data Verification Checklist).
There are three general options for filing taxes, and these same options apply to energy benchmarking as well. Choosing the right approach for you will depend on your goals, as well as available time, budget, energy and skills. We will outline each of the three approaches and highlight pros and cons of each.
1. Hire it out. Many people hire a tax accountant to file their taxes each year. Similarly, there are many energy consultants available for hire who will take responsibility for energy benchmarking. This is the most expensive approach, but usually saves time by pushing all the busywork onto someone else. Another benefit is the expertise of a professional for those cases where it is not exactly clear how to calculate something. Finally, hiring a consultant conserves emotional energy; you can breathe easy because you have paid someone else to "own" the process.
2. Do it yourself. You might be the type of person that takes pride in their ability to fill out IRS forms, and doesn't even hesitate turning them in. If so, the DIY approach to energy benchmarking is for you. To do your own benchmarking, you can use Portfolio Manager. You can collect the data from the most recent year of bills for each utility and either type them directly into Portfolio Manager or upload the data as spreadsheets. In addition to utility bills, you will need to collect and enter basic data about your building, such as the square footage, year of construction, primary use (e.g. office, school, retail) and details like the presence of data centers, normal operating hours, number of people onsite, and specific equipment like computers and refrigerators. Once the data are submitted, you can create the Data Verification Checklist and Statement of Energy Disclosure from Portfolio Manager, and submit to the CA Energy Commission. Doing the benchmarking yourself is free in terms of dollars and provides you the most flexibility to tailor your benchmark to your building. But it can be time-intensive, and requires more expertise around energy than some people will feel comfortable with.
3. Buy software. Just as Turbotax has emerged in recent years to help people file their taxes, new software products have emerged to help property managers and building owners calculate their Energy Star benchmarks. These tools provide a "middle ground;" they are generally less expensive than paying a consultant and easier than doing it yourself. Cost and capabilities vary by product, but in the example of WegoWise, the software collects data from your utilities, walks you through the information you need about your building, and then automatically sends the data to Portfolio Manager. As property managers use these tools, they get comfortable with their data and quickly move beyond legal compliance to a data-driven energy management system that leads to lower bills and greener buildings.
The Twist - "On Demand" Reporting
So we've outlined three ways to comply with the AB1103 requirement to benchmark a commercial building in Energy Star. These approaches apply beyond the jurisdiction of California law, and many owners and managers have performed energy benchmarking to comply with local laws or as a voluntary step toward increasing sustainability.
In contrast to these common uses of Energy Star benchmarking, the AB 1103 rules require a constantly-updated benchmark. So instead of an annual effort to update energy data and confirm building information, California real estate professionals need to keep the energy benchmark up-to-date. This can mean tedious data entry, or a higher consultant fees. But the technology exists to automate the data collection, keeping the Energy Star data current all year long. That means that when a transaction comes up and the AB 1103 requirement sets in, everything will be ready to go and compliance does not become a roadblock to the deal.
Just like filing taxes, there are multiple ways to comply with laws like AB 1103. Some people will hire a consultant, some will do it themselves, and others will use a software tool. In all cases, energy benchmarking is an excellent "first step" to getting a handle on energy costs and improving the sustainability of your buildings. By calculating energy benchmarks for commercial real estate and then keeping them current, you will be ahead of the game - not just for AB 1103 compliance, but for improved operation of your portfolio.