By Cheryl Osborn, President and Founder, CASCO CONTRACTORS
Title 24 is probably the most used commercial Real Estate term of 2016. It means a lot of things to a lot of different people, so what does it mean to you?
First of all – what is it? Title 24 is a California energy code that was actually enacted in 1975. Its purpose was to reduce California’s energy consumption with the growing population in the areas of HVAC, Electrical / Lighting, and building envelope (insulation). Up until 2013, it wasn’t significantly impacting the real estate industry. In 2013 (effective in July 2014) the state of California came out with an amendment to the Energy Code for commercial and residential structures to not only have a zero net energy gain on new residential structures by 2020 and new commercial structures by 2030, but to significantly reduce peak energy consumption in existing commercial buildings. The new construction piece is relatively clear but the existing commercial building requirements to reduce peak energy consumption are extremely hazy, to say the least. So what does it mean to you – as a Broker, a Tenant and Landlord?
Brokers are in a difficult situation because they depend very early in the process of client representation on the information they receive from architects, engineers and general contractors. Because there are not any “rule of thumbs” to Title 24, it is increasingly difficult to explain to the client exactly what is required. When this happens, professionals tend to error on the “safe” side – which translates to more tenant improvement money required to make the deal. Brokers need to understand there is a premium to any construction right now for Title 24 (as much as $8-$10 per sf) and guiding their clients through their options can significantly maximize opportunities to lower the TI costs and make a deal that is right for the customer. Doing good research on the existing conditions and the proposed renovations and negotiating well with the landlord is imperative to making sure the tenant doesn’t end up with less than desirable results.
Tenants are also in a precarious situation because of the unknown. When shopping for space, tenants need to understand their potential cost exposure to seemingly “small” improvements to a tenant improvement. A lot of a TI allowance can be eaten up in the required Title 24 upgrades, depending on whose responsibility the improvements fall upon, leaving nothing for the items that really translate to the end user and their employees as palpable benefits (i.e. finishes, furniture, millwork, upgraded stone, etc.). It is important for the tenant to make sure the broker has negotiated a clear responsibility for the costs of these improvements. They also need to be open to creative ideas that may slightly affect the floorplan but can significantly minimize the exposure – such as adding a door to cordon off open areas to minimize lighting retrofits or picking and choosing which areas of the space to remodel. Tenants also need to be conscious of making sure the end results fit their work demands – such as placing the motion sensored power outlets correctly and having the right lighting controls for their needs.
Over time, clearly landlords are poised to capitalize on the direct energy savings costs on their investments required by Title 24, but in most cases, they are being asked to fund them now with payoffs at more than 8 years – when the typical lease is 5 years. Being straddled with capital expenditures when tenants are looking for more can be a hindrance to a landlord in a competitive market. Landlords are now doing more allowance deals than build to suits because the allowance is safer from a cost exposure perspective. At the very lease, landlords need to budget for these capital expenditures and develop a plan to retrofit that works for them.
Overall, Title 24 energy requirements are not going away, but there is talk that a 2016 code will come out on existing building retrofitting to offer some clarity to the California Real Estate industry. In the meantime, plan well for your commercial construction projects and turn off those lights!