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Local jurisdictions are implementing new regulations known as Building Performance Standards, or BPS. These regulations reduce buildings’ environmental impact by limiting greenhouse gas (GHG) emissions and energy use. According to the Environmental and Energy Study Institute, buildings in the United States are responsible for almost 40% of the country’s carbon dioxide emissions, making the built environment a primary target for regulators.
BPS regulations establish a limit of permissible emissions based on a building’s primary use and size. Exceeding these limits can result in significant fines totaling hundreds of thousands of dollars, higher financing charges or costly system upgrades.
There are 13 BPS regulations currently in force in the U.S. Additional jurisdictions are developing regulations set to take effect within two years.
Anticipating future risk
You might be thinking, “I don’t have buildings in these jurisdictions,” or “Those new regulations don’t come into effect for a couple of years.” That may be true, but future fines can impact buildings’ value today.
Consider that when buildings are purchased, the net asset value (NAV) is calculated based on expected future cash flows. This means penalties from future fines impact buildings’ values today, and potential fines represent a real risk.
For example, if a building with an expected life of 25 years and a discount rate of 6% receives a $50,000 annual fine, the negative impact on the building’s NAV would be $639,000. That figure reflects the present value of fines paid annually over the building’s life, discounted at 6% — a straightforward illustration of how a recurring penalty compounds into a significant drag on asset value.
System upgrades pay dividends
System upgrades can eliminate the risk of future fines, generating a positive cash flow that immediately increases NAV, improving energy efficiency and enhancing tenant satisfaction and retention. Common upgrade paths include HVAC modernization, LED lighting retrofits, building automation systems and smart metering. These improvements reduce emissions while delivering ongoing operational savings. According to the U.S. Department of Energy, heating and cooling accounts for around 35% of all building energy consumption — the largest share of any end use — making HVAC modernization a logical starting point for building owners looking to move the needle on compliance
BPS regulations are here, expanding and likely to shape investments going forward. As more jurisdictions adopt standards, the financial case for proactive upgrades only strengthens. Investors are already factoring BPS exposure into valuations, and buildings that can demonstrate compliance, or a credible path to it, are better positioned in the market. Building owners should have proactive discussions with investors to manage future risks effectively and make the most of the NAV upside that energy upgrades can deliver.
Yardi Sustainability Reporting tools and team are available now to help you assess your portfolio and stay ahead of compliance requirements. To check your jurisdiction’s current BPS requirements, visit our BPS programs resource page.
