Green Building Law Blog : Green Building Lawyer & Attorney : Shari Shapiro: Calliope Communications, LLC

     On January 1, 2013, the U.S. Congress passed last minute legislation known as the American Taxpayer Relief Act of 2012 to avoid automatic increases in income taxes for millions of Americans, as well as draconian cuts to the budget of the federal government, that many feared would plunge the nation’s economy back into recession. 

        Also included in this eleventh-hour legislative compromise were reinstatements of two business and personal tax credits applicable to energy efficient residences and appliances that had expired on December 31, 2011. The Act extended the tax credits through December 31, 2013, and made them retroactive to December 31, 2011, meaning that the credits are now available for both 2012 and 2013 projects. 

26 U.S.C. §45L Business Tax Credit for New and Renovated Energy Efficient Residences

            The Act reinstated and extended the 26 U.S.C. §45L business tax credit of up to $2000 for contractors or developers that construct or significantly renovate “dwelling units” (apartments, condos or single-family homes) that meet certain energy efficiency standards.

Importantly, the credit is calculated based on the “dwelling unit,” not the building. IRS guidance on the credit defines “dwelling unit” as “a single unit providing complete independent living facilities for one or more persons, including permanent provisions for living, sleeping, eating, cooking, and sanitation, within a building that is not more than three stories above grade in height.” Therefore, contractors and developers of low-rise multi-family properties can claim a credit for each individual unit, and attached townhomes each qualify for an independent credit.

            In addition, the credit had previously applied only to residences acquired before December 31, 2011. The credit is now available for homes built and acquired from December 31, 2011 through December 31, 2013, which includes those built and acquired either in 2012 or 2013.

            In addition to extending the credit, the Act changed the baseline of energy efficiency required to qualify. Previously, §45L required a 50% reduction in energy usage as compared to the 2003 edition of the International Energy Conservation Code (IECC). The Act amended the baseline energy standard to reference the 2006 edition. 

            The 2006 edition of the IECC contains several structural changes to make the code easier to apply, and adjusted some of the technical requirements. However, as determined by the Oak Ridge National Laboratory, the revisions did not change significantly the level of energy efficiency from the 2003 edition.  Therefore, although it is important to be aware of the technical changes, properties that would have qualified for the prior version of the §45L credit will likely meet the energy efficiency requirements of the new standard.  This will disappoint many critics of the §45L tax credit, who have argued that it is not stringent enough from an energy efficiency perspective.

            The Act also freezes the credit to the standard “in effect on January 1, 2006,” the 2006 edition of the IECC. Updating the baseline energy efficiency standard to more current editions of the IECC, which are up to 30% more energy efficient than the 2006 edition, will require further legislative amendment, and is therefore unlikely to occur in the near future.

26 U.S.C. §25C Individual Tax Credit for Energy Efficient Residential Improvements and Appliances

            The Act also reinstated the 26 U.S.C. §25C individual tax credit of 10% (up to $500) of the cost of certain energy efficient existing property improvements, like insulation, windows and door, and energy efficient heating, cooling and water heating appliances. 

            As with the §45L credit, the §25C credit, the Act extended the availability of the credit to improvements placed in service between December 31, 2011 and December 31, 2013, meaning that improvements placed in service in either 2012 and 2013 are now eligible.

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I have posted previously about the Destiny USA debacle, wherein the IRS is auditing a "green" shopping center project that failed to meet its sustainability obligations that qualified it for tax exempt bonds.

Now, according to the Boston Globe, a solar manufacturing plant in Massachusetts that received $4.5 million in property tax abatements will have to pay back a portion of the money. 

Yesterday, the Economic Assistance Coordinating Council, the state board charged with overseeing the tax breaks, unanimously voted to cut short Evergreen’s 20-year property tax break, originally estimated to be worth $15 million, and voided another $7.5 million in state tax credits after the company eliminated the hundreds of jobs it promised to create and retain in Devens.

