Are You Missing Out on the Gold in Green?
Wednesday, February 10, 2010 at 11:04AM 
Are Architects and Other Designers Missing Out On the Gold in Green?
By Gary L. Cole AIA, Esq.
[Disclaimer: Nothing in the following article should be construed as legal or accounting advice, nor endorsements of any parties referenced within – the contents are entirely the opinion of the author. Parties interested in learning more should always consult their tax, legal and other professionals for specific advice and information.]
Architects, engineers, contractors and other designers of energy-efficient public projects may be eligible for substantial tax benefits under the Energy Policy Act of 2005 – though it appears than many are unaware of this opportunity to effectively increase their project compensation.
Under Section 179D of the Internal Revenue Code (the “IRC”) – created as a part of the Energy Policy Act of 2005 – owners of energy-efficient commercial buildings, which generally includes federal, state and local properties, may take a tax deduction of up to $1.80/SF square foot of qualifying construction. The $1.80/SF maximum deduction is allocated at $.60/SF for each of the three following improvements: (1) the interior lighting system; (2) the heating, cooling, ventilating, and hot waters systems; and, (3) the building envelope.
While that’s great for owners of income-producing commercial properties – how does it help architects, engineers, contractors and other designers increase their compensation on such projects?
In an apparent effort to incentivize the design and construction of green public buildings, Section 179D of the IRC includes a clever provision that allows owners of “Government-Owned Buildings” to “. . . allocate the § 179D deduction to the person primarily responsible for designing the property (the designer).”
In other words, since the federal, state or local agency that owns the energy-efficient building doesn’t pay income taxes – and therefore doesn’t need and can’t take tax deductions – they can allocate their tax deducations to the “designer” (defined as “. . . the person that creates the technical specifications for installation of energy efficient commercial building property . . .”) of the building.
Let’s do the math. Suppose the “designer” designs a 100,000 SF building that qualifies for the maximum deduction of $1.80/SF. Since 100,000 multiplied by $1.80 equals $180,000, the owner can allocate a tax deduction of $180,000 to the designer.
Nice as this is, it’s important to understand that a $180,000 tax deduction doesn’t equal $180,000 cash as it might in the case of a dollar-for-dollar tax credit. A tax deduction lowers a taxpayer’s taxable income by the amount of the deduction. The cash value of a deduction is then, roughly calculated by determining how much in taxes a taxpayer does not pay by virtue of having taken a tax deduction that lowers their gross income. However, in some cases, depending on when the subject building was placed in service and a designer’s particular income and tax history, they may be able to file an amended tax return for an immediate refund.
A certification of the project, made by qualified individuals, is also required to establish that the property meets the IRC’s energy efficiency requirements. Companies such as Engineered Tax Services provide assistance in obtaining such certifications, as well as providing other accounting/engineering services (contact Cyndi Lucas at clucas@engineeredtaxservices.com for more information).
Also, while the IRC specifies the form of the written allocation of the deduction to be made by the building owner, it doesn’t appear to require an owner to make it since the language says that an owner may, not shall make the allocation. Architects and other designers may consider negotiating provisions in their service agreements that require owners to properly allocate any tax deductions to them – something always best negotiated before the services are commenced than after.
Naturally, nothing is simple when dealing with tax issues and architects and other designers should consult their tax and legal professionals to understand how to qualify for this benefit – the requirements are complex and precise – and beyond the scope of this article. And, what the Government gives, the Government shall also take away as this tax benefit is currently set to expire in 2013.
In the meantime, however, architects and other parties who qualify as “designers” may be able to enhance their compensation on energy-efficient public projects by availing themselves of these tax benefits.
