Building Performance Standards and Financing: Due Diligence, Loan Covenants, and Insurance Considerations

This course will provide guidance to real estate finance attorneys and other deal participants on how to navigate Building Performance Standards (BPS), municipal/state regulations, and accompanying due diligence energy data requirements. Time will also be spent on negotiating and drafting covenants and loan provisions, as well as best practices to avoid retrofits and performance penalties.

BPS are increasingly seen at state and local levels. Aimed at reducing carbon footprints and offering capital cost reductions, BPS programs require commercial and multifamily buildings to meet energy and efficiency targets that gradually increase over time. Failure to meet targets results in noncompliance penalties. As BPS grows in popularity, real estate practitioners need to prepare and account for financing complications.

Although BPS compliance offers lower capital costs, the associated compliance penalties and building expenses necessary to meet targets are affecting net operating income. This financial tension is causing lenders and investors to treat BPS as a material deal risk. As a result, lenders are increasingly auditing for BPS compliance during the due diligence phase of financing or refinancing, treating potential fines as a liability.

Also, loan documents are evolving to include detailed representations and warranties regarding current compliance status, energy usage data accuracy, and violation disclosures. Underwriting now includes covenants to address benchmarking, retrofit timelines, escrowed capital expenditures, and energy audit cooperation. Counsel may encounter tailored defaults tied to missed performance thresholds or unpaid penalties. Time will be spent discussing these new underwriting requirements and ways to mitigate them. Insurance considerations such as environmental, specialty liability, or other products designed to offset regulatory and performance risk should also be considered and incorporated into agreements. Our panel will help the audience spotlight and address these issues and more for their next transaction. 

Listen as our authoritative panel shares practical guidance on integrating BPS diligence into transaction workflows, drafting targeted representations and warranties, and structuring affirmative and negative covenants, as well as ways to negotiate default and cure provisions tied to performance standards and penalties. Attendees will leave with actionable tools to advise lenders and borrowers on compliance, insurance considerations, and risk transfer strategies for both new originations and refinancing transactions.