Going green

Recently, many people in real estate industry have started talking about green housing and green ideas. It has become a new buzzword, which I’m hearing everywhere. I have decided, therefore, to investigate myself why people are suddenly expressing their admiration for the colour green

The question arises whether the ‘green concept’ is a passing craze or if it going to become a permanent feature of our industry, and if so in what shape and form (especially within what legal framework) it is going to materialize.

Once we realise, however, that 40 pct of final energy consumption is attributed to residential and other commercial sector buildings, we start to get an understanding that in this period of global warming, reduction of the above consumption level becomes an extremely important issue and it will be receiving a lot of attention in more environmentally conscious countries.

Firstly, the issue of energy-efficiency was broadly addressed in the European Union Directive 89/106/ECC amended by the Directive 93/68/ECC on construction materials. Its purpose was to narrow the gap between the legislation of member states in respect of the issue of construction materials. The above Directive set out rules for the introduction and use of construction materials in member states. The important element of this Directive was the introduction of a principle that once a construction material is allowed for use in one member state it shall be allowed for use in all other member states. The Directive did not create standards for individual construction materials to be met, but did this indirectly by providing for the set of basic criteria that should be met by buildings and structures if built out of such approved construction materials. These should be verified for their compliance with the criteria set out in the Directive, and upon being found compliant a material may bear a ‘CE’, which is a confirmation of such compliance. From our perspective of ‘going green’, one of the important criteria introduced by the Directive was the requirement that buildings should be energy-efficient and that this was introduced as a benchmark criteria for buildings in the European Union to be complied with. This means that buildings and their heating, cooling and HVAC facilities should be designed and constructed in a manner which will ensure a low level of necessary energy to be used during the period of use of a building.

Following the signing of the Kyoto Protocol (aimed at an increase in energy efficiency) and the EU Council endorsements requesting measures to enforce energy efficiency in the building sector in member states, the EU introduced the Directive 2002/91/EC.

This Directive will have a much more direct impact on the legislative frameworks in member states than all previous EU legislation on the subject. The Directive introduced a requirement to measure the energy performance of buildings in member states. The criteria to be met and methodology to be used for measurements should reflect individual climate conditions in each of the member states, but it should measure the efficiency of insulation, heating and air conditioning. It should also verify the application of renewable energy resources. Qualified or accredited experts are to carry out the energy audits. Local legislation should establish a basis for this new profession. The above rule should apply to all buildings to be constructed as of July 2007. By January 1st 2009, the energy efficiency of all existing buildings is to be evaluated. As you can see the clock is now ticking.

The Directive also requires using major renovations of existing buildings as an opportunity to improve their energy efficiency. The definition of ‘major’ is established by reference of the cost of the renovation of a building’s shell and/or energy installations as a percentage of the value of the building. This criteria, however, is not very clear because one does not know which value should be used for this purpose as a point of reference, book value, replacement value, market value? Major renovation is also renovation of more than 25 pct of the shell of a building. Again, not a very precise definition, as we do not know whether the idea is to refer to 25 pct of a surface of a shell or its value? I hope that this issue will be more precisely addressed at the level of local jurisdictions.

The Directive also introduces the concept of an energy certificate that will be issued for each building for a period not exceeding ten years. The exact mechanism is left for individual legislations to deal with. Such certificates would be issued for buildings as a whole as well as for individual premises in buildings (the latter has significant consequences under the Polish draft of the law implementing the Directive). In public buildings certificates will have to be displayed so they will be available to the public.

The Directive should have been implemented in member states’ legislations by January 4th 2006, but some countries (including Poland) were allowed to introduce it later – but not later than January 2009.

Polish regulations

This leads us to the Polish aspect of ‘going green’ legislation. Poland has not yet adopted laws implementing the Directive, but there is a draft of law of August 18th 2006. As the draft follows the Directive closely (with some exceptions which I will describe later), it is pretty safe to assume that the Polish version of the legislation will be introduced in the same form.

The draft does not apply to buildings of which energy efficiency has been improved and the cost of a design and costs of relevant works do not exceed in aggregate 25 pct of the replacement value of such a building. I doubt, however, if such exclusion is permitted by the Directive, which provides for a close catalogue of exclusions to be chosen from by local legislators and such exclusion forms no part of it. In addition, it will not apply to historic monuments, places of worship, buildings to be used for a shorter period than 2 years in all or less than 4 months every year (there are some other exceptions, but these are not relevant to the commercial real estate market).

The draft establishes categories of energy-efficiency, which will be attributed to all types of buildings. Also, the reference category will be established for each type of building and premises. The newly constructed buildings and premises will have to comply with energy efficiency standards provided for the reference category.

Polish energy certificates (świadectwo energetyczne) will be issued for buildings and flats for a period 10 years and then they could be extended for another ten years provided that the energy-efficiency of a building or the premises does not change within this period. The energy certificates will be issued for a building or premises and therefore will be transferable to subsequent purchasers.

The draft introduces a requirement for a building to be issued an energy certificate before the occupancy permit is issued. Simply a certificate will become one of the requirements for the issuance of an occupancy permit. Energy certificates will also have to be obtained within 6 months following completion of work improving the energy efficiency of a building (there are some exemptions to this rule). The draft also implements the Directive requirements for accredited experts to evaluate the energy-efficiency of buildings and establishes a new real estate licensed profession – energy auditors (audytorzy energetyczni) as well as sets out a legal framework for the licensing of such professionals.

The draft however introduces requirements that are not provided for in the Directive. It stipulates that energy certificates must be delivered to the purchaser of a building or a flat at the signing of the notarial deed, which transfers the title of the real estate. A notary is obliged to verify that buildings or premises to be sold have such relevant energy certificate in place. I believe that the above requirement may be treated as unconstitutional, as it restricts the transferability of a title to real estate by the titleholders, and this issue should be carefully considered before the completion of the legislative process.

The draft also differs from the Directive in that it requires the landlord to disclose an energy certificate to the tenants. This may actually create an interesting situation in the market, as probably tenants will prefer buildings which are more energy efficient because this should be reflected in lower service charges. This also may have an impact on further differentiation in pricing between prime and B class segments of the office and retail market.

Failure to transfer a certificate to a subsequent purchaser or to disclose it to a tenant will result in the criminal liability (misdemeanour) of the transfer and/or landlord. But I am concerned about something more important than criminal liability: the practical aspects of the whole requirement. It would result in the situation that the transfer of a building or a flat or the renting of premises without a certificate would be impossible. This sounds like a good mechanism, but in practice it would be a nightmare for a market. The law will probably not be introduced before the beginning of 2008. To fully implement it, there will have to be many decrees issued by the minister of construction to establish criteria for the evaluation of energy-efficiency, but more importantly a whole new profession must be established with people licensed to carry out the energy audits of thousands of properties across the country (as according to the Directive, the certificate requirement for existing buildings must kick in no later than January 1st 2009). Time is extremely short and thousands of transactions (especially in the residential sector) may be stopped or suspended because I doubt that the owners will be able to obtain energy certificates (since at the outset there will not be too many people licensed to carry out the energy audits) for their premises and notaries will be obliged to refuse to execute transferring deeds without them. The market consequences of the above-mentioned legislation could be avoided if the requirement for a transfer of energy certificate upon the sale of a building or a flat could be postponed. This should not pose such a problem as the Directive does not introduce such requirements and I hope that the people who approve the legislation will have enough market knowledge to recognize the problem.

To end up on a positive note, it would appear that the future of our industry is pretty much green.      n

Paweł Dębowski