Understanding California's South Coast AQMD Warehouse Indirect Source Rule – key points for warehouse owners, operators and tenants

Logistics facility

Real Estate Alert

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Commercial logistics and distribution chains in the US rely heavily on warehouses of all sizes as secure waypoints to receive and send goods, typically served by trucking and rail transportation operations. Recently, government attention has turned to regulating warehousing operations as a way to indirectly limit emissions from vehicles that transport goods to and from those buildings.

In Southern California, warehouse owners, operators and (by extension) tenants are facing new and very novel regulations intended to do just that. Warehouse owners, operators and tenants should understand and prepare for these new rules.

About the WAIRE program

In May, the South Coast Air Quality Management District (SCAQMD) adopted the new Warehouse Indirect Source Rule, Rule 2305. This rule seeks to reduce nitrogen oxide and particulate matter emissions produced by light- and heavy-duty trucks and tractor-trailers (mainly diesel) traveling to and from warehouses by regulating the owners and operators of warehouse facilities, alleged to be the “indirect source” of those emissions. Since its adoption, various key concerns have emerged concerning the path to complying with the rule.

Rule 2305 implements SCAQMD’s Warehouse Actions and Investments to Reduce Emissions (WAIRE) Program and applies to owners and operators of existing and new warehouses within the South Coast Air Basin (including portions of Los Angeles, Riverside, and San Bernardino counties, and all of Orange County) with at least 100,000 square feet of indoor floor space, with those that conduct warehousing activities in at least 50,000 of those square feet required to earn “points” to offset emissions. While the goal of Rule 2305 is to assist with reducing and controlling air emissions to meet state ambient air quality standards, implementing the Rule may prove challenging to owners, operators and tenants of warehouse facilities.

Warehouse operators must earn a specific number of points (called WAIRE Points) to offset the number of truck trips to and from warehouses under their control. Warehouse operators incur their WAIRE Points obligations on a weighted basis, with, until 2026, larger obligations for larger warehouse facilities, and for warehouses hosting larger vehicles (eg, tractors or tractor-trailers).

WAIRE Points are earned through emissions-reducing activities or payment of mitigation fees. Both owners and operators of such warehouses must also comply with significant new information gathering and reporting obligations under the Rule.

Rule 2305 will be phased in over three years, applying to larger warehouses first. The Initial Compliance Period begins on January 1, 2022 for warehouses 250,000 square feet or more, on January 1, 2023 for warehouses 150,000 feet or more, and on January 1, 2024 for warehouses 100,000 square feet or more. 

Key components

Below are some key components of Rule 2305:

  • The number of WAIRE Points a warehouse operator must collect each year is calculated using Weighted Annual Truck Trips to or from the warehouse.
  • Warehouse operators must earn the Points, but warehouse owners may also earn Points to satisfy the obligation (for example, as a way to attract tenants).
  • WAIRE Points may be earned by completing emissions-reducing actions in SCAQMD’s WAIRE Menu, completing a Custom WAIRE Plan (which must be approved by SCAQMD prior to being implemented), paying a mitigation fee of $1,000 per Point, or any combination of the three.
  • If an owner or operator earns more WAIRE Points than required in a year, those Points may be used to satisfy the same warehouse’s obligation in the following three years, transferred to another warehouse under the control of the same operator (but only for the current compliance period), or transferred between owners and operators of the same warehouse and used during the subsequent three years.
  • Rule 2305 imposes substantial reporting and recordkeeping requirements on both owners and operators, including:
    • Owners must submit a Warehouse Operations Notification by September 1, 2021, with general information about the warehouse
    • Operators must submit an Initial Site Information Report by July 1 of the year in which they will have to submit their first Annual WAIRE Report for that warehouse, including the methods by which the operator anticipates earning WAIRE Points to satisfy its WPCO
    • Operators required to earn WAIRE Points must also submit an Annual WAIRE Report within 30 days of their Annual Reporting Date, which must include truck trip data and the number of WAIRE Points earned
    • Owners and operators must keep records documenting the accuracy and validity of all information submitted to the SCAQMD for at least seven years after the reporting deadline.
  • Rule 2305 is accompanied by a corresponding fees rule (“Rule 316”) to recover SCAQMD’s costs of implementing Rule 2305. Rule 316 imposes fees for submitting the various Reports outlined above, and for the payment of a mitigation fee in lieu of earning WAIRE Points. Owners of exempted warehouses (less than 100,000 square feet or less than 50,000 square feet for warehousing activities) are not required to pay these administrative fees.

Key compliance considerations

Warehouse owners

Rule 2305 raises implementation concerns for warehouse owners, who in many cases have little to no control over the day-to-day operations of their warehouses. For example, it is the owner’s responsibility to submit a Warehouse Operations Notification, which must include information that an owner often does not possess or control and may even be subject to confidentiality provisions in operator leases.

The same challenges would arise with the Initial Site Report and Annual WAIRE Report required of the warehouse operator. While the rule’s Implementation Guidelines specify that “[t]he warehouse owner may choose to comply on behalf of the warehouse operator[,]” from a practical standpoint, the warehouse owner may be best positioned to submit the Initial Site Report because much of the required information relates to the facility itself rather than any operator’s activities. For example, if the warehouse has an alternative fueling station or electric charging station onsite, the Initial Site Report must include the “[t]otal fuel dispensed and/or charging provided in the previous 12-month period.” Warehouse owners may also be best positioned to submit the Annual WAIRE Reports.

Thus, warehouse owners may find themselves having to take an active, leading role in working with their tenants to prepare and submit Initial Site Reports and Annual WAIRE Reports to ensure compliance. Aside from legal and contractual obligations, this information may be difficult to collect for a warehouse owner with limited oversight of day-to-day activities. And warehouse owners with smaller leases that aggregate to over 100,000 square feet likely will shoulder most of the compliance obligations.

Many warehouse owners will thus need to implement new strategies and systems for gathering and reporting required information, including working closely with operators to ensure compliance. Owners may also need to try to reach an agreement with their tenants to incorporate addendums or other modifications (including via the rules and regulations that are often attached to leases) into new or existing lease agreements to address the preferred mode of compliance with Rule 2305 and to allocate responsibility for compliance (or non-compliance) with the WAIRE Program among warehouse owners, tenants and operators.

Warehouse operators

As mentioned, warehouse operators have an obligation in the first instance to submit the Initial Site Report and/or Annual WAIRE Report. Where responsibility for reporting falls on the operator, it may face significant challenges in information gathering and contractual compliance issues when creating these Reports. In particular, certain critical operational information like the types of trucks and lengths of truck trips to and from warehousing facilities may be challenging to collect. Key considerations for operators regulated by Rule 2305 include how such information will be collected, whether existing agreements with trucking and freight vendors account for such functions, and strategies for compliance with reporting and fee payment/Points earning obligations.

Again, both owners and operators should consider exploring mutually agreeable ways to satisfy the requirements of Rule 2305 by incorporating responsibilities for compliance into new or existing lease agreements.

Distributing the cost of compliance

Crucially, the costs associated with compliance should also be considered. Whether operators can or will invest in costly equipment or pay mitigation fees to satisfy their WPCOs, Rule 2305 is likely to significantly affect the operational costs for large warehouse facilities in the SCAQMD. Reasonably allocating these costs among owners/operators, tenants and/or trucking vendors and downstream customers that are not directly regulated under Rule 2305 will present legal and practical challenges requiring thoughtful, comprehensive solutions, including analysis of existing leases and other agreements, and other operations and compliance options.

To learn more about potential strategies for compliance with Rule 2305 for owners, operators, and trucking companies affected by the rule, please contact any of the authors of this article.