Title 24's Impact on Tenant Leases

May 2, 2018

 

Energy consumption is a global issue and California is leading the charge in enacting legislation to reduce the state’s carbon footprint. Simply put, the long-term goal of Title 24 is to ensure a brighter future for California by increasing the energy efficiency of commercial and industrial buildings. However, landlords and tenants have been feeling the short-term effects of Title 24, which include higher construction cost (typically 10% to 20%) and longer timelines to complete the same scope of work.

 

New construction is automatically required to comply with Title 24, but, the law also applies to renovations of existing improvements depending on their scope. Common triggers include changes to lighting fixtures and mechanical infrastructure, which are difficult avoid when renovating an office suite. Fortunately, only the suite actually being renovated is subject to the Title 24 code. That way, landlords of existing buildings can spread the cost of new regulations over time as tenant turnover occurs.

 

For buildings less than 10,000 SF, the contractor is permitted to review designs. Renovations in buildings 10,000-50,000 SF can be completed by a design engineer while renovations in buildings over 50,000 SF must be completed by a third party not associated with the building project. The majority of office and industrial buildings in Orange County fall into the latter two categories, which once again, increases costs and extends timelines.

 

Title 24 is front and center in almost every lease negotiation, as the parties each attempt to pass the cost of compliance on to the other. We are seeing landlords offering TI allowances rather than turnkey build-outs along with higher rental rates to cover the increased cost, while tenants are making more of an effort to find space that requires fewer alterations in hopes of avoiding compliance.  

 

When a renovation triggers Title 24, it is important to understand the cost versus benefit. If the landlord provides TI dollars for the upgrades in a NNN lease, this indirectly provides future savings for the tenant on utilities. On the other hand, if a landlord pays for the upgrades in a FSG lease, it make take as many as 10 years to break even. Either way, it is imperative that the responsibility of these costs are negotiated up front and clearly stated in the lease in order to avoid any disputes and/or delays.

 

Originally adopted in 1978, Title 24 is updated periodically to account for improvements and modified to improve compliance and enforcement. Five key requirements of Title 24 standards are:

 

#1: Zero Net Energy – Title 24 is designed to move buildings toward zero net energy (ZNE) where annual energy consumption is equal to the annual production of renewable energy. Under Title 24, all new commercial buildings should achieve ZNE by 2030.

 

#2: Comprehensive Building Solutions - Title 24 now requires the design process to begin by addressing ways to reduce energy consumption through smart and energy efficient technologies. Design must also include plans to install on-site renewable energy generation like solar panels, solar hot water heaters and fuel cells.

 

#3: Plug-in Controls - Electronic devices such as computers, tablets, cell phones, TVs, and desk lamps continue to use power even when they are turned off. Title 24 requires that all 120-V outlets be configured so they can be turned off without drawing electricity.

 

#4: Efficient Lighting Technologies - Interior lighting must have manual on/off controls and each area must be independently controlled. Title 24 calls for increased usage of natural lighting and sensors that measure the amount of natural light available and adjusts electric lighting accordingly.

 

#5: Automated Demand Response - Buildings over 10,000 SF must have automated demand response lighting systems. Smart meters monitor when the electricity grid is reaching a critical peak supply period and initiate pre-programmed reductions of at least 15%.

 

 

Have questions about how Title 24 is impacting your situation?

Give me a call (949) 263-5303

 

 

 

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