Authors – Paul M. Seby, Katy O’Brien & Matthew K. Tieslau
The new year brings with it new legal expectations from the City and County of Denver that require all existing commercial, multifamily, and public buildings 25,000 sq. ft. and larger to comply with stringent “energy efficiency” mandates. These requirements are known as the “Energize Denver” program, whose stated purpose is for all existing and new Denver “covered buildings” to systematically reduce their greenhouse gas emissions (GHG) to zero by 2040. Covered buildings are primarily comprised of commercial and multifamily buildings, which Denver cites as the leading contributors to greenhouse emissions in the City and County of Denver. The first mandatory compliance period commenced January 1, 2024, and, in addition to ongoing reporting requirements, may require immediate building retrofits to bring covered buildings into compliance. Denver plans to enforce the requirements with the imposition of civil penalties, liens for noncompliance, and mandated compliance status disclosures prior to any sale of a “covered building.”
Denver’s Office of Climate Action, Sustainability, and Resiliency (“CASR”) administers Energize Denver, which has two main components. First, CASR requires covered building owners to submit annual benchmarking reporting their building’s energy usage annually. Second, CASR has set the final building performance standards that covered buildings must meet by 2030. CASR also sets interim compliance targets for calendar years 2024 and 2027, which are determined by drawing a “straight line” from a covered building’s 2019 baseline Energy Use Intensity (EUI) score to the final 2030 EUI building performance standard. Both the annual benchmarking and the building performance standards under Energize Denver are expressed using an EUI metric, which is essentially the covered building’s energy use per square foot (expressed as kilo British Thermal Units (“kBtu”) per square foot). Benchmarking submittals utilize the Energy Star (a federal energy program administered by the Environmental Protection Agency) online reporting system, in which building owners input annual energy usage, and the EUI metric is then calculated. Covered buildings are assigned 2024, 2027, and 2030 EUI compliance targets based on property type (e.g., office buildings will have different EUI targets than hospitals or multifamily buildings).
Starting January 1, 2024, covered building owners must have implemented the energy efficiency measures necessary to meet their first interim building performance standard requirement. Energize Denver requires covered building owners to meet the EUI building performance standards by:
(1) retrofitting existing buildings to convert natural gas equipment to electric space and water heating – effectively reducing or eliminating their use of natural gas equipment;
(2) meeting energy efficiency targets by reducing the energy consumption of the building through non-space and water heating efficiency retrofits (insulation, energy efficiency timed lights, etc.);
(3) using some combination of efficiency and natural gas conversion measures; and
(4) installing on-site renewable power generation or purchasing off-site renewable power.
For many existing covered buildings in Denver, the primary pathway to meet the 2030 (and potentially the interim 2024 and 2027) EUI building performance standards will be to replace existing gas-fired HVAC and water heating equipment with electrified equipment. That is because Denver EUI targets are so stringent that analysis predicts lesser building energy efficiency measures such as LED lights and improved windows and insulation are insufficient to enable a covered building to meet Denver’s EUI requirements. The concern for property owners is that this may leave covered buildings with limited compliance options, perhaps necessitating the abandonment of existing, functioning natural gas-fired equipment and replacing it with new electrical equipment– which, under certain circumstances, may be unable to function as a like-kind replacement in terms of effectiveness or operating costs. This is especially true for older buildings that are farther away from the 2030 EUI building performance standard requirements.
The Energize Denver regulations aim to compel covered building owners to electrify existing fossil-fuel utilizing equipment is exemplified by provisions which give “covered buildings” a 10% increase in their required EUI target if the covered building owner can demonstrate that their building is 80% electrified. We note that covered buildings between 5,000 and 24,999 sq. ft. have their own set of regulatory compliance obligations also aimed at achieving net zero greenhouse gas emissions in Denver by 2040.
Energize Denver also intends to compel owners of covered buildings to comply with the rigorous EUI building performance standards by imposing civil penalties for non-compliance. Penalties for covered buildings that fail to meet the interim 2024 (or 2025), 2027, and final 2030 EUI building performance standards include a combination of target penalties and maintenance penalties depending upon the type of non-compliance. The minimum penalties are set at $0.30 per year for each required kBtu reductions that are not satisfied; however, CASR expressly reserves the right to assess civil penalties up to $0.70 per year for each required kBtu reduction that a covered building fails to achieve in that year. Take, for example, a hypothetical 25,000 sq. ft. financial office. Energy Star estimates the median financial office nationwide uses 52.9 kBtu/sq. ft. Energize Denver sets a 48.3 kBtu/sq. ft. EUI building performance standard, translating to a required 4.6 kBtu/sq. ft. reduction from the nationwide median. Assuming the median financial office in this example were to make no reductions in its EUI score, that would equate to a 115,000 kBTU shortfall (4.6 kBtu/sq. ft. times 25,000 sq. ft.), equating to an $80,500 annual civil penalty. For covered buildings larger than this 25,000 sq. ft. hypothetical or which have energy usage farther outside the median Energy Star kBtu/sq. ft. figure, these fines would increase significantly.
Building owners and lenders will also want to consider the impacts of Energize Denver when buying, selling, leasing, or financing properties in Denver. Specifically, owners of covered buildings must make disclosures to prospective buyers, including information related to a building’s compliance status, performance targets, any approved alternate compliance pathways, and whether any penalties have been assessed. Purchasers and lenders of covered buildings in Denver will want to analyze these materials and, in addition, consider obtaining an independent energy audit to analyze not only the immediate compliance and consumption status of a building, but to also understand long term needs and potential compliance costs and penalties that might be incurred after closing. Because Energize Denver expressly contemplates that delinquent fines will constitute a perpetual lien on the covered building that is superior and prior to all other liens, regardless of their dates of recordation (excepting liens for general taxes and prior special assessments), it will be critical for purchasers and lenders to evaluate a covered building’s penalty and lien status and ensure both immediate and ongoing compliance capabilities of the asset. From a leasing standpoint, owners of covered buildings will want to consider implementing specific tenant compliance, reporting, and cooperation mandates. Landlords should also evaluate existing lease provisions and whether they allow for capital expenditures to reduce energy consumption and compliance upgrades to be included as operating expenses.
Lastly, we note that there are no exemptions for covered buildings to comply with the Energize Denver building performance standards. However, covered building owners can apply for timeline adjustments for the 2024, 2027, and 2030 deadlines for reasons such as the end of major equipment system life, the timing of a major renovation, change of building ownership or tenant, and financial distress. Timeline adjustment applications are handled on an individual basis by CASR. Denver’s CASR has also issued interim guidance indicating that the first 2024 interim compliance deadline will be extended to 2025 for all covered building owners deemed to comply with benchmarking submittals for the 2021 data year (submitted by June 1, 2022).
Bottom line – covered buildings in Denver are facing stringent energy efficiency requirements that took effect in January of this year – to achieve Denver’s net zero goals by 2040. Owners of covered buildings should be taking immediate action to assess building energy consumption, preparing and timely submitting requisite disclosures, and thinking about immediate and long-term building retrofits or alternative compliance pathways under the Energize Denver program. We lastly highlight that the State of Colorado has likewise recently adopted Regulation 28, imposing similar building performance standards on buildings over 50,000 sq. ft throughout the State.
Greenberg Traurig Shareholder Paul M. Seby is a leading practitioner in the Rocky Mountain region, with over 30 years of experience focusing on energy and environmental issues. Katy O’Brien is a shareholder specializing in commercial real estate. Of Counsel Matthew K. Tieslau focuses his practice on environmental compliance, water law, and brewery representation.
