Building Green: Legal and Tax Issues in Commercial and...

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Building Green: Legal and Tax Issues in Commercial and Residential Construction

Navigating the Regulatory and Legal Challenges of Sustainable Real Estatepresents

Today's panel features:

Jeffrey D. Masters, Partner, Cox Castle Nicholson, Los Angeles

CJ Aberin, Senior Manager, KBKG Inc., Pasadena, Calif.

Don Neff, President, La Jolla Pacific, Ltd., Irvine, Calif.

Tuesday, April 21, 2009

The conference begins at:1 pm Eastern12 pm Central

11 am Mountain10 am Pacific

The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference.

A Live 90-Minute Audio Conference with Interactive Q&A

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Building Green: Commercial Tax Incentives & Strategies

Presented by:CJ Aberin, Electrical EngineerSenior Manager

www.costsegregation.com

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www.costsegregation.com© KBKG, INC. Cost Segregation & Tax Credit Specialists

Overview

Overview of the Energy Efficient Commercial Building DeductionBenefits & How to Achieve DeductionEnergy Tax Credits & Other Tax Saving Opportunities

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What is the Energy Efficient Commercial Building Deduction?

IRC Section 179D allows for an immediate depreciation deduction of up to $1.80/sf for “commercial buildings”that achieve a 50% reduction in total energy and power costs.

Building EnvelopeHVACInterior Lighting

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History of Energy Deduction

2005 – Energy Policy Act of 2005 enacted (aka “EPAct”)

Deduction effective 1/1/06 through 12/31/07Notice 2006-52 – IRS issues interim guidanceLater extended through 12/31/08Notice 2008-40 – clarifies previous guidanceEmergency Economic Staibilzation Act of 2008 (aka bailout bill) extends 5 more years through 12/31/2013

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Energy Consumption in 2000

Problem = Buildings are responsible for almost half of all US energy consumption

Buildings consume 76% of all electricityLarge contributor of carbon dioxide

*Source: Architecture 2030

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Opportunity to Solve Problem

300B sf of buildings as of 2005Every year,

1.75B sf of buildings is torn down5B sf is renovated5B sf is newly constructedBy 2035, 75% new or renovated

*Source: Architecture 2030

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Who Benefits?

Whoever makes investment and places in service (PIS)

Building owner or landlordTenantREITs

Designers for government buildingsBuilders and developers who don’t PIS are not eligible

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What is a Commercial Building?

“Commercial Buildings” includesPublic & government buildingsTypical commercial buildings (i.e. office, retail, industrial, etc…)Rental housing that is 4 stories or higher

ASHRAE (American Society of Heating, Refrigerating and Air-Conditioning Engineers) Standard 90.1-2001 defines buildingsMust be located in the United States

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What’s Eligible?

Ground up constructionRenovations and retrofitsApplies to affected square footagesPIS between 2006 through 2013

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About the Deduction

Deduction is treated as an amortization deductionSubject to 1245 recaptureDeduction limited to amount invested in energy efficient property.

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Benefits Overview

Multiple paths to deductionWhole $1.80/sf for 50% or greater reduction in total annual energy cost related to HVAC and interior lighting in comparison to ASHRAE Standard 90.1-2001Partially Qualifying Property

Up to $0.60/sf for Building EnvelopeUp to $0.60/sf for HVACUp to $0.60/sf for Interior Lighting

Fractional deduction through Interim Rule

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Various Ways to Achieve DeductionFully

Qualifying Property

Partially Qualifying Property

Envelope HVAC Lighting (Permanent Rule)

Interim Lighting Rule(PIS before publication of final 179D regs)

2006-52 Energy & Power Cost Reduction Requirement *

50% 16-2/3% 16-2/3% 16-2/3% 25% to 40% LPD Reduction (50% LPD Reduction for Warehouse) + other factors


50% 10% 20% 20% 25% to 40% LPD Reduction (50% LPD Reduction for Warehouse) + other factors

Tax Deduction $1.80/sf $0.60/sf $0.60/sf $0.60/sf $0.30 to $0.60/sf (using applicable % from 2006-52)

* Compared to a Reference Building that meets ASHRAE Standard 90.1-2001

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Qualifying Property










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Qualifying Property










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Benefit Example of 100,000 sfBuilding ($1.80/sf Deduction)

1st Yr Deduction Increase = $177K1st Yr Cash Flow Increase = $73K*NPV Benefit = $50K**

*Assume 41% Blended Tax Rate**Assume 8% Discount Rate

179D Deduction vs Depreciation Deduction

$0$20,000$40,000$60,000$80,000

$100,000$120,000$140,000$160,000$180,000$200,000

2008 2013 2018 2023 2028 2033 2038 2043

179D Deduction

MACRS Deduction

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Difficulty Levels

50% energy & power reduction cost for HVAC and lighting is achievable but very ambitious.

