For environmental consultants, the evolving landscape of environmental regulations has made assessing building energy performance another important component of commercial real estate (CRE) transactions. While developers and investors increasingly recognize the financial and regulatory implications of energy efficiency, it is the role of due diligence consultants to ensure these factors are properly evaluated. More than just a regulatory checkbox, energy performance assessments can directly impact property values and investment decisions.
The ASTM Building Energy Performance and Improvement Evaluation (BEPIE) standard, first published five years ago, is due for an update, as ASTM standards require every eight years. Anthony Buonicore, chair of the ASTM Building Energy Performance Task Group and Chairman of Sustainable Real Estate Solutions, has begun organizing revisions, incorporating feedback and suggested corrections based on experience over the last five years. This effort aims to strengthen the standard’s relevance and usefulness as CRE regulations and energy efficiency demands evolve.
The Business Case for Investors and Lenders
In recent years, energy performance has become a key consideration in real estate valuation. High-performing buildings boast benefits like lower operating costs, increased tenant retention, and higher rental premiums. On the flip side, underperforming properties may face marketability challenges, increased operating costs, and higher vacancy rates.
Lenders have a vested interest in energy performance as well. Properties with poor energy efficiency can decrease in value, which directly impacts a lender’s collateral and may result in building obsolescence. Including BEPIE in due diligence helps both lenders and buyers better assess long-term risks and make more informed decisions about property investments.
The Regulatory Case
With growing regulatory pressure, states and municipalities across the U.S. have passed laws requiring energy disclosure. Six states and fifty-eight municipalities have already passed building energy performance disclosure legislation and regulations, including California and New York City, with many more expected to follow suit.
“The goal of these government initiatives is straightforward,” noted Buonicore. “Reward high energy performing buildings and penalize those that under-perform. Reducing building energy use also help states and municipalities in achieving their greenhouse gas emission reduction goals.”
New York City’s Local Law 97, for example, mandates significant carbon emissions reductions for buildings over 25,000 square feet. Non-compliance could result in substantial fines, which has made building energy performance a growing concern for many real estate investors. Consultants providing BEPIE assessments ensure clients are informed about these critical factors, mitigating risk, and identifying opportunities for improvement.
Understanding BEPIE
BEPIE is a powerful tool for consultants to integrate into property condition assessments (PCAs), adding substantial value during the pre-acquisition due diligence process. This assessment helps determine if a building is under-performing compared to peers and offers potential solutions for improvement, with the goal of getting a building’s energy performance at least on par with peers. For due diligence consultants, incorporating BEPIE into PCAs is not only cost-effective but also can add significant value to the pre-acquisition due diligence process.
Unlike traditional PCAs, which assess physical deficiencies and ignore energy performance, BEPIE zeroes in on energy performance, providing data that also may influence purchase price negotiations. By identifying energy under-performance, investors can gain leverage to negotiate lower prices or budget for energy upgrades that can improve long-term value.
The BEPIE standard offers two levels of assessment: a screening assessment typically conducted pre-acquisition during due diligence and a more comprehensive assessment typically conducted post-acquisition. By conducting a BEPIE screening assessment during the acquisition process, consultants can flag energy performance issues early on, allowing buyers to budget for potential improvements. For example, an under-performing property with an outdated HVAC system could be flagged, allowing the buyer to allocate resources for a high efficiency upgrade rather than just a code-compliant upgrade presumably to help bring the building’s energy performance in-line with peers. Moreover, the cost premium for the high efficiency upgrade can be factored into purchase price negotiations similar to other deficiencies identified in the PCA.
Looking Forward: Updating the 2019 BEPIE Standard
Although ASTM E3224-19 is currently a voluntary standard (as are all ASTM standards), its impact is growing. As CRE owners, investors, and lenders gain valuable insights into the potential impacts and risks associated with a building’s energy performance, “it is increasingly likely that they will request their PCA consultants to include the BEPIE screening assessment as a supplement to their standard PCA deliverable,” explained Buonicore. An update to the existing standard is in the works, with a revised version expected in 2025, further strengthening its role in commercial real estate due diligence.
Incorporating BEPIE assessments into the services of due diligence consultants positions firms as forward-thinking advisors. By helping clients navigate the complexities of building energy performance, consultants not only meet regulatory requirements but also unlock value and reduce risk for property buyers and lenders alike.
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