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Digging for Dollars

Government incentives are not always easy to get, but they can significantly help a project's bottom line.

By Allyson Wendt

It feels like common knowledge by now: building green doesn’t have to cost more. And it’s true, especially if a design team focuses on the environmental performance of a whole building rather than just the materials within it. Also helpful is the wide array of incentives for green building. From tax deductions and credits to grants and expedited permitting, incentives make green building even more affordable and profitable.

Digging for Dollars
Illustration by Gerard Dubois
Digging for Dollars
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Federal Tax Deductions and Credits

Tax deductions and tax credits are both beneficial to building owners and tenants, but operate differently. Generally, a tax credit offers a bigger financial advantage, since it reduces dollar-for-dollar the amount of taxes owed by a company or individual. A tax deduction reduces taxable income, which translates into reduced taxes based on the applicable tax schedule. Also, tax credits are often transferable from an entity that does not pay taxes to one that does, while deductions are not.

The main incentive for commercial buildings, the Energy-Efficient Commercial Building Tax Deduction, will expire in 2013, and is worth up to $1.80 per square foot. It covers three areas of a building—the lighting system, mechanical systems, and building envelope. But the requirements are challenging; receiving the full deduction in all three areas requires a whole-building simulation showing at least 50 percent energy savings over the standards set in ASHRAE 90.1-2001. Buildings can take partial deductions, however, for meeting requirements in various systems. According to Paul Naumoff, national director of business incentives and tax credits at financial services firm Ernst & Young, few building owners pursue the entire deduction. “It’s a challenging process to document the $1.80 per square foot,” he said, and noted that most teams pursue the lighting portion of the deduction.

A report recently released byArchitecture 2030 suggests extending the tax deduction by increasing its value from $1.80 per square foot to $3–$9 per square foot, and making eligibility dependent on meeting 2030 Challenge targets. Several bills currently being considered in Congress would do just that, and one—the so-called Building Star bill—would change deductions to rebates, according to Naumoff.

In addition to the tax deduction, three major tax credits are available for commercial buildings: those for combined heat and power generation, onsite renewable generation, and fuel cells and microturbines. These credits can be claimed by the owners of the systems and are worth from 10 to 30 percent of the purchase price; a separate tax credit is available for the manufacturers of the systems.

The American Recovery and Reinvestment Act (ARRA)

As part of its efforts to jumpstart the economy in 2009, Congress included several green building provisions in the ARRA, covering renewable energy production, weatherization, transit construction, and job training, among other things. Some of these provisions involve direct funding through government appropriations or grants. Many of these—like the Neighborhood Stabilization Grants administered by the U.S. Department of Housing and Urban Development (HUD)—are distributed through federal agencies; others are through state governments.

State Financial Incentives

Like the federal government, state and local governments offer tax breaks for energy efficiency—41 tax-related incentives in total nationwide, according to the Database of State Incentives for Renewables and Efficiency (DSIRE). More than 1,200 additional rebates, grants, loans, and bonds are available nationwide for everything from dishwashers to entire buildings.

Green building incentives—those awarded for green building elements beyond energy efficiency—are a bit harder to track. USGBC keeps a tally of legislation and incentives that require or reward LEED-certified buildings: 213 localities and 34 state governments have some form of LEED-related policy or legislation. DSIRE lists 18 green building incentives, including financial and non-financial incentives (such as expedited permitting).

In North Carolina, the state hands authority for distributing financial incentives over to local governments. All counties and cities are allowed by law to offer reductions or partial rebates of building permit fees for green buildings meeting LEED, Green Globes, or other green building standards, according to DSIRE. The amount of the reduction ranges from 10 percent up, depending on the locality. Naumoff notes that North Carolina is only one of many states. “Some have been more aggressive than others,” he said, but teams should always look at both state and local programs for funding.

In states where there is little in the way of financial incentives for energy efficiency or green building, project teams may have to think outside the box. Such is the case in South Carolina, where John Knott, founder and CEO of the Noisette Company, is redeveloping a blighted part of Charleston into a walkable, mixed-use community. Although the state and local utilities offer some incentives and loans for energy efficiency and renewable energy, few apply to the work Knott is doing. “Our work isn’t driven by tax credits,” he says, noting that the financial savings associated with energy efficiency are in many cases making it possible to retrofit older buildings.

Noisette has used a tax increment financing district (TIFD) to fund infrastructure improvements. TIFDs allow developers to access funds from future taxes to improve blighted areas—municipalities assume that improvements will result in increased taxes in the future, and essentially loan developers that tax money. According to Knott, this type of funding is very helpful in historic urban areas, where “the cost of infrastructure is so massive” that it makes it hard to pursue environmentally responsible development.

Non-financial Incentives

Facing budget crises and a down economy, local and county governments are increasingly turning to non-financial incentives to boost green building in their jurisdictions. Expedited permitting, in which green buildings are given priority over their conventional counterparts, is quite popular. Time is money, especially for developers and owners paying property taxes on undeveloped land. Moving the permitting and construction processes ahead can save owners money and, in the case of speculative buildings, get them to the profitable stage of development much sooner.

Other non-financial incentives are also available. The City of Seattle, for example, offers density bonuses to green buildings downtown that achieve a LEED Silver rating or higher. Since 2006, these buildings have been allowed to have larger floor area ratios—the ratio of the total floor area to the site area—and greater heights than are allowed by the zoning laws governing the area.

Getting the Green

There’s a lot of financial assistance for green building—and it’s growing all the time. “The level of funding has increased substantially, but there are still challenges to access,” says Naumoff. Those challenges include understanding the requirements and documenting your project’s compliance. Naumoff cautions that even with such an advisor, obtaining all of the incentives available isn’t easy. “It’s not one-stop shopping,” he said. Teams must consider federal, state, local, and utility-backed incentives, and ensure they apply within often-limited application windows.

Knott cautions about reliance on incentives. “If you run your business based on tax credits, you might make poor decisions,” he says. “But if you can make the project work without tax credits, they can only help your financial picture.”

 

Allyson Wendt is a freelance writer and former managing editor of Environmental Building News.

 

This article appeared in the print issue of GreenSource Magazine.

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