Requires proactive design from architects & engineers familiar with EPActIn 2005, less than 5% of “commercial buildings”could qualify for full deductionLEED (Leadership in Energy and Environmental Design) certification doesn’t guarantee full deduction

Partial deduction for lighting is much easier

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Strategies to Get There

EnvelopeBetter insulation & windowsUse of daylightingReflective coatings

HVACMore efficient HVAC equipment & controlsGeothermal systems and heat pumpsThermal energy storageEvery 3-watt reduction in lighting power results in roughly a 1-watt reduction in HVAC

LightingMore efficient luminaries, ballasts, and lampsBi-level switchingLighting retrofit project can range from $0.60 to $2.00/sf

And more…

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The Engineering Process

Certification by “qualified individual”Method of Computation (Energy Simulation Models)Use of DOE-approved software

© KBKG, INC. Cost Segregation Specialists

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Special Rule for Government Owned Building

Government may allocate 179D deduction for use by the designer(s) in year of PIS date.

Designer, architect, engineer, contractor, environmental consultant, or energy services provider who creates the technical specs that incorporate energy efficiency.

Government can allocate to primary designer or among several designers.Deduction doesn’t trigger income.

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Identifying Good Opportunities

Identify opportunitiesLarge square footages (50,000 sf+ ideal)

Industrial Facilities (i.e. Warehouse, Distribution, Manufacturing, etc.)Chain facilities with multiple locations

LEED certified buildingsHigh Energy Star rating (High 90’s)Energy efficient retrofits (i.e. lighting)

Possible “free-riding” for pre-2006 buildings

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Other Incentives

DSIRE – Database of State Incentives For Renewables & Efficiency

Federal, State, Local, Utility & Private Financial Incentives940 promoting Energy Efficiency630 promoting Renewable Energywww.dsireusa.org

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Other Green Building Tax Incentives

30% Tax Credit for solar energy property PIS by December 31, 2016

Equipment which uses solar energy to generate electricity, to heat or cool a structure, provide hot water in a structure, or to provide solar process heat.Equipment which uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlightSolar energy property also has a 5-years MACRS tax life.

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Other Tax Credits (Expires 12/31/2016)

30% tax credit also available for:Certain fuel cell power plantsSmall wind energy property

10% tax credit available for:Equipment used to produce, distribute, or use energy from a geothermal depositCertain microturbine power plantsCertain CHP or cogeneration systemsGeothermal heat pumps

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Another Green Building Tax Strategy

If possible, perform cost segregation studyProvides even greater accelerated depreciation deductionsDoesn’t negatively impact energy efficiency deduction and can be used togetherAllows for a correct and increased allocation of costs for any energy property that qualifies for tax credit (i.e. solar energy property + ~35%)

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Contact Info

CJ Aberin, Electrical EngineerSenior Manager1-877-525-4462 [email protected]

To learn more about KBKG, visit:www.costsegregation.comwww.kbkgtaxcredits.com

BUILDING GREEN:

Legal and Tax Issues in Commercial

and Residential Construction

Don Neff, President / CEO

La Jolla Pacific, Ltd.

Corporate Office 9571 Irvine Center Drive

Irvine, CA 92618 (800) 645-8955 toll free (949) 336-8900 phone

www.lajollapacificltd.com [email protected]

Additional Offices Located Throughout the US

©2009 La Jolla Pacific, Ltd.

I. Current Trends and Opportunities

A. “Green” has become mainstream, consider the following:

1) 75% of Americans consider themselves “environmentalists”

Source: The Wall Street Journal Survey

2) 87% of Americans say they are “concerned” about the environment Source: Environmental Research Associates

3) 86% of Americans would choose one home over another based on energy

efficiency Source: The Shelton Group

B. Why now? What are the driving forces? 1) Economics 2) Awareness of global warming issues

3) International green building influences

4) Desire for healthier living and working environments

5) Energy codes

6) Environmental regulation and stewardship

C. What does “green” really mean?

Per USGBC:

The Office of the Federal Environmental Executive defines green building as “the practice of 1) increasing the efficiency with which buildings and their sites use energy, water, and materials, and 2) reducing building impacts on human health and the environment, through better siting, design, construction, operation, maintenance, and removal — the complete building life cycle.”

D. Implementing a green building program 1) Prescriptive vs. performance-based programs 2) Select the right program based on your projects goals and objectives

3) Manage buyer expectations

4) Leverage marketing and media opportunities

©2009 La Jolla Pacific, Ltd.

5) Third party verification and commissioning

E. Overcoming green building challenges

1) Start early!!! 2) New technology and materials 3) Trade partner awareness and training 4) More complex assemblies need detailed drawings and specs 5) Consumer awareness and education

# # #

About La Jolla Pacific

With an extensive background in direct construction experience, La Jolla Pacific Ltd. is an industry leader in construction risk management, third-party peer review, green/sustainable building, quality assurance, and forensic investigation services. For more than a decade, the firm has provided its exclusive Shark Repellent® package of proactive defensive strategies to single-family, multi-family and commercial builders across the US. For further information about La Jolla Pacific Ltd.’s array of services, please visit www.lajollapacificltd.com.

Building Green: Legal and Tax Issues in Commercial and...

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