The U.S. Congress managed to extend federal tax incentives for environmentally conscious construction until 2013, as part of the Energy Improvement and Extension Act of 2008, a component of the financial sector rescue bill signed into law on Oct. 3. Given the momentum and strength of the green building movement internationally and nationally, however, tax incentives appear to be simply icing on the cake for green building owners.
Green building was incorporated into the federal tax code with the 2005 act, which created the commercial building tax deduction, allowing tax benefits for owners of energy-efficient commercial buildings who use environmentally sound building practices to achieve certain levels of energy savings.
The standards are exacting. Buildings must be certified as having projected energy savings of 30 percent to 50 percent beyond already strict engineering standards for energy efficiency. The energy savings can be achieved through attention to one of the following building aspects:
1. The building envelope, or outer shell (windows, insulation, etc.);
2. The heating, air conditioning, and water heating systems; and
3. The interior lighting system.
Right now, the tax incentives apply only to buildings that will be in service by Dec. 31, 2013, when the credits sunset. In addition to the commercial deduction, there are residential energy incentives that also will expire.
Federal tax incentives, however, have not been the primary driver in the move toward green construction. States weary of waiting for federal energy conservation guidance are enacting their own laws - some of which offer more incentives than the existing federal inducements.
According to the U.S. Green Building Council, 18 states and 73 cities and counties now require that public buildings or publicly funded buildings meet some level of environmentally conscious certification.1 In some cities, all commercial buildings must include energy conservation measures. Typically, the requirements are based on the Green Building Council's Leadership in Energy and Environmental Design (LEED®) standards.
Legislation varies broadly across states, however. Five states - Maryland, New Mexico, New York, Nevada, and Oregon - offer incentives ranging from property tax exemptions to personal or corporate income tax credits. All require buildings to meet certain environmental standards to be eligible for the tax credits. Other states may mandate green construction, but they do not reward it.
The Green Evolution
The jurisdictional disparities surrounding green construction may simply be another part of its evolution. Just a decade ago, builders and designers faced with skeptical owners were rather hesitant to promote green building on a wide scale. Today, they are promoting environmentally sound building not to stay ahead of the curve but just to run with the pack. It seems inevitable that green building will soon be considered commonplace. The change has little to do with tax incentives, although owners are always interested in minimizing their taxes. Instead, owners are going green because it's advantageous for them.
The biggest barrier to green construction in the past was cost. Environmentally friendly materials, innovative design, and eco-conscious construction practices all drove prices up - particularly when suppliers didn't routinely stock appropriate building materials, and designers were unfamiliar with green building requirements.
But conservation has jumped to center stage recently, through heightened awareness of global warming concerns in the media and the public consciousness. The change is evident in building trade magazines, which feature articles on green building virtually every day, as well as its promotion in mainstream media and entertainment outlets.
Suppliers now routinely carry green building supplies, and architectural and design firms seek out LEED-accredited professionals to help develop their projects. And the public is demanding environmental responsibility from architects and builders. As a result, the differential cost of green construction is decreasing.
Steadily Lower Costs
In its "Cost of Green Revisited" study released in July 2007, the international consulting firm for architects and contractors, Davis Langdon, found no significant difference in average costs for green buildings and non-green buildings.2 Additionally, the study found that projects are achieving LEED certification within their budgets, despite dramatic increases in construction costs overall.
Still, the report notes that green continues to be viewed as an added feature rather than an accepted - and expected - part of construction. That too may change as more and more owners discover the real economic benefit of being environmentally conscious: operational savings.
LEED-certified buildings, or their equivalents, can represent significant long-term savings for owners through reduced costs for water, power, and heating and cooling alone. In fact, energy cost savings is the number one reason most owners opt for green construction.
