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Real Estate Journal
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hese days , peopl e talk a lot about “go- ing green.” Companies By Bruce A. Johnson and Leendert Jan Enthoven Energy Incentive Programs: Good for the Earth and the Bottom Line T levels that allow commercial real estate owners to increase their cash flow while decreas- ing their carbon footprint.
construction for newly con- structed and recently reno- vated commercial buildings. EPAct 179D allows taxpayers to accelerate depreciation of qualified energy-efficient commercial building property placed in service after Dec. 31, 2005 and before Jan.1, 2017. This is a one-time de- duction benefit, and while it is best claimed in the year of construction, it can be claimed retroactively using a 3115 Change in Accounting Method. A 179D deduction of up to $1.80 psf is available for the
cost of developing energy- efficient property. This is achieved by qualifying for a deduction of up to $0.60 psf in three key areas: interior lighting, HVAC, and building envelope. The deduction is based on total building square footage but cannot exceed the cost of the energy-efficient improvements. Clearly, the best candidates are the larg- est candidates, and properties like hotels, retail facilities, warehouses, trucking termi- nals, and industrial facilities are all excellent choices. In order to claim a 179D
deduction, a taxpayer must be able to document the reduc- tion in energy consumption generated by the improve- ments. Reduction in con- sumption is compared to a set benchmark determined by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE). Projects com- pleted prior to Dec. 31, 2015 must be able to demonstrate at least a 50% improvement in efficiency in comparison to ASHRAE Standard 90.1- 2004. Projects completed after Jan. 1, 2016 are com- pared to a slightly higher standard, ASHRAE Standard 90.1-2007. Improvements in interior lighting are the easi- est to document—a simple spreadsheet enough to do the trick. Often, retrofits involv- ing LED lighting are efficient enough to qualify for the 179D deduction on their own. Taxpayers who also wish to document improvements in HVAC or building envelope will need to submit a more thorough document, however, including building modeling using software approved by the Department of Energy. Buildings that qualify for the 179D deduction must be inspected and certified by a professional contractor or engineer who is based in the same jurisdiction as the property. The third-party inspector must be completely independent of the property owner, with no personal in- terest in any potential tax savings that may result. Many people don’t realize that the 179D deduction can also be claimed on tax-exempt entities. When schools, mu- nicipalities, and governments implement qualified improve- ments, the deduction may be claimed by the primary designer, architect, or engi- neer. This is a tremendous windfall for a designer. First, buildings of this nature tend to be quite large, resulting in a larger deduction. Second, whereas a property owner would have to reduce his basis by the amount of the credit, the designer has to do no such thing: The asset isn’t on his books at all, so there’s nothing to reduce. The designer gets all the benefit of the deduction, with none of the drawbacks of basis reduction. continued on page 16C
promote en- vironmental- ly conscious p r o g r a m s and policies to win new customers , i m p r o v e public image, and reduce
The federal government has four major initiatives avail- able to the environmentally conscious property owner. The star of the show is a powerful deduction benefit colloquially referred to as “EPAct 179D,” or simply “179D.” The Energy-Efficient Commercial Buildings Tax Deduction (IRC section 179D, enacted by Section 1331 of the Energy Policy Act of 2005), incentivizes energy-efficient
Bruce Johnson
costs. Indeed, energy incen- tive programs may confer tre- mendous tax savings. There are a number of programs at both the federal and state
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