Successful multi-family property managers have different styles but the ones who thrive share one critical discipline. Every detail of a real estate transaction is in writing. Agreements cannot cover every future contingency, but forward-thinking managers may want to consider an energy efficiency lease upgrade.
As the energy efficiency market develops it may alternate among cap-and-trade programs, energy conservation mandates and carbon taxes, but someone will reap the benefits and someone will bear the expense. Writing a lease addendum that addresses this issue for the future just makes sense.
The one thing we know with certainty is that energy will become more expensive. With the volatility in the markets there are already finite incentives for making buildings more efficient. Issues arise, however, when the owner makes the improvement but the lessee receives the resulting benefit.
Therefore addressing ‘potentials’ in any real estate agreement becomes good business. Consulting an experienced real estate attorney with a comprehensive understanding of real estate law and energy markets might be a good starting point. Language should cover these future anticipated ‘property’ rights and serve to prevent as much ambiguity later as possible. A contract focused on ‘original intent’, which clearly outlines the parties’ understanding of the same, may prevent future disputes.
The final forms of these anticipated benefits cannot be known, but even a boiler plate agreement that establishes parameters, describes ‘royalties’ and/or identifies the development and ownership of the ‘environmental attributes’ of commercial residential buildings can establish a basis for legal intent.
The format could be similar to deeds in which a municipality, utility or seller retains the ‘undiscovered’ mineral or water rights to a property through a title-company prepared legal document. These considerations may not have seemed important a few years ago, but our era is on a fast technological track. In a condominium building, for instance, does the homeowners’ association own the wind rights above the building or will the individual owners? If energy credits or tax incentives are created with on-site energy production, who owns those? Asking and answering these questions before there is a financial incentive involved can be wise.
As the concept of climate change has become more concrete, governments around the world are creating incentives they hope will encourage conservation and carbon neutral energy use. Regulation and legislation can be expected to accelerate to meet the many energy supply challenges ahead. As technology and science present even greater opportunities for efficiency and conservation, new financial incentives will certainly follow. The one element that will not change, however, are the demands by government and the public for greater efficiencies and higher performance of all existing energy delivery systems. As the Environmental Protection Agency (EPA) estimates 30% of commercial building energy is used either inefficiently or unnecessarily, there may already be a fat bull’s eye painted on the multi-family housing sector.
Energy credits, carbon offsets, green depreciation, white certificates and other types of government incentives are already in use in several countries and poised to become even more valuable assets worldwide. Wise property management companies need to stay up-to-date with their lease agreements in order to ensure multi-family property owners have clear title to current and future valuables earned through a building’s greater efficiencies and/or green design. This issue will become a hot button as more municipalities begin to mandate energy improvements in the commercial and residential sectors.
Mandated building benchmarking is already in place in a few cities and although unsuccessful generally, attempts have been made to mandate implementing energy efficiency improvements as well. For example, New York City’s Mayor Bloomberg had an ambitious plan, Green Greater Buildings, but backed off on implementation because of the roar from building owners when details were announced. The law firm of Goulston & Storrs reported on the energy policy in an article in December of 2009 which contains the original information from the plan. Here is an excerpt from that article:
This requires annual benchmarking of energy and water use using U.S. EPA’s Portfolio Manager tool for (i) buildings over 10,000 gross sq. ft. that the City owns or for which it pays all energy bills (excepting certain buildings in Department of Housing Preservation and Development or tenant interim lease apartment purchase programs); (ii) non-City buildings that exceed 50,000 gross sq. ft., (iii) two or more non-City buildings on the same tax lot that together exceed 100,000 gross sq. ft., and (iv) two or more non-City buildings governed by the same board of managers as condominiums, and that together exceed 100,000 gross sq. ft.
Nearly the same set of buildings covered by the benchmarking ordinance must conduct American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Level II energy audits of the “base building” every 10 years, and recalibrate or “retro-commission” building systems for optimal performance.
Once the real estate markets settle down and profits rise, many cities will re-examine mandates and we predict the above will seem mild by comparison. As more data is compiled and public utilities endure the strain of greater demand for finite energy supplies, commercial and residential owners should expect to be required to make building improvements. Federal and local governments have already started refurbishing and recommissioning government-owned buildings, which will also give them some experience in what needs to be done with our existing building stock.
If your standard lease agreement assigns the ‘benefits’ of any energy conservation improvements to the landlord, these savings can off-set the expense of the required building upgrades.
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