The U.S. Green Building Council estimates that buildings and construction account for at least 31 percent of energy-related CO2 emissions globally. Although no strict timeline has been established, commercial building owners in Texas may have to one day consider the level of emissions created throughout the life of their properties when deciding what to do with aging structures.

By Harold D. Hunt and Bucky Banks

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In real estate, the environmental impact of a decision to either refurbish or demolish and rebuild an existing commercial property is a perfect example of pressures on the horizon that will force more attention on this subject. The Carbon Leadership Forum reports that approximately 30 percent of all global carbon emissions are attributed to the building sector.

When attempting to quantify the environmental impact of decisions regarding existing properties, one of the challenges commercial property owners may soon face will be minimizing “embodied carbon.” According to the U.S. Green Building Council (USGBC), eight states already have policies in place addressing the issue: Washington, Oregon, California, Colorado, Minnesota, Connecticut, New York, and New Jersey.

Life Cycle of Commercial Buildings

Embodied carbon is defined as the greenhouse gas emissions produced by the manufacture, transportation, installation, maintenance, and disposal of building materials. All of these factors combine to make up the life of a commercial building. Numerous publications separate a building’s cradle-to-grave life cycle into four discrete stages:

1. Product stage: Involves the extraction, transportation, and manufacture of the materials needed to construct a building.

2. Construction stage: Involves the transportation to and installation of material components at the site to erect the building.

3. Use stage: Involves the operation, maintenance, repair, and possible refurbishment of the finished building.

4. End-of-life stage: Involves the deconstruction, transportation, waste processing, and disposal of building materials.

The embodied carbon in a commercial building comprises all greenhouse gases (GHGs) produced in every life cycle stage except the use stage. GHGs produced in the use stage are defined as “operational” carbon that can be heavily impacted by the building’s energy efficiency. Historically, much more attention has been paid to the level of operational carbon in commercial buildings than levels of embodied carbon. The formula used to calculate embodied carbon is typically:

Embodied carbon = quantity of each material or product × a carbon factor for the product

According to the Institution of Structural Engineers (ISE), approximately 55 percent of the carbon embodied across a building’s life cycle occurs before a building is even occupied. The highest levels of embodied carbon will be produced in the production stage followed by the construction stage.

A quick online search reveals several available software products for estimating embodied carbon in new construction. ISE also provides a detailed analysis and discussion of the subject in its 2020 publication How to Calculate Embodied Carbon

These numbers can provide a reasonable estimate for a proposed building’s environmental impact from construction to demolition, so long as the exact materials and quantities or volumes are known. However, the availability of embodied carbon statistics for the materials being used in construction is a limiting factor.

The USGBC reports that levels of embodied carbon in building materials and products can be identified through a reporting system known as Environmental Product Declarations (EPDs). The system can assess a material’s environmental impact throughout every life cycle stage. Although EPDs are largely voluntary in the U.S., their use is on the rise.

The USGBC’s LEED rating system does offer “materials and resources” credits to reduce embodied carbon. However, they also note that changes to the LEED requirements and credits are ongoing as new information, strategies, and policies become available.

The Inflation Reduction Act (IRA) is a recent attempt at the federal level to decrease embodied carbon. The legislation aims to reduce total carbon emissions by 40 percent by 2030. Approximately $5 billion will be allocated to low-carbon spending to improve physical infrastructure. The distribution of funds will include money for developing and standardizing EPDs as well as labeling and using low-embodied carbon materials, technologies, and products.

Regulatory Response and Developer Dilemmas

Real estate professionals should expect more legislation at all levels of government addressing the environmental impact of commercial development and redevelopment. The USGBC, EPA, and the Urban Land Institute (ULI) are all advocating and adopting increasingly stringent standards for limiting GHG emissions through improved designs and materials.

While the cost of altering or removing dated properties may prove beneficial to the environment, it can simultaneously lower the return on a property owner’s investment. How landlords respond will have a significant impact on the future of commercial real estate development. If a meaningful shift in demand or supply for commercial space occurs along with GHG restrictions, many properties may have trouble maintaining positive cash flow, thus reducing any financial benefits from a renovation. Destruction of property value and a loss of appeal for new development will follow.

A newly constructed building using superior materials can produce a property that is more energy efficient and lower in embodied carbon. However, developers will also factor in the tradeoff in extra cost for constructing such a property. Furthermore, calculating the amount of embodied carbon in older existing buildings is a much more complex task. Again, cost will play an important role in the decision to refurbish or demolish an existing building.

Cost benchmarking data for determining acceptable embodied carbon in a commercial retrofit project is another limiting factor in the process. Due to a lack of building-level data, no consensus has formed around any benchmark for embodied carbon levels in a building.

To quantify GHGs and their potential effects on climate change, a method known as a life cycle assessment (LCA) is used to track the emissions produced over the full life cycle of a material or construction process. The emissions are then converted into specific metrics that reflect their potential effects on the environment.

