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

Steven Johnson, in his book Where Good Ideas Come From (read an excerpt here) explained that great ideas, the ones that transform the marketplace, are based on the “adjacent possible:”

The phrase captures both the limits and the creative potential of change and innovation. In the case of prebiotic chemistry, the adjacent possible defines all those molecular reactions that were directly achievable in the primordial soup. Sunflowers and mosquitoes and brains exist outside that circle of possibility. The adjacent possible is a kind of shadow future, hovering on the edges of the present state of things, a map of all the ways in which the present can reinvent itself.

Treehugger reports today that a cutting-edge green community, breaking ground both in its design and its site (it was gentrifying an historically lower income, African-American community) is facing foreclosure. The explanation, in part, is because the development skipped ahead of the adjacent possible:

This was a cutting edge design, by the greenest of cutting-edge architects. Most developers build the same thing over and over again so that they get to know their costs really accurately; when you are the first, you don't. You build in contingencies, and may even benefit from the fact that in a downturn, construction costs drop significantly, but green roofs, solar thermal hot water and other green features cost money. Purchasers are not often willing to pay their full value because they are thinking about investment and resale, and banks don't make it easy to get mortgages on the green goodies, so your margins on a green, innovative or different building are often smaller.

Move one square to the left, and you are a genius. Skip over a square, and you are a failure, ahead of your time. This seems to be one of the classic problems with the green movement. We try to skip over steps, assuming that the rest of society will make the leap with us. Not so. 

With respect to cap-and-trade, there has been significant argument that its advocacy skipped a vital step—linking cap-and-trade to where the American public is now. In the Daily Kos, Frank Luntz, the pollster and wordsmith, had this to say about bringing climate change into the adjacent possible:

Luntz's report, "The Language of a Clean Energy Economy," finds that the majority of the public across the political spectrum is convinced that global warming is happening and caused at least in part by humans. But, Luntz says, talking about the problem won't win support for the legislation that would solve it. Among both Democrats and Republicans polled by his firm, addressing climate change was the least important reason to support a cap-and-trade policy.

So what should environmentalists say instead? Luntz suggests less talk of dying polar bears and more emphasis on how legislation will create jobs, make the planet healthier and decrease US dependence on foreign oil.

In innovation, there are no skipped steps. Moving from the present to the adjacent possible is the only route to transformation, one step at a time. Many have argued that there is no time for incremental change, but moving along the continuum of the adjacent possible does not necessarily mean a lengthy timeframe. Rather, it means linking the next vision to the one we are already connected to. For example, the internet went from text based pages to picture to video to facebook in just over a decade.

Now let me bring this back to law. Laws, regulations and programs promoting green and energy efficient construction must build on the adjacent possible. When they do not, as in the IRS Bond Requirements for the Destiny USA Project (which mandated completely unattainable green features and job creation obligations), they are destined for failure. When they do, like the 1603 grant for solar power (great article on 1603 grant results here), they can spur a whole industry forward and radically reduce the price of solar panels. 

As of February 25, 2011, a total of 7,180 alternative energy projects were funded through the §1603 program, totally $6.4 Billion in Treasury funding...Whereas solar P.V. installations in 2010 grew by 114% over 2009, netting $757 Million in 1603 grants, industry analysts forecast that solar installation will grow by an even larger factor through 2011. Solar has been receiving more attention in recent months from consumers, industry analysts and property owners alike. This attention has raised awareness of the benefits to installing solar, resulting in a spike in ground mounted and rooftop P.V. installation. In 2011 and beyond, the authors are confident improved technology and increased economic incentives will meet with this awareness to result in a marked increase in the amount of cash grants dedicated to solar technology.

The most audacious ideas are those that build on what already works, and makes it better, faster and more impactful. The same is true for regulation. Move forward to the adjacent possible, one step at a time.

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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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Although most of you are probably in St. Martin enjoying fruity cocktails on the beach, we here at GBLB are hard at work.  So take a break from your mai-tai to read about a very interesting appellate decision out of California on weighing the relative priorities of green development.  The case, brought to our attention by a loyal reader, is Sven Toorvald v. City of West Hollywood, and the decision is available here.

A quick summary of the case is as follows:

Mr. Toorvald installed a small solar panel to power his halogen security lights, presumably like the one available here from Amazon.com.  Importantly, the Court notes:

The opening brief describes plaintiff's system, "an industry standard collector (one foot by one-foot comparable in size to a solar panel on a freeway call box), separate inverter and storage battery, [which] collects, stores and distributes solar energy for electrical generation."