__________
Gary Cole is an Illinois and Florida-licensed attorney and an Illinois-licensed architect with over twenty years experience in design, construction and real estate development. He combines his architect's experience and insight in the design and construction industry with his legal expertise to offer a broad range of developer and architect-related services including leasing, property acquisition and disposition; design/construction transactional and litigation matters; public finance, tax-increment financing, tax credit and abatement programs and other development economic incentives; construction, mezzanine and permanent financing; land use matters; legal entity formation and joint venture agreements; state and federal (ADA) accessibility law; historic rehabilitation tax incentives and regulatory compliance; and Green construction and alternative energy facilities development. Mr. Coleis General Counsel and on the Board of Directors of The Chicago-Midwest Institute of Classical Architecture & Classical America.
Reader Comments (10)
Off the top of your head, do you happen to know what the actual definition is of "energy-efficient commercial buildings" per Section 170D of the Internal Revenue Code?
Posted by Leonard Greer
The mere fact that Green needs to be subsidized by states (and this is happening in the US...) is a testimony that this is not economically viable on its own (ie not sustainable by the definition of the UN). The mere idea that this subsidy is used to enhance ones return rather than improve the sustainability of the asset (ie invest more in clean or sustainable assets), is a contradiction to the whole idea.
The mere fact that this is supported by academics is a testimony of how this is becoming big business where the end game is not anymore building sustainable assets, and a better place, but an individual rush for gold
Regards
Posted by Olivier Elamine
Thank-you,an interesting read.
Posted by Susan Brown
John,
I don't think this post is different from the majority we see on LinkedIn groups. The tax credits mentioned, if not widely known, will eventually begin to impact values as buyers/developers become aware. I personally have no interest in this subject, but if I did, this would be relevant. I think this is a privately owned group started by an AI member but not owned by the AI so it's up to the group owner to decide what's appropriate. I think 97% of what I see on LinkedIn is self-promotional in nature.
Posted by Stephen Bullock, MAI, MRICS
"Green" is rapidbly becoming a sign of pc sillinness. I received an email last week from one of my software providers touting their 'greenness.' No one is against common sense conservatiion, but the whole green movement is rapidly losing its credibility largely because it has become a quasi-religion and caused so many otherwise intelligent people to lose their objectivity.
Posted by Roger Pellegrini, SRA, IFA
Hi Grant,
I fear most do not really grasp the gold in green. Not just the tax incentives but the opportunities in branding, energy audit professions, legislative initiatives and job creation. According to WorkForce One, 144 new professions are on the drawing board for the near future so job creation is upon us. But education and courses need to be developed and offered for prices all can afford-
The blog you reference from IGP is invaluable and one that should be read daily by every real estate professional, broker, residential and commercial developer and legal entity.
Kerry Mitchell
Posted by Kerry Mitchell
To many people drinking the cool aid. Maybe some of you could be better serves by spreading you wings to ligit groups that appear to be tackling the future valuation issues of the day (or as this case maybe tomorrow). Understanding sustainability in the built environment is one thing, valuing it is another. One article in a persons arsenal is nice. It however does not answer any of the pressing questions. Without promoting anyone or any organization, I would direct people (even you Mr. Austin - which I actually know you have seen this issue) to Property World, 2009 Fall Edition RICS Americas. Not endorsing anything, but in following the links it may just have moved the debate from an appraisers POV one more square down the chess table.
As an professional group we should be helping each other down a road that I think has to be the next major frontier in the valuation process. As a general rule, the body of commercial appraisers (Americas) really has learned to move in unison over the last decade. This is just another turn in the road that we are all going to have to navigate. It is here that I have my issues. I just don't like the self-promotion with out moving the debate.
I believe we see enough of that in Congress. Maybe we should leave that to the not so leading leaders in DC and get on with our issues.
Posted by John O'Dwyer, MAI, MRICS
I just read the article recommended by Mr. Austin, and I cannot even begin to fathom why anyone would have a problem with him referring his readers to an article like this. I am truly stunned - drivel? Have you READ a Complete Narrative Appraisal Report in full and complete compliance with USPAP? - and THIS is drivel?!