Out of the $4.5 million in property tax breaks they have received to date, Evergreen will only have to repay the current year's value, about $1.5 million, and in addition to the property tax breaks, the now almost defunct solar manufacturer also received over $21 million in other grants, the fate of which is uncertain. 

A question which occurs to me is why didn't the government pull the plug sooner? At this point, it may be all but impossible to recoup the public investment.  To the extent that the public is taking a position in green companies (or any companies, for that matter), someone should be watching to guard the public's investment.  As early as 2009, the writing was on the wall for Evergreen. According to their 2009 Annual Report:

We cannot assure you that our business will generate sufficient cash flows from operations, or that future borrowings will be available to us in amounts sufficient and on terms reasonable to us to support our liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including our senior convertible notes, sell assets, reduce or delay capital investments, or seek to raise additional capital. We may incur additional indebtedness. If we do so, our increased debt service requirements may adversely affect our ability to meet our payment obligations on our currently outstanding senior convertible notes and otherwise successfully grow and operate our business.

Moreover, Massachusetts rescinded Evergreen's property tax breaks for failure to create jobs, not failure to achieve environmental goals. The state should have known about this situation well before mid-2011. As early as 2009, Evergreen announced it was moving its manufacturing operations to China. According to its 2009 Annual Report:

In addition to our direct expansion into China, we also announced plans to begin shifting panel fabrication from our Devens facility to China using wafers and cells produced at the Devens facility.

[As a side note, Destiny USA had both obligations--to create 1000 construction and 1500 permanent jobs, as well as install its green features.  The IRS may follow suit and rescind the tax exempt status of the Destiny bonds for jobs reasons, thus avoiding the controversy over whether the green aspects were met]

According to the company's website, Vanguard Group, Inc., BlackRock Institutional Trust Company,  and Brigade Capital Management, LLC are the top holders of Evergreen stock. To the extent that Evergreen issued tax exempt paper, it will be interesting to see if these entities enter the fray if the tax exempt status of their investments is rescinded. 

Moreover, if Evergreen declares bankruptcy, it will be fascinating to watch whether the public agencies which granted the incentives will be able to recoup any of their investment, particularly where they are competing with private creditors.  

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According to an AIA study, between 2006 and 2009, municipalities with green building programs increased by 50%.  Many programs sponsored by municipalities, states, utilities and the federal government are designed to promote energy efficiency and green construction. 

Although green building has increased exponentially, only a small segment of companies have done energy efficient upgrades to their facilities. Why isn't every business looking to take advantage of incentive programs and the low cost of labor generated by the depression in the construction industry to green their facilities and implement energy efficiency measures?

My answer is that energy to businesses is like dry cleaning to lawyers.  Every lawyer needs clean suits, so the dry cleaning bill is part of the household budget.  Most people who use dry cleaners do not really know what happens at the dry cleaner  to get their clothes clean, or what the cost of the actual dry cleaning process is.  It is very difficult to get comparative prices for dry cleaning, so it takes research to find out whether you are paying your dry cleaner too much or could get a better deal elsewhere.  Switching from the dry cleaner you've always gone to requires figuring out which new dry cleaner to go to, new hours, etc., all with little guarantee that the cost and service will be as good or better than the dry cleaner they currently use.  And, at the end of the day, the potential savings from switching dry cleaners relative to the entire household burget is marginal.  In the presence of all of the transaction costs and with no particular event to motivate change, most people conclude that it is simply not worth the effort.  

Energy is very similar.  All businesses use energy and pay energy bills.  Few really understand where energy comes from and how it is priced.  Switching to more energy efficient systems, net meters, etc. requires commmitting corporate resources to figuring out which ones to invest in and believing that the energy efficiency measures will have a positive impact on energy usage.  And, at the end of the day, the potential savings from more energy efficient facilities relative to the entire corporate budget is, in most cases, marginal.  In the presence of all of the transaction costs and with no particular event to motivate change, most companies conclude that it is simply not worth the effort.