While LEED certification requirements can be stringent and complicated, there are several ways for owners and contractors to achieve at least a minimal level of LEED certification at little or no additional cost. Simply choosing a sustainable site - one that isn't in a floodplain or wetlands, for example - can qualify a project for up to two LEED credits. LEED credits are the basis for determining which of four LEED certification levels is appropriate. There are 69 possible points, and basic certification requires 26 to 32 points. The highest level, platinum certification, requires 52 to 69 points.
Other relatively easy and inexpensive ways to earn LEED credits include:
• Building near public transportation;
• Encouraging people to bike to work by providing secure bicycle storage and shower facilities close to workplaces;
• Limiting disturbance of undeveloped areas of the site;
• Reducing or eliminating water used for irrigation;
• Using existing building stock rather than demolishing it;
• Minimizing waste;
• Using local and regional building materials (sourced within 500 miles of the project) with recycled content;
• Providing air quality controls - temporary ventilation and moisture control - prior to occupancy;
• Using low-emitting materials such as paint, sealants, adhesives, and floor coverings; and
• Inviting a LEED-accredited professional to participate in creating innovative designs.
In addition to the financial benefits these
and other environmentally conscious strategies accrue, contractors and
owners are also learning that green building has public relations
value. Any company that is in the public eye, whether nationally or
locally, can enhance its standing with an environmentally sound
building. Similarly, architects and builders can use green buildings to
set themselves apart from the competition.
practices need not be limited to new construction. Expanding or
remodeling a building can involve energy-saving practices, too - most
notably with lighting. The requirements for an overall federal tax
deduction include energy modeling to demonstrate that a building meets
energy-efficiency requirements. For the lighting component alone,
however, no energy model is necessary.
Regardless of whether a business is
contemplating new construction or an expansion or remodeling project,
it's important to begin thinking green during the design phase. While
it isn't too late to start green construction after site work begins,
it's more efficient and cost-effective to incorporate environmentally
conscious techniques into the plan during design and preconstruction.
designers and contractors may help identify energy-saving opportunities
that would otherwise be overlooked. They also are more likely to be
aware of new products and materials to boost the overall "greening" of
Investing With Care
There is one note of caution. Green or not, a building is an investment that deserves the same cost/benefit analysis that any investment would receive. It's important that owners talk with their financial consultants and tax advisers before undertaking any building project.
It is important for owners to weigh tax incentives, energy savings, up-front costs, and a host of other factors in deciding where and how to expand or relocate. Businesses that want to open their operations in more than one state may especially need help in sorting through state and local tax incentives, as well as LEED credits, to determine the best locations and building strategies.
Let's say energy-efficiency measures would add $2 million to the cost of a $10 million building. Owners might be reluctant to pursue LEED certification. If they learned that tax incentives and energy cost savings, however, would offset all but $500,000 of the additional cost, they could decide that complying with LEED standards was advantageous.
Given the results of the Davis Langdon study, it's possible that an owner wouldn't face that dilemma. Energy efficiency may not add to the $10 million price tag at all. In that case, tax and energy savings would appear in effect to offset the cost of a LEED-certified building by $1.5 million compared to a non-green building. Without a complete cost/benefit analysis, done in cooperation with experienced advisers, however, it's impossible to know.
Green construction isn't new, but it's rapidly gaining prominence with politicians, architectural and design firms, contractors, and the public. But acceptance has been slower in the United States than in some areas of Europe and Asia, where sustainable design trends are more prevalent. Slow-starting or not, though, sustainable buildings and designs are here to stay. Even without federal tax incentives, they're demonstrating their value.
1 "LEED® Initiatives in Governments and Schools," U.S. Green Building Council, August 2007.
2 "Cost of Green Revisited: Reexamining the Feasibility and Cost Impact of Sustainable Design in the Light of Increased Market Adoption," Davis Langdon, July 2007, p. 3.
Ridge Miller is an executive with Crowe Horwath LLP in the Indianapolis office. He can be reached at 317-706-2686.
Ed Meyette is an executive with Crowe Horwath LLP in the Grand Rapids, Mich., office. He can be reached at 616-752-4234.