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Written By: Roger J. Brothers Esq. and Philip M. Greenan

Buchman Provine Brothers Smith LLP

Walnut Creek, California

On January 1, 2013, AB 1103 will be implemented and will require commercial building owners to record and disclose energy consumption data before their buildings may be sold, leased or financed. Although AB 1103 became law 5 years ago, its implementation has been delayed. Now that the options to postpone AB 1103 have been exhausted, AB 1103 will take effect finally in January 2013. It is imperative that building owners, renters and financiers prepare themselves for the effects that AB 1103 will have on their respective businesses.

AB 1103 will require owners who sell, lease or finance commercial property to report the energy data from the properties through the Portfolio Manager software, which is available for free online through the EPA Energy Star program. The Portfolio Manager will advise owners, lessees and financiers as to the energy efficiency of their building in comparison to buildings of similar industry, size and climate. Buildings will be given a score between 1 and 100, with 50 meaning that the building is of average energy efficiency and 90 meaning that the building is in the top 10% of energy efficient buildings in its category. Any building that achieves a score of 75 or more will be given an Energy Star rating.

While past rules may have called for a simple disclosure of monthly utility costs and energy consumption, AB 1103 will require more complete disclosures. Even though building owners may fear that this litigation will have an adverse impact on their rental business, AB 1103 is designed to provide an incentive to make buildings more energy efficient, possibly resulting in increased net operating income and greater property values. A better energy rating may render the building more attractive to potential lessees, who may be willing to pay more rent if it means saving money on energy costs. The reporting of this information provides all parties with greater leverage in the negotiation of rental rates, for the benefit of the owner if the building has a high energy efficiency rating, or for the lessee if the building is inefficient.

A study published by the Institute of Business and Economic Research at UC Berkeley found that office buildings with energy efficiency certifications enjoy rental rates that are 2% higher per square foot than otherwise identical buildings within the same vicinity, and when adjusted for their higher occupancy levels, the "green premium" exceeds 6%. Less money spent on operating costs will likely mean more rent collected by the building owner, but more saving for the lessee overall.

AB 1103 encourages landlords and tenants to work together in order to maintain a good energy efficiency rating. Past problems include situations where owners have passed utility costs off to tenants and tenants who have refused to comply with energy efficiency directives, which could potentially hurt the owner's ability to negotiate with future lessees. While AB 1103 was designed to discourage such practices, there are additional steps that landlords can take in order to assure accountability on the part of their tenants for disregarding energy-efficiency mandates. Owners should include provisions in lease agreements to protect their interests in maintaining a high efficiency rating by including clauses that address, among other issues, the following:

1. Acknowledgment that energy efficiency is a primary concern for the landlord;

2. That the tenant's maintenance of energy saving measures is a condition of the lease;

3. That the landlord has a right and legal obligation to monitor the tenant's energy use;

4. That the landlord may restrict the use of certain inefficient appliances; and

5. That the landlord may offer incentives to tenants who improve energy efficiency over time.

In addition to including provisions that emphasize the importance of maintaining energy efficiency, building owners must also disclose more information regarding a building's energy consumption before a lease is signed. Certain documents required under the new disclosure law include summary sheets, a data checklist and a statement of energy performance. As with all disclosures made before a lease is signed, it is imperative that no disclosure be misleading. This includes information provided by third-party energy auditors with separate rating systems. Owners should be careful not to misinform potential lessees with energy performance evaluations that are calculated using different variables than those used by the Energy Star program.

AB 1103 will require building owners to disclose their building's energy rating at or before the time that (1) the owner presents a sales contract to a prospective buyer, (2) the owner presents a lease for the entire building to a prospective lessee or (3) the owner presents to a prospective lender a loan application to finance the entire building.

AB 1103 provides a framework that is designed to benefit owners, tenants and financiers by potentially increasing the value of commercial properties. By implementing a reporting system for energy efficiency, the parties will have additional information to utilize in the negotiation of lease agreements. Furthermore, tenants will better be able to project operating costs for the businesses associated with a particular building. The purpose of AB 1103 is to reduce overall energy consumption and protect the environment. When the new law is implemented on January 1, 2013, all involved parties stand to benefit if energy consumption is reduced and reported properly through the EPA Energy Star program. AB 1103 will require that sales, leasing and financing documents be drafted and reviewed carefully with regard to the respective energy savings representations, warranties and obligations of the parties to such agreements.

For more information about Buchman Provine Brothers Smith, please visit www.bpbsllp.com or the International Society of Primerus Law Firms.