To each actor, the savings are small, but in the aggregate, incremental saving in building energy usage would have a significant impact on greenhouse gas emissions and fossil fuel use.  The dry cleaning example starkly highlights the disconnect between the individual benefit and the group benefit.  According to the ABA, there are 46,276 active lawyers in Pennsylvania.  Let's say each lawyer dry cleans one suit per week on average. 

Most households are not going to bother with the high transaction costs of switching dry cleaners for a total savings of $52.00 per year, which in the scope of the whole household budget is a rounding error, but $2.5 million in annual savings for lawyers overall is real money. 

Likewise, potential aggregate building energy efficiency savings in 2030 has been estimated at nearly $170 billion. But for an average business, the cost savings are negligable as a percentage of overall corporate spending.  For example, according to a Washington State study, the average annual small business energy costs attributable to buildings was about $5000. Even a 10% reduction in building energy costs would only result in a $500 annual savings. Another study puts the potential savings somewhat higher, at $2800.00, but most small businesses would still conclude that energy efficient upgrades are not worth the institutional investment.       

So how do you change the individual corporate decision making process with respect to energy efficiency? 

The ultimate answer is to internalize the environmental and health costs of energy into energy prices, so the cost to the individual corporation and the percent of their overall budget attributable to energy is higher.  In other words, raise the price of energy.   

In the absence of energy price changes, which is not a politically palatable solution right now, there are still things that can be done to incentivize energy efficient construction:

• Reduce transaction costs
• Increase price transparency
• Provide uniform metrics for quantifying savings
• Construct motivating events 
• Incentivize aggregators

I will address these five interim solutions in later posts, but I would love to hear feedback from the GBLB community on other ideas for motivating energy efficient construction.

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Yesterday, I wrote about Senator Merkley's new set of incentives to encourage green commercial building retrofits, and left you with the question of whether these new incentives will actually change behavior. An interesting article came out today on CNN.com which highlights a barrier to incorporating green building technologies into building projects:

Appraisals for newly built green homes do not fully reflect the cost of green technology, and the lower appraisal values mean buyers often cannot get the full financing they need from banks.

In essence, according to this articel, the cost of incorporating the green features is not covered by a commensurate increase in the purchase price, causing homeowners to avoid incorporating costly green technologies, even if they represent savings in the long run. 

This is the perfect opportunity for designing a targeted grant or financing incentive.  The government agency could look at the difference in the appraisal of homes without green technologies, homes with green technologies, the cost of those technologies and the ultimate payback, and design an incentive to make up the difference.  A great example would be providing financing for green renovations at a lower rate than standard renovations.  Unfortunately, most incentives are not designed around barriers to entry and cost data, but are essentially throwing some non-targeted amount of money at the problem without analyzing would be the best amount and struture to really change behavior.

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Last week, Senator Jeff Merkley of Oregon introduced S.B. 3079, the Building Star Bill, to:

To assist in the creation of new jobs by providing financial incentives for owners of commercial buildings and multifamily residential buildings to retrofit their buildings with energy efficient building equipment and materials and for other purposes.

In essence, Building Star provides rebates for retrofitting commercial and multifamily buildings in existence as of December 31, 2009 with energy efficient components, like insulation, window, doors, HVAC equipment, etc.  the rebates are structured as follows:

• For energy audits and commussioning studies--$.05 per square foot of audited or commissioned space or 50% of the cost of the audit or commissioning study.
• For energy efficient building operations and maintenance training--$2000 per individual trained and certified
• For service on space heating equipment--$100 per unit serviced
• For service on cooling systems--$2 per ton of namepate cpacity of the serviced cooling system and 50% of the total service cost
• For installation of qualified energy monitoring and management systems--the lesser of $.45 per square foot of building space covered by the system or 50% of total installation and commissioning costs
• For upgrades of qualified energy monitoring and management systems--the lesser of $.15 per square foot of building space covered by the system or 50% of total installation and commissioning costs
• For HVAC testing, balancing and duct sealing--$.75 per square foot of duct surface tested, balanced and if necessary, sealed

The Building Star incentives can be combined with other incentives, like the existing deductions for energy efficient buildings. 