LCA tools are becoming more popular for deciding whether to refurbish or demolish and rebuild commercial properties. However, users should be aware that different LCA tools will generate different results. Unfortunately, some underlying databases are not regularly maintained, while documentation of some data sources and methodologies are not always easily available. Furthermore, most LCA tools have been primarily focused on specific material characteristics and not whole buildings. Data collection and reporting guidelines are needed for data standardization and transparency. Material manufacturers must increase participation in this process as well.

Users should also remember that embodied carbon calculations in LCAs are only estimates. Many variables and assumptions are included in the calculations. For example, estimates of the embodied carbon generated can vary widely based on the location where materials are produced, the transportation distance from production to final destination, and the method of production. Uncertainty in results can increase even further when estimating embodied carbon in older buildings.

Refurbish or Demolish? That is the Question

The decision to refurbish an older commercial building or demolish it for new construction will generally be based on which choice produces the highest return on investment. The answer may often be in favor of demolishing and redeveloping the property. Unexpected problems can always arise when the choice is refurbishment. Newly constructed buildings have the advantage of newer, possibly higher quality materials that abide by more stringent energy codes that many cities have put in place.

RESPONDENTS TO A RECENT U.S. GREEN BUILDING Council survey on green building trends and sentiments ranked passive design principles, energy efficient equipment, and reducing embodied carbon of key materials such as concrete, steel, and glass as the top three strategies for achieving building decarbonization.

The result of implementing such products should be an improved tenant experience and higher rents, a win-win for both developers and tenants. Practically speaking, owners should be committed to supporting the refurbishment of an existing building if there is tenant demand. However, most owners will remain committed to maintaining the attractiveness and energy efficiency of a property only if it supports improved cash flow growth. Although studies have shown that refurbishing buildings has only half the embodied carbon impact of new construction, energy efficiency does not necessarily guarantee a building will command superior rents. Building owners have little reason to support any costly renovation that does not increase tenant demand or utility.

The current, post-COVID economic environment has initiated the conversation between building owners, developers, and municipalities regarding what to do about existing commercial buildings, especially office properties. As a result, expect refurbishment or demolition to make way for new construction to be a higher priority for many office buildings.

Before the pandemic, trophy-class office properties were often assumed to be insulated from near-term market forces. Such properties are no longer shielded by the perception of continued strong demand for office space in the years ahead. This trend appears to be entrenched, and the negative value shift may provide property owners with an incentive to seek returns through alternative uses. Such a decision will invariably result in a greater release of GHGs.

As more older commercial buildings of every type become increasingly inefficient or obsolete, the concern over the environmental impact of any type of change or removal of the structures will only grow.

Dr. Hunt (hhunt@tamu.edu) is a research economist with the Texas Real Estate Research Center at Texas A&M University and Banks (bbanks@ mays.tamu.edu) is associate director and executive assistant professor for Texas A&M’s Master of Real Estate program in Mays Business School.

Understanding the mechanics of an “As Is” contract and the interplay of the option period is important for agents and their clients when negotiating the original sales price of a contract or renegotiating the sales price during an option period. By

Now that the COVID-era feeding frenzy for buying properties has subsided and interest rates are on the rise, buyers and sellers are on more equal footing. This is a good time to remind buyers, sellers, and their agents how the property’s condition affects the sales price at various stages of the real estate transaction.

A logical place to start is by looking at the importance of the Seller’s Disclosure Notice, the meaning of “As Is,” the inspection provisions of Paragraph 7 of the One to Four Family Residential Contract (Resale), and use of the option period when renegotiating the sales price following an inspection.

Seller’s Disclosure Notice

Although the Seller’s Disclosure Notice is a separate document from the sales contract, it’s no coincidence that it’s part of the contract’s Paragraph 7 on Property Condition. The Seller’s Disclosure Notice is required by Texas Property Code Section 5.008. That statute sets out the minimum information about a property’s condition that a seller must disclose to a buyer in a residential sales transaction, including prior flooding events.

The Texas Real Estate Commission (TREC) has a Seller’s Disclosure Notice that parallels the statutory provisions. Some real estate trade associations and brokerages have Seller Disclosure Notices that contain more information than is required by the statute.

Paragraph 7B of the sales contract indicates whether the buyer has received the notice before signing the contract, the buyer has not yet received the notice, or the seller is not required to give the notice under specific exemptions contained in the property code.

If the buyer has not yet received the notice, the seller has a negotiable number of days to deliver it, and the buyer has the right to terminate the contract within seven days after receiving the notice. Paragraph 7B is structured this way because the sales contract is an “As Is” contract (more on this in a moment), and knowing information about the property’s condition prior to signing the contract will affect how much the buyer is willing to pay for the property. The seven-day period allows the buyer time to review the disclosures made by the seller and possibly renegotiate the sales price or repairs based on the new information. If the parties reach an agreement during that period, they will execute an amendment to the sales contract. If no agreement is reached, the buyer has the right to terminate the sales contract and get his earnest money back.

Kerri Lewis

Not only is the Seller’s Disclosure Notice important for negotiation of the sales price of a property, but it could also affect a buyer’s decision to purchase the property at all. Knowing this, some sellers may get “selective amnesia” when filling out the notice to make their property more attractive to buyers. But sellers beware: failing to properly disclose the condition of a home can bring a lawsuit from the buyer months or years after the sale.

