Sustainability and the Bottom Line:
Making Economic Sense of the Green
Real Estate Trend
James D. Weier, a Principal in the firm’s Real Estate group and a member of the Construction Law practice, blends his knowledge of development and financing, design and construction agreements and claims, accessible design, and sustainable (green) design and construction issues to provide effective, focused counsel. Before entering into legal practice, Jim worked for more than a decade in the architectural profession and construction industry. He can be reached at 312.521.2741 or jweier@muchshelist.com.
By James D. Weier
A growing number of real estate owners and developers are showing interest in green and sustainable building initiatives. But budget-conscious professionals want to know if “going green” on a project will cost or save them money. Few may realize that there are significant business benefits and financial incentives to going green, including a federal tax deduction that is available to certain owners and leaseholders through the Energy Policy Act of 2005.
Signed by President Bush on August 8, 2005, the act establishes a tax deduction for expenses related to “energy-efficient commercial building property,” defined as certain types of eco-friendly systems that can be installed in commercial buildings. The deduction is available through January 1, 2009, but might be extended through 2013.
Any owner or leaseholder who plans to construct a new commercial building, or make capital improvements to an existing one, should analyze the project in terms of the act, with the assistance of appropriately qualified tax and design professionals. Failure to do so could amount to leaving money on the table, not only in terms of the tax deduction the act offers, but also in terms of energy costs that can be saved through compliance.
In order to take advantage of these opportunities, one must first understand the definition of “energy-efficient commercial building property,” the details of the tax deduction itself, the timing involved and the certification process required by the act.
What Kind of Property Qualifies?
The act clearly limits “energy-efficient commercial building property” to certain interior lighting systems; heating, cooling, ventilation and hot water systems (HVAC); and the building envelope system of a commercial building. It further requires that such systems be located in buildings in the United States and can be either depreciated or amortized. In addition, the systems must comply with ASHRAE/IESNA Standard 90.1-2001, Energy Standard for Buildings Except Low-Rise Residential Buildings.
The systems must be certified as part of a plan designed to reduce the total annual energy costs of the building (with respect to those systems) by 50 percent or more in comparison to a reference building that meets certain minimum requirements. The assistance of a qualified engineering professional is key when determining whether the systems comply with the act.
The Tax Deduction
Once it is determined that the systems qualify, it is time to calculate the deduction. Essentially, the amount of the deduction is equal to the expenditures made by the taxpayer/owner in relation to energy-efficient systems. The deduction is subject to a cap, and the act also provides for partial deductions.
The complete deduction is available to owners and leaseholders who install all three energy-efficient building systems (interior lighting, HVAC and building envelope). It is limited to an amount equal to $1.80 per square foot of the building for which the expenditures are made. The complete deduction is allowed in the year the systems are placed in service, which generally means the time at which they are ready for their intended use.
Partial deductions are available to owners and leaseholders who install at least one of the three energy-efficient building systems, and are limited to an amount equal to $0.60 per square foot of the building for which the expenditures are made. Like complete deductions, partial deductions are allowed in the year the system is placed in service. Instead of the 50 percent reduction in energy costs required if all three systems are installed, each individual system must deliver a minimum 16 2\3 percent reduction when compared to a reference building.
All calculations must be performed using qualified computer software listed by the Department of Energy at www.eere.energy.gov/buildings/info/qualified_software.
Timing
Owners and leaseholders who want to take advantage of the tax deduction should act quickly. Currently, the deduction is effective only for commercial systems placed in service after December 31, 2005, and prior to January 1, 2009. However, various bills have been introduced by Congress to extend the deduction through 2013, and to raise the deduction to $2.25 per square foot. Owners and leaseholders should keep themselves informed–through their tax professional or attorney–of any changes to the effective date of the act and the deduction amount.
Certification
In order to claim the tax deduction offered by the act, an owner or leaseholder must consult with a “qualified individual”–who meets certification standards outlined in Section 179D(c)(1) of the Internal Revenue Code–to obtain certification that the required energy savings will be achieved.
Guidance on the form and substance of certification letters can be found at www.efficientbuildings.org. Provided by the Commercial Building Tax Deduction Coalition, this website offers a wealth of information and informal guidance on how the tax deduction for energy-efficient commercial building property works.
Additional Resources
Beyond the tax deduction, there are a variety of other financial incentives for green projects. DSIRE (Database of State Incentives for Renewables & Efficiency) offers a plethora of information on federal, state, local and utility incentives that promote renewable energy and energy efficiency at www.dsireusa.org. An ongoing project of the North Carolina Solar Center and the Interstate Renewable Energy Council, DSIRE is funded by the U.S. Department of Energy. The website provides extensive information on the Energy Policy Act, as well as on green financial incentives at the state and national levels.
The Dual Meaning of Green
The tax deduction provided by the Energy Policy Act is just one example of the financial benefits of energy-efficient systems. As green becomes mainstream, other benefits–both tangible and intangible–are emerging that build a business case for sustainability. These include reduced operating costs (such as lowered electric, gas and water bills), marketing advantages, and even improved employee retention and productivity rates. With determination and thoughtful planning, owners and leaseholders may not only green the project, but also green the bottom line.
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