Due Diligence in Real Estate Transactions: Know Your Energy Efficiency

For real estate transactions, knowing the energy efficiency of the building is an important step in due diligence. Use of the new ASTM (American Society for Testing and Materials) Standard E-2797-11, Standard Practice for Building Energy Performance Assessment for a Building Involved in a Real Estate Transaction, is required in several states and cities and under consideration in others. Federal legislation is also being discussed.

Why would someone want to know this?

More energy-efficient buildings cost less to operate, have higher net operating income (NOI), better asset value, and are more attractive to tenants. More reasons:

• Property owners and lessors can leverage higher performing buildings to attract and retain tenants, who know that these buildings will have lower utility and operating costs.
• Potential buyers can make a better choice between similar properties.
• It provides a proven baseline from which to develop improvement programs.
• In many cases, the Pro Forma given to lenders has a line item for utilities under building operating costs.
• The Standard is obtaining more and more acceptance, and may be combined with regulations requiring Level 1 Site Assessments for environmental issues and Property Condition Assessments. Each of these have their own Standards for performing the related audit.

The Standard accomplishes several important actions:

• Establishes a practice for collection, assembly, evaluation, and reporting required information.
• Ensures consistency in reporting
• Supplements a Level 1 Site Assessment for environmental issues and / or a Property Condition Assessment as part of the Due Diligence process.
• Ensures that the process itself is consistent, transparent, and reliable and serves as an industry-wide Standard.

What happens next?

While knowing how well a building fulfills in terms of energy efficiency is important for real estate transactions, it is also the first step in planning energy efficiency improvements that cut operating costs and provide additional benefits. This process is more involved than one might expect; there is a remarkable amount of information that has to be considered and it requires specialized knowledge, skills, and abilities that only an expert can provide.

The process of improving Due Diligence and relativity of energy audits is ingoing; during May, I served as a one of a panel of 14 commercial building energy auditor subject matter experts at a workshop funded by the National Renewable Energy Laboratory. The purpose of the workshop was to identify and catalog all the activities - Job Task Analyzes (JTAs) and Knowledge, Skills, and Abilities (KSAs) - needed to successfully complete a building energy audit using the most reliable guidelines, standards, and analysis tools , such as those provided by ENERGY STAR, ASTM, ANSI, ASHRAE, and the Department of Energy. The results of the study will be a set of national guidelines for use by organizations in developing and improving training curriculum and for use by the General Services Administration and the Department of Energy. My hope is that as the DOE and GSA require contractors meet these criteria, it will lead to an industry-wide practice, additional recognition of the profession, and improved energy and cost savings for building owners and operators.