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8C — June 10 - 23, 2016 — Pennsylvania — M id A tlantic

Real Estate Journal

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By Tricia J. Sadd, Esq., Montgomery McCracken Walker & Rhoads LLP What lawyers should know about “Global Real Estate Sustainability Benchmark”

G lobal Real Estate Sustainability Bench- mark – or “GRESB” as it is commonly known – is emerging as the leading way for the commercial real estate industry to report sustain- ability performance on a portfolio basis. It is an annual survey of environmental, so- cial, and governance (“ESG”) data that is evaluated on year-over-year performance and then ranked against the organization’s peers. GRESB is different than standards like LEED and Energy Star that look at the environmen- tal design and performance of individual buildings. With GRESB, sustainability is pushed beyond individual as- sets up to the portfolio level. The goal of GRESB is to establish standards for col- lecting and reporting invest- ment grade ESG data that companies and investors can use as a performance indicator for commercial real estate portfolios. According to researchers, green build- ings mean lower risk and higher returns for investors. P. Eichholtz, N. Kok and J. Quigley, The Economics of Green Building , 95 The Rev. of Econ. & Stat., 50-63 (2013). The fundamental idea is that this concept holds true on a portfolio level, and GRESB quantifies ESG data, giving investors a reliable means to evaluate ESG performance. In essence, a high GRESB ranking is a theoretical proxy for overall business health and a signal for better long- termfinancial performance of a portfolio. The GRESB survey col- lects and synthesizes a large amount of data on energy, water, greenhouse gases, waste, social responsibil- ity, ethics, and governance. Gathering the data needed to complete the survey can be a difficult challenge, even for well-organized property man- agers. The data requested is not always collected in the normal course of business, and even if it is, it might need to be verified, parsed or aggregated to provide accu- rate responses to the GRESB survey prompts. As an ad- ditional wrinkle, GRESB is designed for real estate port- folios around the world, and some of its definitions and

intentionally putting inef- ficient assets into GRESB’s “indirectly managed” category. The ultimate goal of GRESB is improved ESG performance, and driving ESG improvement is easier for properties under the landlord’s operational con- trol than it is for properties un- der tenant operational control. Acknowledging this challenge, GRESB distinguishes between directly and indirectly man- aged assets, with indirectly managed assets being given less weight. This means that shifting an underperforming asset into the indirectly man- aged category will improve an organization’s GRESB score. Under the GRESB defini- tions, the categorization of an individual asset turns on whether “the single tenant . . . [has] the ability to introduce and implement operating and/ or environmental policies and measures.” 2016 GRESB Real Estate Assessment Reference Guide . Thus, during the leas- ing process counsel should consider which category the organization wants the asset to fall into and weigh this along with other business consider- ations in the negotiations. Third, GRESB focuses on year-over-year performance. Each year, more is required to achieve a comparable score. This means that it is impor- tant to keep track of what and how data were reported. If an organization reported a data point one year and fails to do so in a subsequent year, its GRESB score will suffer. This also means that a significant change in use from something with a low energy usage (office space) to something with higher en- ergy usage (restaurant space) will have a negative impact on the score. In addition to helping an organization achieve a better GRESB score, counsel should also keep a close eye on the survey responses related to renewable energy to avoid the risk of breaching a renew- able energy contract and/or making inaccurate claims. The GRESB survey asks de- tailed questions about onsite generation and consumption of renewable energy. The wording of the survey does not fit the regulatory frame- works and business models common in the U.S. Many

