Home Real Estate Energy Mandates Could Squelch Colorado’s Already-Struggling Real Estate Industry | Brownstein Hyatt Farber Schreck

Energy Mandates Could Squelch Colorado’s Already-Struggling Real Estate Industry | Brownstein Hyatt Farber Schreck

by Kianna Warburton

Colorado Property Owners Face New Energy Reduction Mandates

Commercial and multifamily residential property owners in Colorado are facing aggressive new energy reduction mandates that come with significant costs and deadlines. These mandates include the High Performance Existing Buildings Program, also known as “Energize Denver,” and Regulation 28 approved by the Colorado Air Quality Control Commission (AQCC).

Energize Denver, which was adopted by the City and County of Denver in November 2021, requires owners of buildings with gross square footage of 25,000 or more to benchmark their annual energy usage and meet annual Energy Use Intensity (EUI) performance requirements. These buildings must demonstrate achievement of interim EUI targets in 2024 and 2027, with an ending EUI target in 2030. Smaller buildings are not subject to benchmarking or energy reduction requirements but may have obligations regarding lighting and clean energy.

Regulation 28, approved by the AQCC in August 2023, applies to buildings statewide and mandates energy reduction in covered buildings by 7% or 13% by 2026, and 20% or 29% by 2030, depending on the path of compliance. Covered buildings include those with 50,000 square feet or more, excluding single-family homes, duplexes and triplexes, storage facilities, standalone parking garages, airplane hangars, and buildings primarily used for manufacturing, industrial, or agricultural purposes. It is estimated that around 8,000 structures throughout the state will be impacted by these standards, predominantly commercial, multifamily residential, and public buildings.

As a result, property owners across the state will need to ensure compliance with these new energy reduction programs. However, many in the real estate industry are concerned about the substantial costs and tight timeline associated with compliance. Experts estimate that the total cost of complying with Regulation 28 alone could exceed $3.1 billion. These costs, averaging $387,500 per covered building, are a significant burden that could have adverse effects on property owners and the real estate market as a whole.

The real estate industry has voiced opposition to these new standards, arguing that they will lead to higher costs, building abandonment, and a lack of compliance. The Colorado Real Estate Alliance (CREA) has expressed concerns about the impact on market-rate apartment buildings, which could result in higher rents and worsen the already challenging affordability problem in the state. Office landlords are also struggling in the post-COVID environment, and the additional strain of compliance with energy reduction mandates could push many buildings into foreclosure.

Moreover, meeting the requirements of Energize Denver and Regulation 28 may prove challenging for many buildings due to their specific uses, age, unique characteristics, and a shortage of skilled trades. For example, hospitals, among the most energy-intensive buildings, would require extensive renovations and upgrades to meet the new EUI targets. Additionally, the sheer volume of modifications needed before 2030, averaging approximately 1,200 buildings per year, may overwhelm the available workforce.

Energize Denver and Regulation 28 do provide some flexibility and alternative compliance options for building owners. These options include adjustments for specific uses, renewable energy credits, electrification adjustments, and the opportunity to apply for financing, grants, tax credits, and other incentives related to retrofitting and upgrading energy systems. However, the deadlines for requesting target adjustments or exploring these options are approaching quickly, making it essential for property owners to act promptly.

The effects of Energize Denver and Regulation 28 are already being felt in the market, with buyers and tenants inquiring about compliance with these programs and plans for meeting the EUI performance targets. Parties involved in lease agreements must negotiate terms regarding the costs of compliance and capital improvements to the property. Sellers should also be aware of the disclosure requirements associated with these mandates, ensuring compliance when marketing their properties for sale.

To navigate these complex requirements, property owners should consider seeking guidance from experienced consultants, brokers, and legal counsel. Auditing energy consumption, benchmarking reports, and ensuring accurate information is crucial for avoiding potential discrepancies and legal disputes.

While the goals of reducing the environmental impact of the built environment are commendable, the real estate industry in Colorado faces significant challenges in achieving compliance with the new energy reduction mandates. Balancing these goals with the financial and practical realities of the market will require collaboration, innovative solutions, and ongoing support for property owners as they work towards meeting these obligations.

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