Next door, a developer sought to build a four-story, nine-unit courtyard condo building with subterranean parking.  The development was a "green" development in that it complied with the West Hollywood green building regulations, was a "high achieving" green building project that qualified for an additional unit density bonus and had solar panels.  In addition, the project was an urban in-fill project.  

The controversy emerged because the green development was going to "cause an obstruction to his solar absorption for eight months of the year."  Mr. Toorvald alleged that this violated Municipal Code Section 19.20.170(A) which  mandates:

A structure, fence, or wall shall not be constructed or modified in a residential zoning district, and vegetation may not be placed or allowed to grow, so as to obstruct more than 10 percent of the absorption area of a solar energy system on a neighboring parcel at any time.
 

The trial court determined that Mr. Toorvald's solar lighting installation was not a "solar energy system," and therefore its obstruction did not violate Section 19.20.170(A). 

To justify this conclusion, the trial court and the appellate court go through a convoluted set of contortions to conclude that a solar panel that produces electricity for a lighting system is not "Any solar collector or other solar energy device whose primary purpose is to provide for the collection, storage and distribution of solar energy for...electricity generation..."

If that sounds like a silly argument, it is. What the courts were really trying to resolve is whether a high-value green development project was "worth" more than a tiny solar light.  The problem was not in the decision--I believe that the court and the city council rightly decided that an appropriate, in-fill green development should be approved.  The problem was in the justification, and the clumsy regulatory drafting which it uncovered.  "Solar energy system" was not defined in the Municipal Code.  The definitions that the Court refers to in state legislation were equally broad. 

Now that green buildings and renewable energy installations are becoming more commonplace,  city councils and planning commissions will be forced to weigh the environmental impact of competing development.  Is an in-fill development more environmentally worthwhile than a tiny solar installation? Just like health and safety regulations, these regulatory bodies will need to have discretion and guidelines to weigh the relative factors on environmental impact.

Because if it looks like a solar energy system and it quacks like a solar energy system, it probably is a solar energy system.

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Recently there have been several cases of neighbors raising objections, valid or invalid, to green projects. 

There was the Northland Pines case where community members challenged the LEED certification of a local high school.  Recipients of smart meters sued the utilities claiming the smart meters wrongly measured their electricity use.  Neighbors held up the Cape Wind offshore wind energy project for years. Neighbors even object to the placement of solar panels, most famously on Al Gore's mansion in Tennessee.

Now, a 24 hour solar and biomass large scale renewable energy plant in California has been scrapped due to the objections from neighbors.  According to the New York Times:

Although local residents and regulators had raised issues about the proposed solar farm’s water consumption and other impacts, it was the project’s plan to operate around the clock by burning biomass that proved problematic, according to energy commission records.  

The neighbors were apparently concerned about the added air pollution from trucks hauling biomass.

The question for policy makers, is, of course, how to balance individual rights with the collective need to develop renewable energy sources and allow for green building technologies. 

This is a tough nut to crack, particularly in the United States where individual property rights are a sacred cow that no politician wants to slaughter.   Evidence of this can easily be found in the aftermath of Kelo v. New London, wherein the Supreme Court decided that private property could be taken for economic development.  In the wake of the decision and popular outrage that individual property could be taken and given to another private party, states and municipalities throughout the country passed laws significantly curtailing eminent domain powers.

Policy makers need to take into consideration some or all of the following: 

1. Weigh the value of the project have towards meeting environmental goals--This may seem like an obvious consideration, but the value of a large scale solar project to the greater community trying to come off foreign power sources should be given greater latitude than a small project that will have limited impact, but causes significant distress in the community. But, large projects usually cause more handwringing than small ones. So...
2. Consider ways to minimize the impact--Are there ways to do the project differently so that individual concerns are minimized? Could the California renewable plant have used alternative fuel trucks which caused less pollution? But...
3. Give the community a voice--There may be valid concerns with the project.  If neighbors have a voice in the process, they might raise legitimate issues, and feel empowered as part of the decision making process. But...
4. But limit the pretextual objections--My husband likes to call needling neighbors BANANAs--Build Absolutely Nothing and Nowhere Anytime.  Do the neighbors object to any projects, no matter how beneficial to the community? If so, there has to be policy in place to air valid concerns and resolve them, without endlessly delaying good projects.

In order to stay the same, things need to change.  We need to reduce our energy usage and convert to renewable sources to retain our standard of living.  Policymakers need to balance the valid claims of individuals with our collective pursuit of new energy sources.

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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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There was a nice article on Triple Pundit this AM on the positive impacts on business that the California green regulations have had. 

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