I am sick of the concept that somehow professional means above promotion and marketing - it is not. If you are a professional all that means is you are called to a higher standard of service to others, and part of that service may well be blogging and otherwise sharing information that can be of benefit to others. Our professional status can and will only be judged based on our relative value to those we serve.
In my opinion, Mr. Austin is appropriately promoting his professional services through his LinkedIn activities and his blogging activities. And not only is that professional but it also is just the way it is - and the appraisal profession better "cowboy up" and start living in the real world, or we're going to end up as irrelevant as buggy whips on the Autobahn (and yes, I know that I am mixing metaphors).
Posted by Skip Preble, MAI
Thank you for this post. Section 179D does offer some great incentives.
I would like to point out that this opportunity is available for ANY public building or installation - County courthouse, school, prison, military installation, community center, etc., whether at the state, school district, city, county or federal level.
Because it based on square footage, the larger the building the greater the opportunity. A public parking garage could do really well on the lighting subsidy ($0.60/sf).
I've heard some rules of thumb that readers might want to consider when pursuing these deductions. A project needs to be north of 50,000 sf and/or $1 million investment before the tax savings will exceed the costs of pursuing the deduction.
Unlike John, I think Grant's posts are interesting. But when I see his name on a post, I defer reading it until later. It's not that I think green building is unnecessarily "PC" or irrelevant. While there's a lot of "PC" in all the green hype, but there's a lot of solid reasoning behind it, too. Unfortunately, my local market just does not recognize "green" as a trait worthy of a price premium.
Example: I was engaged to appraise a little 1150 sqft new-construction house within the city limits of a small rural town in an adjoining county. On inspection, I found the heat pump covered in ice; a component had failed, and it could not de-ice itself. The little house was of SIP construction, slab-above-grade, steel-clad outside, drywall inside, foam in the middle. Interior walls were drywall on metal studs; framing members were structural steel. That little house was as warm as toast with an inoperative heat pump. You could heat it with a candle and cool it with an ice cube. The fly in the appraisal ointment is that it was unique--and I mean that in the full sense of the word! It was the only one in the county.
I spoke with four different active real estate agents in the local area. All of them liked the little house, but every one of them said substantially the same thing: Buyers in that starter-home segment wouldn't pay any more for such a house. Personally, I think there's something lacking in their sales training. Why wouldn't you pay a small premium for superior insulation, lower operating costs, and the near-certainty that a termite would never go near your house?
So, okay, I'm a well-read appraiser, so I know what to do: We'll base this value on the cost approach. It's a unique property, right? Not another like it anywhere nearby. If you want one, you have to pay what it costs. Only problem was that the cost approach--including the manufacturer's entrepreneurial profit--was below the market for stick-built houses. He'd built it for a turn-key price, land and all, of $65K. Most newer houses were selling around $68-75K. There was no market evidence that this house would go for a premium over others, despite the fact that it was an order of magnitude better-quality construction!
All right, then, couldn't I capitalize the energy savings, and use that as a quality of construction adjustment? Only if I can provide at least a hint of evidence that the typical residential buyer in the local market would do that. And he'd do that only if the selling agent told him about it, using it as a selling point. Two of the agents that I interviewed did that. In a market whose average market time is 3-6 months, this little house languished with a below-market asking price for over a year. It was new-fangled stuff, and the buyers were leery of it.
The manufacturer built two more of these around the county with similar results, then gave up trying to seed the market.
This incident shows that until green construction is well-understood by the market, it will never command the premium price of which is is worthy. I'm not one of those "save-the-earth" tree-hugging extremists. If there's no solid, tangible benefit to me as a buyer, then I won't buy it. And buyers who are making what may be the biggest investment of their lives are leery of putting their money into an "unproven" design. ("Unproven" in this case means anything they're not used to seeing.)
I think Grant's pursuit of green education is a good start. Unless appraisers can be made to understand the benefit of green, we cannot hope to educate the market on its benefits. And until the market understands green, they won't pay any more for it--at least not in this area.
Posted by Jim Plante