Development Magazine Spring 2010

Finance

Strategically Green: Navigating Sustainability Financing

In today’s real estate environment, sustainable building means different things to different people. It runs the gamut from using low toxicity building materials and low (or no) emission FF&E, all the way to buildings which are "net zero" and have the property’s energy need supplied with renewable and energy efficiency technologies.

However, in the current real estate market, there is growing interest and capital investment for improvements that make buildings more energy efficient with the goal of permanently reducing a building’s operating costs. In general, such improvements make sense. However, financing energy efficiency projects can be challenging for owners or managers with short-term return horizons or current capital constraints. Fortunately, federal, state and local tax incentives, in the form of tax credits, subsidies, rebates, loans or grants can help even commercial real estate owners make an energy efficiency project economically feasible. In addition, public utility and other local incentives may also be available.

Nonetheless, the savvy businessperson needs to remain sharp, as there are some financial traps when looking at the tax and other financial benefits available in the energy efficiency and renewable energy arena. For example, some federal tax benefits for energy efficient commercial buildings may reduce other federal tax benefits, such as tax credits, and alter the timing of tax depreciation deductions. In other cases, while some federal energy-related grants may be tax-free at the federal level, they may be fully taxable at the state level, thereby reducing the true benefit. Unless you consult with an accountant experienced with these precise matters and do your tax planning beforehand, you or your partners may find unexpected income tax results.

If you have tax-exempt owners or tenants, certain other rules can limit or prevent you from realizing the benefits described above. Specifically, tax rules expressly deny tax credits to governments or tax-exempt entities when they own or lease equipment otherwise eligible for federal energy tax credits or depreciation deductions. However, some tax deductions may be available to governments even though those same deductions are denied to tax-exempt entities. This is true in the case of government buildings, where there are actually accelerated tax deductions that do not exist for other tax-exempt energy efficient building owners. This deduction is the federal "Energy Efficient Commercial Buildings Deduction" and can be as much as $1.80 per square foot of the energy efficient commercial property placed in service after 2005 and before 2014. In the case of Real Estate Investment Trusts (REITs), the opportunities abound, though the equation is fairly complex, and even more careful financial planning is required.

Before taking advantage of the many financial incentives available for going green, the prudent taxpayer, developer and investor should ask some critical tax and financial questions with respect to the federal and state income tax consequences of using these incentives to maximize value and return. Some of the decisions may involve not taking "free" grant money or rebates and instead, entering into more sophisticated financial structures such as monetizing federal or state tax benefits, foregoing immediate cash reimbursement for delayed tax reductions, or educating executives, building managers and other professionals on how to employ tax minimization strategies in an effort to increase return on investment and investment yield.