Disclosure time – California's AB 1103 energy disclosure law and two new clauses to add to your forms

"Energy Use Data” means a record of kilowatt hours, therms, or any other measure of energy recognized by Portfolio Manager." 20 CCR § 1681

What's "AB 1103"? 

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"AB 1103" is California's years-old commercial energy disclosure law, which was delayed repeatedly but is now finally going into effect. The law requires building owners to disclose a building's energy performance each time an entire building is financed, leased to a single tenant, or sold. Disclosures to tenants and buyers must be made at least 24 hours before the tenant signs the lease or the buyer signs the purchase agreement. Disclosures to lenders must be made at or before the time of the loan application.

Schedule of Compliance & Link to the CEC's Website

Starting January 1, 2014, disclosures will be required for commercial buildings over 10,000 square feet, and on and after July 1, 2016, disclosures will be required for buildings over 5,000 square feet. (Note that previously compliance for buildings over 5,000 square feet was scheduled to be required on and after July 1, 2014, but this date was extended to July 1, 2016).

For more information, including the implementing regulations, visit the CEC's website on the new program here: http://www.energy.ca.gov/ab1103/index.html

Two New Clauses to Add to Your Forms.    

So, other than handing a tenant, buyer, or lender a disclosure statement  – and allowing at least 30-days lead time to generate the statement – what else should you think about? Increasing, landlords will want to ensure they have access to the energy use data for their buildings and a good description of their tenants' uses which together drive the Energy Star rating. 

AB1103 requires a disclosure of a building's comparative energy use in the form of an Energy Star rating. Two types of data are used to generate the Energy Star rating: (1) the building's energy consumption, that is the aggregate use of gas and electricity for all occupants, for the prior 12 months; and (2)  metrics or "use details" describing the use of the building, which Energy Star uses to compare the building with other buildings.

To ensure a landlord has access to and can accurately report both energy use and building use details, and not only when required for a mandatory disclosure, but also for its own purposes, landlords should consider adding the following two provisions:

 1. Access to Energy Use Data

First, a landlord may consider adding a provision that secures its access to energy use data. A typical provision would address the following points:

  • For any utility accounts in a tenant's name, requiring the tenant to maintain statements and records for at least the prior 12 months and to deliver copies of the statements or (or energy use data reflected in the statements) from time to time when requested by the landlord.
  • Giving the landlord the right to use the information above and share it with others -- including consultants, prospective lenders, purchasers and tenants.
  • Giving the landlord the right to collect the information above directly from utility providers.

As detailed on the Better Buildings Challenge website, Prologis has begun include a provision covering some (although not all) of the points above, and has also begun requiring California tenants to provide signed utility authorization release forms during the move-in process.

The average tenant should not have too many objections to providing its landlord with access to energy use data. If confidentiality were a concern, the tenant could request that any energy use data by anonymous (which would provide some comfort on a multi-tenant building, but wouldn't be helpful on a single-tenant building). A tenant might also request that if the landlord's requests for energy use data were too frequent, that the tenant be reimbursed for its administrative costs.  However, given all of the other issues in a lease left to negotiate, so long as the landlord's provision is not overly aggressive, and the tenant does not have unique concerns, a landlord's request for utility statements is likely something few tenants will (or should) spend a significant time negotiating.

2. Reporting of Use Details Data

A landlord should also add a provision to its lease that secures access to the "use details" of its tenants and any subsequent changes a tenant may make. For most property types, this would include requiring the tenant to specify its weekly operating hours, number of computers,  and number of employees  on its main shift and any other shift, and requiring the tenant to notify the landlord of any material change to these details.

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Why is this important?  Use details, as I understand them, are the keys that unlock the raw energy data uploaded to Energy Star and permit the program to benchmark one building and compare it to a group of other buildings.  

The simplest example of why use details would be important is that if you compared two identical buildings, say one with 1,000 workers working 10 hours a day, six days a week, and another building with 500 workers working 8 hours a day, 5 days a week, the first building would clearly use much more energy than the second, regardless of efficiency, and to have any sort of meaningful benchmark, Energy Star needs to be fed accurate use details so that it can adjust for these factors when generating its rating. You wouldn't want to produce a disclosure report that shows your building as being inefficient simply because your tenants have more employees, computers, and work longer hours than the Energy Star baseline. 

The list of Portfolio Manager property types, definitions, and use details is available here: http://www.energystar.gov/buildings/tools-and-resources/list-portfolio-manager-property-types-definitions-and-use-details

Finally, although few seem to have caught on to this point, the type of provision mentioned above which requires a tenant to disclose its use details  is far more important than the energy use data provision first mentioned because the regulations implementing AB1103 require utility companies to upload energy use data, making the provision somewhat superfluous, but there is no requirement that tenants disclose their "use details" to a landlord.   

photo credit: shazam791 via photopincc

Jonathon Giebeler

Jonathon Giebeler is a graduate of the University of Southern California Law School, where he also earned a Master of Real Estate Development. His practice emphasizes commercial leasing representing landlords and tenants (including retail, office and industrial leases), real estate-secured finance, and the sale and purchase of real property.