April 13, 2007
Author: Marc Brookman and George J. Kroculick
Organization: Duane Morris LLP
As the energy-efficiency movement continues to gain momentum, the challenge for professionals in the field is to remain informed of and well-versed in its various requirements and advantages.
Federal Tax Deduction
The federal government offers tax incentives to commercial building owners and leaseholders. Pursuant to the Energy Policy Act of 2005, a commercial building owner or leaseholder may claim a deduction of up to $1.80 per square foot for the installation of energy-efficient commercial building property. Energy-efficient commercial building property is property: (i) with respect to which depreciation (or amortization) is allowable; (ii) installed in a building located in the United States and within the scope of 90.1-2001 of the American Society of Heating, Refrigerating and Air-Conditioning Engineers and the Illuminating Engineering Society of North America; and (iii) installed as part of the interior lighting systems, heating, cooling, ventilation, hot water systems, or as part of the building envelope which will reduce the total annual energy and power costs by 50 percent or more.
The green building and sustainable energy movement can only be expected to grow and the building and construction industry is a primary candidate for new programs encouraging energy efficiency and waste reduction. According to the U.S. Green Building Council (www.usgbc.org), in 2001 U.S. construction of commercial, residential and industrial buildings represented approximately 20 percent of the national economy. Further, U.S. buildings represent 39 percent of primary energy use, 70 percent of electricity use and 12 percent of all potable water use (or 15 trillion gallons of water per year). A green building, in addition to being eligible for the federal and state tax incentives mentioned above, can present up to a 30 percent savings in energy expenditures, 30 to 50 percent savings in water use and waste cost savings of 50 to 90 percent.
Pennsylvania Tax Credit
A new energy-efficiency bill has recently been proposed in the Pennsylvania House of Representatives that would provide benefits to both new construction and renovations of existing multifamily, commercial and industrial buildings. If enacted in its present form, House Bill 46 would represent a significant step forward for the ongoing energy-efficiency movement in the Commonwealth. The bill (sponsored by Rep. Carole Rubley, R-Chester/Montgomery) is currently under consideration by the House Committee on Finance and would establish a High-Performance Buildings Tax Credit for the development of so-called "green" buildings.
Generally, eligible buildings would include commercial or industrial buildings containing at least 10,000 gross square feet, four-story multifamily buildings containing at least 10,000 square feet of interior space, or a combination of the above (e.g., as part of a phased project provided certain project-based square footage requirements are met). The tax credit would be available to projects that meet or exceed a prescribed level of achievement under a high-performance building standard which is to be adopted by the Department of Revenue (in consultation with the Department of Environmental Protection). The actual high-performance building standard has not yet been designated; however, a number of possibilities exist (see, e.g., the discussion of LEED certification below).
The tax credit would be available to owners or tenants for either the construction of a high-performance building or the rehabilitation of a building into a high-performance building. The base tax credit would be $35,000 and recipients would receive an additional tax credit based on square footage and the actual level of achievement reached. Projects that meet the highest standards could receive an additional tax credit of $3.50/sf for the first 10,000 gsf, $1.50/sf for the next 40,000 gsf and $1.25/sf for any additional gsf. This tax credit would be distributed equally over four tax years following the receipt of a certificate of occupancy for the building.
Recognizing these benefits, the U.S. Green Building Council has established and continues to administer a LEED certification program that provides accepted recognition for the construction or renovation of green buildings. LEED (which stands for Leadership in Energy and Environmental Design) certification employs an established set of criteria for various types of development (e.g., New Commercial Construction, Multiple Buildings, Existing Building, etc.) and utilizes a rating system that designates projects as either certified, silver, gold or platinum.
The move toward LEED certification is increasing at an almost exponential rate. Major companies have made commitments to green buildings (for example, PNC Bank, Starbucks, Target, Bank of America and Goldman Sachs). These moves are justified by a number of factors. In addition to the reduction of energy and occupancy costs, companies are turning to efficient design and technology in order to attract and retain tenants and employees and gain brand value. Federal, state and local municipalities have also taken the lead by mandating LEED certification for the construction of various types of public building projects. Some of these municipalities include New York, Boston, Chicago, Atlanta, Dallas, Portland, San Francisco and Seattle. A bill is currently pending in the Pennsylvania House of Representatives (House Bill 45) that would impose high-performance building standards on the design and construction of all state-owned or leased public building projects and all "major facility projects" that receive any amount of state funding. Certain municipalities are expanding the requirements into private development. The Boston Zoning Commission, for example, has just approved amendments to the city's zoning code that require all major new and rehabilitation construction projects exceeding 50,000 square feet to earn a minimum of 26 LEED New Construction points.
Many of the LEED standards are easily attainable with proper advance planning and without the need for increased development costs. Meanwhile, the cost of meeting additional LEED standards typically is more than offset by the resulting reductions in energy and operation expenses and increases in the project's marketability.
For Further Information
For more information or if you have questions about this Alert, please contact Marc D. Brookman, George J. Kroculick, one of the other attorneys in the Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.