The much touted American Clean Energy and Security Act of 2009 cleared the House of Representatives in June and is gaining momentum as it approaches the U.S. Senate floor in September. The impact of this legislation, however, is either a winner or loser for commercial real estate depending on how you view it. For starters, let’s ignore the extremely controversial cap and trade portion of the bill and focus on three other key provisions that directly affect commercial real estate: building code, energy labeling, and incentives to offset the cost of retrofits.
A change to the national building code would include a mandate of energy improvements in existing buildings. Beginning with 2018, buildings would be required to use 5% less energy than a baseline consumption marker established in 2005. Every third year thereafter, an additional 5% reduction would be required culminating in a 25% total reduction by the year 2030.
Enforcement of these codes is still unclear with regard to method. The most recent version of this legislation is proposing federal fines for non-compliance within stated timeframes. Owners of older buildings most definitely face the largest burden. Their properties will need greater capital investment in order to make reductions in energy usage on the scale that is being mandated by the federal government.
This portion of the proposed legislation is much like the EnergyStar program in so far as the EPA would develop an energy performance labeling program. The provision would only affect new construction completed since the enactment of the bill and require property owners to disclose the energy scores or performance ratings of their properties. California already has a law in place that requires reporting of energy consumption on buildings trading hands (bought/sold). Some argue the market will become the largest deterrent to non-compliance by penalizing owners who don’t improve their property’s energy efficiency (ie. tenants will eventually opt away from low efficiency options). If this proved to be true, then federal fines would not be issued often as owners made the move toward achieving total compliance.
Perhaps the stickiest piece of legislation, at least in the current economy, is the energy retrofit requirement portion of the ACES Act. The capital required to bring existing buildings up to the new code will be significant. To address this expense, the bill calls for the set up of the Retrofit for Energy and Environmental Performance (REEP) program, which would support retrofitting initiatives and potentially offer credit enhancements, interest rate subsidies, and initial capital for public revolving loan funds. This could feel like more handouts from the government and, as of yet, is not clear how it will be funded.
Cap And Trade
This all brings us back to the hot button portion of the ACES Act – Cap and Trade. This provision calls for a 17% reduction in carbon emissions across the U.S. by 2020. This is of particular concern to manufacturing and mining operations, who would be required to make the most aggressive cuts in order to comply. Most office buildings are unlikely to fall within the parameters defined as “unacceptable” and therefore unaffected directly by cap and trade. However, in states where there are coal-fired utilities (midwest for example) or rural areas relying on coal energy, the costs will most certainly be passed down to businesses and consumers alike.
On the bright side, Oregon is mostly hydro-powered so impact to our state would not be as heavy as, say, Ohio or Pennslyvania.
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