Counsel should also be mindful of the reasons why the organization is buying carbon offsets. Some organi- zations, usually heavy emit- ters of greenhouse gases, buy carbon offsets to comply with governmental regulations. Others buy them volun- tarily to reduce their carbon footprint. The motivation for a carbon offset purchase should be well understood to make sure that the carbon offsets have not been used for a purpose that prohibits their use in environmen- tal performance reporting. This caution is particularly important for organizations that are legally obligated to purchase carbon offsets. Also, an organization could improve its GRESB ranking by qualifying its energy ef- ficiency retrofits and weath- erization projects to generate carbon offsets. The Veri- fied Carbon Standard (VCS) methodology VM0008 pro- vides one way to turn these types of capital improvement projects into a source of car- bon offsets. The generated carbon offsets could be sold or they could be retired by the organization to offset its own emissions. Of course, like renewable energy cred- its, carbon offsets cannot be included in a tally for GRESB unless the organization owns and retires the carbon credits during the reporting period. In the years to come prop- erty companies and funds will likely receive more and more pressure to report on ESG per- formance, andGRESB appears to be emerging as the industry standard. Even with these pressures to participate, the decision to join GRESB should not be taken lightly. It takes a lot of work just to complete the survey, and doing sustain- ability well across a portfolio –

survey questions do not quite fit the regulatory frameworks and business models used commonly in the U.S. Understanding a little about the way the GRESB survey is evaluated can help an organization achieve bet- ter rankings or explain an apparent drop in its perfor- mance. First, the more com- plete an organization’s data, the better its GRESB score will likely be. (As a result, smaller portfolios with fewer assets and more complete data sets tend to have bet- ter GRESB rankings.) To improve an organization’s GRESB ranking, make it a goal to consistently and uniformly collect data for all assets on energy usage, water consumption, greenhouse gas emissions, and waste genera- tion and diversion. Counsel can help in this effort by making data collection an in- tegral part of all leases (even triple net leases) and service contracts. These agreements can be drafted to require or incentivize data collection and annual reporting syn- chronized with the GRESB reporting period selected (either a calendar year or a fiscal year) by the reporting organization. The lowest hanging fruit for data collection is energy data, and one efficient way to capture it is to require or in- centivize tenants to use (and give landlord access to) the EPA’s Energy Star Portfolio Manager, the most widely used benchmarking tool for energy performance. This free tool, available on the EPA’s website, easily tracks performance using monthly utility data. In situations where Energy Star Portfolio Manager is not appropriate, consider requiring tenants to collect energy usage data using the ASTM Standard Practice for Building Energy Performance Assessment for a Building Involved in a Real Estate Transaction (E 2797-11) as a guide. This standard provides a frame- work for collecting energy performance data, but this is just a methodology for collect- ing data, not a streamlined data collection system like the EPA’s online tool. Second, an organization can improve its GRESB score by

states incentivize renewable energy by creating a market for renewable energy credits. Renewable energy credits, called different things by different states, are a regula- tory fiction that separate (or unbundle) electricity from the fact that the electricity was generated from a renew- able energy source. States create this regulatory fiction to make a societal good – the fact of renewable generation – a tradable commodity. For example, this means a solar system produces electricity and renewable energy cred- its. These are two distinct assets that can be sold or consumed separately. This regulatory fiction is particu- larly hard for some people to grasp, including some people filling out the GRESB survey. If the organization has onsite renewables but does not own and retire the renewable en- ergy credits, it cannot count the energy generated by the system in its renewable en- ergy tally for GRESB. Doing otherwise, would likely put the organization in breach of its renewable energy agree- ments and at risk for claims of misrepresentation, which is a particular concern since one of the primary purposes of the GRESB assessment is to report ESG performance to investors. Counsel should pay equally close attention to the GRESB survey responses related to carbon offsets, another regulatory fiction that is easily misunderstood and misreported. Carbon offsets commoditize the greenhouse gas abatement (or carbon sequestration) resulting from a specific greenhouse gas emissions reduction project. One carbon offset generally represents the removal of one metric ton of carbon dioxide equivalent from the atmosphere. Like renewable energy credits, the idea is to turn a societal good – here the reduction of greenhouse gases in the atmosphere – into a tradable commodity. Unlike many nations, the U.S. does not have a common standard for measuring and verifying carbon offsets. This means that not all carbon offsets on the market are created equal. Buyer – and GREBS reporter – beware.

and receiv- ing a good G R E S B ranking – t ake s no t o n l y t h e c o m m i t - ment of the leadership, b u t a l s o

Tricia J. Sadd

strategic thinking by counsel. Tricia J. Sadd, Esq. is a partner with Montgomery McCrackenWalker&Rhoads LLP. n

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