Keep in mind that Texas law requires sellers and real estate agents to disclose any known material defect on the property to the buyer, whether or not it is an item listed on the Seller’s Disclosure Notice. Real estate agents do not want to get drawn into a lawsuit, so here are a few best practices concerning the Seller’s Disclosure Notice:

• The seller’s disclosure is only the seller’s disclosure, and agents should never assist the seller in filling out the form. Sellers who need assistance should contact a real estate attorney or use an online program that takes them through a step-by-step program to complete the notice. Agents are certainly able to refer their clients to either.

• An agent should offer the seller every form of Seller’s Disclosure

Notice available in the market area, (unless her broker has told them otherwise) and let the seller decide which one to complete.

• An agent should talk to his clients about the importance of completing the form fully and truthfully.

• If an agent knows about a material defect and the seller does not disclose it, the agent has an obligation under the law to disclose it to the buyer.

Paragraph 7D, “As Is” Provision

The language making the sale of the property “As Is” can be found in Paragraph 7D entitled “Acceptance of Property Condition.”

The contract language defines “As Is” to mean “the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract.” Knowing the condition of the property by receiving and reviewing the Seller’s Disclosure Notice and walking through the property to observe its current, visible condition are important steps for a buyer to take before entering into a contract and will determine what price she is willing to pay for the property.

Paragraph 7D provides two options for buyers: (1) the buyer accepts the property As Is; or (2) the buyer accepts the property As Is provided the seller, at the seller’s expense, completes certain specifically named repairs and treatments.

It is important for agents and their buyer clients to understand that the blank to be filled in for Paragraph 7D(2) is not a catch-all to be used for anything found in a future inspection (more on inspections in a minute) but for specific items that may have been noted in the Seller’s Disclosure Notice as not being in working condition, or for visible items of disrepair the buyer observed when viewing the property.

Agents and their buyer clients should also understand this paragraph provides that accepting the property “As Is” under either 7D(1) or 7D(2) does not preclude them from performing any inspections under Paragraph 7A or from negotiating an amendment based on what they find.

An example of the proper use of 7D(2) would be where the Seller’s Disclosure

Notice indicates that the HVAC system is not in working order. A buyer could submit a contract noting in Paragraph 7D that the seller must repair or replace the HVAC system prior to closing. Of course, because the seller noted the issue prior to the contract, she may counter at a higher price to take into account the cost of the repair.

Paragraph 7A Inspection Provision

Under Paragraph 7A of the sales contract, sellers must allow buyers and their chosen inspectors (licensed by TREC or otherwise permitted by law to make inspections, like a plumber, electrician, or termite inspector) access to the property at reasonable times to perform any inspection of the property the buyer deems necessary.

The seller is also required to keep the utilities on while the contract is in effect to facilitate inspections.

sale price or have seller perform certain repairs should the inspection report reveal issues with the property that were not noticeably visible or otherwise disclosed by the seller. That last point is important when a buyer is asking for sales price reduction or repairs to be paid for by the seller under an “As Is” contract.

Remember that an “As Is” contract is one where the buyer is submitting an offer to the seller based on the property’s current condition. Generally, the listing price set by the seller is what the seller thinks the property is worth in its present condition. The seller rightfully assumes that the offer brought by the buyer is based on what the seller has revealed about the property in the Seller’s Disclosure Notice and what the buyer observed about the property’s condition during a walk-through. This is why many sellers are put off by a buyer who tries to renegotiate the contract terms based on items in an inspection report that were previously disclosed or readily observable at the property—because the seller agreed to a sales price based on the property’s present condition

Only hydrostatic testing requires written approval by the seller.

All inspections are at the buyer’s expense.

The buyer’s right to have inspections performed is not tied to the option period. This right is available regardless of whether the buyer purchased an option period, or whether or not the option period has expired.

Option Period and Renegotiation of Price After an Inspection

The option period provides the buyer with some leverage to renegotiate the sales price following an inspection, so it is advisable that a buyer pay an option fee to obtain an option period under Paragraph 5 of the contract. It is also advisable that the buyer get an inspection performed during the option period with enough time left to renegotiate the

It is important that the parties and their agents understand that under an “As Is” contract, renegotiation of the sales price or seller-paid repairs should be limited to items that were not previously disclosed or not readily observable. That is the value that an inspection report brings to the transaction.

If the buyer is still in the option period, he can try to renegotiate the contract terms based on new items found. Although the seller does not have to agree to a price reduction or repairs, he risks losing the deal if the buyer walks and gets her earnest money refunded. In a hot market, this was not such a big deal for the seller. But in a more balanced market, the seller should consider whether he will get another offer and how much longer that will take.

Also keep in mind that if the inspection report reveals material defects, and the seller is made aware of those defects, the seller is obligated to reveal those to the next buyer, and that buyer might want equal or greater price concessions.

Lewis (kerrilewis13@gmail.com) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission.