Due diligence on smart buildings

It is important to understand that the implementation of smart building technology is a journey, not a destination. As technology evolves, the needs of building occupants change, and new opportunities arise. Smart technology can now be applied to various touchpoints within a building, from lighting and HVAC to security and energy management systems.  Prior to the implementation of any futuristic smart technologies, it is crucial to have a long-term vision. By choosing a solution that can expand and flex as the needs of stakeholders change, the building will remain future-proof and efficient. In turn, this will help provide a positive return on investment far into the future. In the shorter term, certain use cases that are easy to implement and provide quick wins can help build confidence among building stakeholders, including owners, managers and occupants. By providing early results, they can demonstrate the value of smart technology and highlight its benefits, from energy savings to improved comfort and enhanced security.  In commercial real estate, making buildings smart can enable landlords to use the same infrastructure for multiple use cases. For example, temperature sensor data can provide a more granular and real-time data feed than a legacy building management system. While useful to optimise HVAC systems, the information collected can also be shared with building occupants through a workplace employee app. By letting employees decide their ideal working environment, comfort and productivity will be improved. Similarly, implementing an indoor positioning system can be used to locate a lost item or a person in the building, or be used to optimise space utilisation.  By leveraging the same infrastructure for multiple use cases, a virtuous cycle is created; the more smart tech is implemented, the more data is collected, and more insights are recorded. For well-connected buildings, this leads to further optimisation and efficiency gains. Choose wisely Conducting proper due diligence is required when selecting a smart building partner, with the market still in its infancy and containing many new start-up entrants with limited experience. Equally, there are several large industry players trying to take a slice of this new market but lacking the real technology skills to deliver. Therefore, it is essential to conduct robust supplier selection and choose a specialist smart building company with a proven track record at an enterprise scale and which understands the technology, business process and cultural aspects of this digital transformation. Ideally, testing them out with a small initial project can be helpful. Prior to implementation, buyers, tenants and lenders will be keen to ensure the solution is worth the investment. To do so, assessing the building’s existing infrastructure, systems and technology is essential. This process requires evaluation of the building’s HVAC, lighting, security and communication systems, as well as analysing the compatibility of various smart technologies with the existing systems. Alongside identifying any potential roadblocks to implementing smart technology, such assessments can highlight likely benefits and help to convince stakeholders of the value of their investment. In turn, a feasibility study may be used to analyse the potential energy savings, operational efficiencies, cybersecurity risks and costs of replacing existing systems and infrastructure. Physical issues to watch out for include inadequate insulation, air leakage and poor ventilation. As smart buildings rely on sensors to monitor and adjust the building’s environment, it is essential that these systems are properly installed and functioning correctly. Failure in this regard may result in increased energy consumption, reduced comfort and poor indoor air quality. Prior to embracing smart solutions, landlords should note the regular maintenance and upgrades required to ensure they function optimally. Building automation systems can be complex and require skilled technicians to install, maintain and troubleshoot them. Therefore, it is essential to have a plan in place for regular maintenance, repairs and upgrades to avoid downtime or system failure. Key questions to answer In many ways, buying a smart building is just the same as buying any other building, but there are a number of areas worth considering in more detail: Does the EPC result reflect your expectations for the building? If, for example, the building is being acquired into a fund that has specific “green” requirements, such as an “Article 9” fund for the purposes of the Sustainable Finance Disclosure Regulation, does the rating match those requirements, or would further works be needed to bring it up to the requisite standard? If the building is let, what “green” provisions have been included in the leases? We comment later on the different shades of green, but the key elements will relate to sharing data, use of sustainable materials for alterations and the energy-efficient use of the building. An important element of a smart building is the ability to collect data automatically, without having to refer back to tenants, so do the leases of the building permit that data collection? And what data is being collected? Does any of it contain information that would be protected under the General Data Protection Regulation and, if so, how is that being consented? As part of the package of service contracts for the building, are there contracts relating to the smart aspects, and can they be transferred to the new owner? As with other service contracts, you will need to check they do not contain a prohibition on transfer or require consent for the contract to move across to the new owner. Part of the planning due diligence should also involve checking that any consents needed to undertake works to install smart technology have been obtained. Many of the same issues will apply on the grant of a new lease of a building or part of it. From the landlord’s viewpoint, it will want to make sure the lease it is granting allows the full use of the smart technology from which the building benefits. That means making sure it contains all necessary consents from the tenant to collect data and share that data, including using it for reporting purposes, whether under the SFDR or any other similar regime. Readers of our earlier articles will be aware that the UK government is putting in place a similar disclosure system, to be known as the SDR, and the more landlords are required to disclose data, the more important it becomes for them to be able to collect it. From the tenants’ side, they will also want to make sure the landlord shares the building data, as occupiers will also have corporate obligations to make statements, for example in their end-of-year accounts, about their approach to sustainability and what they are doing to improve their performance. In practical terms, there may also be equipment connected with data gathering or other smart tech serving the building within a tenant’s demise that the landlord needs access to, so the lease will need to reserve rights for the landlord to access it and to be able to maintain, repair and perhaps replace it. Shades of green Green leases are often categorised as “light green” or “dark green” depending on the extent to which they impose ESG-related obligations. Light green leases are now very common, and there are a number of industry-wide examples, such as the Model Commercial Lease, which include balanced provisions that should be acceptable to both landlords and tenants. The provisions are set out in a schedule which addresses cooperation, data sharing and the impact on environmental performance. Dark green leases are less common and can include detailed restrictions on the materials and methods that can be used when undertaking alterations at the property, as well as more onerous obligations on the efficient use of the area that has been let. Examples of such provisions are produced by the Chancery Lane Project to align with the goals of the Paris Agreement on climate change. The extent to which tenants are agreeable to sharing their data varies across different asset classes. Occupiers of offices seem to be more willing than others to share information about the use of their space, so it is not surprising that it is the office sector that is further ahead than others when it comes to sustainability or that the drive for smart buildings is gaining ground particularly in relation to offices. Case studies Spica Energy solution Ecopilot, from Spica Technologies, was commissioned in May 2020 at Halifax Marriott Harbourfront Hotel. The goal was to help the Marriott improve climate change mitigation, alongside providing continual improvements to guest comfort. The 38,000 sq m site saw savings of 17% in natural gas, 20% in electricity and $100,144 (£80,400) financially in just the first year. As a result of Ecopilot, Marriott was able to reach its energy savings goal and identify system issues it was unaware of to further improve efficiency.  Demma-Nordomatic implemented smart building software strategies to remotely optimise BT building energy management systems across its UK portfolio of offices. This resulted in more than £1.1m of annual cost savings with an 11,267 MWh energy reduction, helping achieve ESG targets. Tim Streather is managing director of Spica Technologies and Jackie Newstead is a partner in the real estate team at Hogan Lovells Image © Gerd Altmann/Pixabay