Creating Real-Estate-Friendly Building Performance Standards

January 21, 2021 | Cliff Majersik

Cities and states around America have set ambitious goals including around jobs, economic recovery, and health that cannot be achieved without improved performance of buildings. Many have also committed to fighting climate change by halving greenhouse gas emissions (GHG) by 2030 and achieving carbon neutrality by 2050. In large cities, buildings typically account for the majority of GHG emissions, so to achieve their goals, jurisdictions are increasingly looking at building performance standards (BPS) that set minimum energy and climate performance requirements for large public and private buildings. Jurisdictions are turning to BPS because while owners are taking great steps to improve building performance and programs and other policies have helped, progress is not on pace to achieve jurisdictions’ commitments.

In the last two years, three cities – Washington, DC, New York City, and St. Louis – as well as the State of Washington, have adopted BPS. More than a dozen localities and states are considering adopting new BPS and have approached IMT for assistance. Others jurisdictions will follow, and President Biden has called for establishing building performance standards for existing buildings nationwide. Even as the real estate sector struggles with the fallout of the ongoing global pandemic, many real estate investors expect progress on ambitious climate goals. In response, IMT has consulted with these stakeholders to develop a model building performance standard ordinance that is practical, acknowledges business and real estate realities, supports community priorities—including job creation and opportunities for historically disadvantaged communities—while supporting real estate to prosper.

Consistency and flexibility for real estate through a model BPS

The model ordinance incorporates the best elements of existing BPS while benefiting from lessons learned. It is designed to encourage consistency of BPS among adopting jurisdictions to help owners of buildings in multiple jurisdictions comply with multiple BPS. And, the model ordinance is a living document; IMT welcomes ongoing dialog with real estate and other stakeholders to improve it.

A key principle underlying the model ordinance is that owners know their buildings best

A key principle underlying the model ordinance is that owners know their buildings best. The model ordinance therefore lets owners decide how and when best to improve performance. One of the fundamental innovations in this regard is the trajectory approach of IMT’s model standard.

The trajectory approach provides long-term certainty regarding expectations for buildings: building owners will know the final Building Performance Standards 15+ years out, so they will know how their buildings are expected to perform, enabling long-term capital and operational planning, which is critical for investments in long-lived assets. The trajectory approach also sets interim targets at five-year intervals to align with typical commercial real estate capital planning cycles. The approach also meets buildings where they are. Under this approach, high-performing buildings—such as Building C in our chart—are expected to perform better at each interim standard, but will be permitted to improve more gradually than lower-performing buildings. Buildings which outperform the final standard will only need to maintain their current performance. And, buildings with more room for improvement—such as Building A in our chart—will be expected to improve more quickly, but will be permitted to use more energy at every interim standard, recognizing that the final standard remains the same.

The ordinance also recognizes that owners need flexibility to make renovations at opportune times

The ordinance also recognizes that owners need flexibility to make renovations at opportune times, including at the time of tenant turnover, scheduled equipment replacement, or when needed capital can be wrapped into a low-interest mortgage refinancing. In most cases, doing so will be possible with the help of the long-term visibility provided by the trajectory approach. In unusual circumstances, owners can secure additional flexibility regarding timing and performance levels by proposing a Building Performance Action Plan. If the jurisdiction approves the plan, then it becomes a binding agreement and so long as the owner carries out the plan, the owner will be in compliance with the BPS.

Giving real estate a seat at the table

Recognizing the benefit of continued dialogue between government and real estate, IMT’s model ordinance calls for creation of a Building Performance Improvement Board with representation from commercial real estate, affordable housing and other experts. The Board will guide implementation of the BPS, recommend complimentary programs and policies, and consider appeals. This provides flexibility in a formalized structure where real estate stakeholders have a voice in the policy’s shaping and implementation.

Using familiar metrics

The model ordinance is a platform for jurisdictions and their stakeholders to use in achieving their shared goals. Depending on stakeholder input, each law may address different performance metrics. The model ordinance suggests minimizing uncertainty for building owners by using performance metrics which are relatively familiar and within the owners’ control, including site energy use intensity (EUI). Site EUI is within the control of owners and occupants and does not depend on a changing electrical grid or on purchases of clean power. To improve site EUI, owners make value-creating renovations and operational improvements. The model ordinance suggests normalizing site EUI to hold owners harmless in the face of extreme weather and to reward owners adding value through dense occupancy. To collect energy and water data, IMT suggests that jurisdictions rely on ENERGY STAR, a free Environmental Protection Agency tool familiar to owners.

The model ordinance also treats public and private buildings equally, unless a jurisdiction chooses to lead by example by subjecting government buildings to the standards ahead of private buildings.

Recognizing the role of tenants

The model ordinance recognizes that owners and tenants must work together to improve building performance. Commercial tenants must have a reason to sit down with owners to set and execute improvement goals. So, the model ordinance employs as a backstop “alternative compliance payments” that owners can pass through to tenants under most existing commercial leases, aligning owner and tenant incentives to improve performance. IMT’s Green Lease Leaders program also provides model lease language that equitably align the cost and benefits of energy and water efficiency investments for both landlords and tenants. Ideally, with aligned incentives, owners and tenants will improve performance and no one will have to make alternative compliance payments. To further align incentives, any required payments will be reduced to reflect progress toward meeting standards.

Collective action for a common challenge

We are in a moment of tremendous change, on the precipice of diverging futures that could lead to greater stability and prosperity or more uncertainty and risk. As demand for action against climate change continues to rise, government and real estate actors must find a response that supports shared goals. The market is already changing rapidly as investors seek more sustainable portfolios and shift their calculations to account for greater risks. Many commercial building owners and operators are struggling as a result of the pandemic, and cities have their own associated woes, but in this moment is a tremendous opportunity to rebuild better. Through improved building performance, we can reduce operating costs, create structures of greater value to owners and communities, create new local jobs, and join together against the existential threat of climate change. Let’s make 2021 the year we set in motion a new normal for building performance and public-private collaboration.

Visit imt.org/BPS to learn more or email me with your thoughts and comments.

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