The Building Star program also provides for a loan program administered by the states to provide loans for energy efficiency upgrades.

So the question becomes, will this incentive program be significant enough to cause building owners to invest in these energy efficiency measures. 

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I will make an admission.  I took tax in law school, and, it was the academic equivalent of having my left arm sawed off without anaesthesia.  Why? Mostly because things which should have been clear seemed hopelessly obscure.  Now I deal with advising clients on incentives available for sustainable projects, and the tax code and I have had to battle to a stalemate.  At least, I battle, and the tax code just sits there impentarably.

One of the features which is particularly difficicult is the relationship between 26 USC 45, which deals with tax credits for producing renewable energy (the "production tax credit" or PTC), 26 USC 48 which deals with tax credits for investing in renewable energy equipement (the "investment tax credit" or ITC) and the Renewable Energy Grant created by the ARRA.  All three of these relate to businesses which have installed renewable energy technologies, like solar, wind and geothermal.  It should be clear and easy to understand which ones apply to your business and what the incentive will be.  As with all things related to the tax code, however, it is not.

I am going to attempt to clear up some of the obscurity, but, as with all information on this blog, it is for informational purposes only, not legal advice; and you should consult your legal and financial advisor to provide you with proper advice for your business.

The incentives are mutually exclusive--The PTC and the ITC cannot both be taken, and they can be swapped for the REG, but you cannot take the PTC/ITC and the REG.

In plain english, it appears that the PTC is designed for renewable energy sources where the power is designed to be sold to others as a Renewable Energy Credit, and the ITC is designed for renewable energy sources where the power is used on-site.  The Renewable Energy Grant allows companies which have invested in either type of renewable energy capacity to receive cash, as opposed to a tax credit, which is helpful particularly if the company has no tax liability or a tax loss. 

 There are some resources available to help you sort through this morass.  The DSIRE database has quick summaries of available state and federal incentives.  The Utah Clean Energy site has a nice summary of the renewable energy features of the ARRA.   The DOE site has a useful summary of renewable energy incentives for businesses as well.

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I have been watching with interest the voracious appetite for the $4500 "cash for clunkers" incentive program which rewards people for trading in less fuel efficient vehicles for new, more fuel efficient ones.  So many people have taken advantage of the program that it ran out of cash within a week of opening, though the $1 billion appropriation was expected to last until November.  Now the Senate is debating whether to pour an additional $2 billion into the program.

Very interesting, but what does this have to do with green buildings, you may ask.  I see it as a very interesting object lesson for structuring green building incentives.  Green building incentives have been very popular, and are often promoted in lieu of mandatory green building regulations.  What is hard, though, is getting the incentives right.  How much is enough to stimulate green building, while maintaining a responsible public fisc?

Las Vegas famously went very wrong with their original green building incentive program, so much so that it threatened to deplete the finances of the state of Nevada.  Essentially, the problem was the same in Las Vegas as it was for the clunkers--too much money was available from the outset with too few requirements, meaning that the program was oversubscribed.  Instead, a step-wise program would have been more reasonable for both LV and the clunkers. 

So, for Clunkers, if the program had started with a $1000 incentive, and been evaluated after 1-2 months, the incentive could have been enhanced.  Now, reducing the incentive will only garner public outrage instead of benefit. 

The lesson for government entities looking to implement incentive programs? Start out with the lowest reasonable incentive, then evaluate the program after a reasonable period to see if it has been successful.  If not, you can create higher incentives or relax the requirements.  

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