Commercial properties in Massachusetts could lose value and be harder to sell or refinance if the state’s energy resources department implements a mandatory building energy rating system, according to industry experts.
The Department of Energy Resources (DOER) is considering a pilot program to evaluate building energy performance based on the quality of components including windows, insulation, mechanical and electrical systems – rather than the actual energy consumed in the space.
The initiative to create a rating system for commercial properties is a direct result of Massachusetts’ 2008 Global Warming Solution Act, which requires an 80 percent reduction in statewide greenhouse gas emissions by 2050 from a 1990 baseline.
“As … commercial and industrial buildings account for more than 60 percent of state electricity consumption, it is clear that reducing energy use in buildings will play a critical part in achieving emission reduction targets,” according to a DOER white paper outlining the program. “A building energy asset rating and labeling program, which is designed to facilitate a direct comparison of energy performance among similar buildings irrespective of tenant behavior, is one of the potential strategies to reduce energy use.
“The goal of an asset rating is to provide the information necessary to enable the real estate market to value energy performance intrinsic to the building, resulting in increased energy efficiency investments,” the white paper says.
Negative Consequences
The program is expected to commence in the fall in Boston, Cambridge and areas of the Merrimack Valley, according to Ian Finlayson, manager of buildings and climate programs for DOER. While the DOER’s white paper also recommends implementation at multifamily rental properties and public buildings, the pilot will most likely start with office properties, he said.
But commercial real estate professionals are concerned the process may have far-reaching, negative effects.
Unfairly labeling older buildings with low scores; lumping various types of commercial properties into a single category; and encouraging environmentally damaging new construction that actually increase the commonwealth’s carbon footprint, at the expense of reusing existing space, were all cited as potential pitfalls. It is also unclear if the potential success of the two- to three-year pilot program will subsequently make it mandatory for all commercial buildings statewide to participate and eventually have their energy use audited.
The program parameters would place new construction in the same category as older buildings in the rating system. In many of the state’s gateway cities, where unemployment is in the double digits, there are commercial office buildings already valued at less than their purchase prices from just a few years ago, according to a letter to DOER from the Boston chapter of the National Association of Office and Industrial Properties (NAIOP).
But Finlayson said because inspectors would be measuring energy used per square foot, “If a building is 300 years old or three years old, it still has a metric you can calculate.”
NAIOP maintains that if every office building in the commonwealth were required to undergo an energy assessment when it is put up for sale, refinanced or renovated – as are possible triggers for the state’s proposed asset audit – the results would be “devastating.” Aged buildings would be branded with a low score and property values for owners struggling to pay the mortgage would decrease, making such assets more difficult to sell and making foreclosures and abandoned properties more likely, according to NAIOP’s letter.
‘Devoid Of Economics’
Under the proposed program, if a new tenant moves into a commercial building and the user or the building owner needs to pull building permits to renovate the space, those potentially minor renovations would be enough to require an audit, according to Gregory Vasil, CEO of the Greater Boston Real Estate Board (GBREB). If the owner were motivated enough by receiving a low grade from inspectors to renovate the building for a better grade during the next audit, it is likely those costs would be rolled into increased rents.
“The whole approach is really devoid of the economics of the situation,” Vasil told Banker & Tradesman.
The GBREB estimates it will cost about property owners approximately $30,000 for the audit itself, with another $30,000 spent on creating computer modeling that would also be part of the assessment process. Rather than provide a cost estimate, DOER said the pilot will help determine the most cost-effective methods of executing the program.
“The idea would be that if you are getting recognition for the improvements … then you’re going to get a higher rent or book value on the building,” Finlayson said.
The cost of operations will also drop thanks to new efficiencies in building systems, said DOER Commissioner Mark Sylvia. Additionally, building owners can seek rebates and incentives for upgrades through their utility company.
But commercial real estate professionals expressed one final fear in advance of the program’s implementation – how will lenders react to a bad grade on a building?
“How is a bank going to look at that if you’re trying to refinance?” asked Tamara Small, NAIOP Massachusetts’ director of government affairs. “There were no lenders … involved in the development of this white paper. I think it’s extremely important to hear from lenders … what the impact on transactions would be. It just seems seriously flawed. We want to attract businesses to the commonwealth, and this seems like it would do quite the opposite.”
