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CDFA Spotlight:
Green Building Finance
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Green building is the practice of creating environmentally-sound and resource-efficient commercial and residential buildings using an integrated design approach. The practice of green building can generate benefits for property owners, commercial businesses, government, residents, employees, and society at large in the form of resource conservation, increased productivity, and reduced health care costs. Policymakers and developers across the country are adopting green building. Thomas Menino, Mayor of Boston, supports green building and says “While the subject is indeed complex, the central facts are simple. High performance green building is just a fancy description for good building. It is good for your wallet. It is good for the environment. And it is good for people.” (From Everyone Benefits from Green Building…Everyone, http://www.cityofboston.gov/bra/gbtf/GBTFhome.asp).
The U.S. Green Building Council (http://www.usgbc.org) defines the benefits of building green in three major categories:
- Environmental Benefits: Green buildings conserve natural resources, protect ecosystems, improve air and water quality, and decrease waste.
- Economic Benefits: Green buildings reduce capital and operating costs, increase property values, and boost worker productivity.
- Health and Community Benefits: Green buildings improve the health, well-being, and quality of life for occupants as well as the surrounding community. The community also benefits from a reduction in pressures on the local infrastructure and service delivery systems.
Green building design features include renewable energy sources, water conservation, green (plant-covered) roofs, waste minimization, proper insulation, and non-toxic materials. The Department of Energy’s Smart Communities Network website (http://www.sustainable.doe.gov/) provides a comprehensive overview of the elements of green building and includes links to publications, local success stories, and sites with information on green building construction and materials.
Financing Green Building
Projects which qualify for tax-exempt status or utilize tax credits and deductions including New Market Tax Credits (NMTC), Brownfields, and Federal Historic Rehabilitation may also take advantage of green building incentives. For example, the Portland Development Commission (http://www.pdc.us/) is using $100 million in NMTCs to implement a “triple bottom line investing strategy,” investments that yield financial returns, community benefits, and environmental benefits. Green building is the centerpiece of the environmental component. Portland is restoring its old Armory with NMTCs and planning to receive platinum LEED certification (Leadership in Energy and Environmental Design). LEED is a certified design standard administered by the U.S. Green Building Council. The LEED certification is widely recognized as the gold standard in assessing the energy efficiency and sustainable design qualities of buildings. Federal green building capital projects follow the LEED rating system. In addition, construction must meet LEED standards in order to qualify for most state green building tax credits.
A high profile example of green building finance is the Conde Nast Building in New York City which was financed with tax-exempt bonds and completed in 1999. This project is widely recognized as the first successfully completed commercial high-rise green building project (http://www.durst.org/i_green.asp).
The following list summarizes credits and financing opportunities available for green building developments.
Federal Green Bonds
The American Jobs Creation Act of 2004 authorized up to $2 billion of tax-exempt private activity “green bonds” to be issued by state or local governments for qualified green building and sustainable design projects. The relevant IRC section requires eligible projects to be approved by the Secretary of the Treasury in consultation with the EPA Administrator. The provision is effective for bonds issued after December 31, 2004 and before October 1, 2009. In order to receive green bond financing, project applications must demonstrate that the benefits of green bonds will go towards one or more of the following:
(a) Purchase, construction, or integration of energy efficient, renewable energy and sustainable design features;
(b) Compliance with LEED certification requirements; and/or
(c) Purchase, remediation, construction, and preparation of a brownfield property.
In addition, projects must include at least 1 million square feet of building or 20 acres of land. Projects must include the cleanup of Brownfield sites. State and local governments that nominate projects must contribute at least $5 million to a project—tax abatements and in-kind contributions will count toward the $5 million. In addition, applicants must demonstrate that each project is projected to provide employment for at least 1,000 construction employees (100 in rural states) and the equivalent of at least 1,500 full-time permanent employees (150 in rural states). Applications must describe in detail how the project contributes to the reduction of electric consumption compared to conventional construction as well as other energy measures. At least 75% of the square footage of commercial buildings in the project must be registered for the LEED green building rating system.
To date, the Internal Revenue Service has not issued guidance (regulations) for the green bond demonstration project. It is expected, however, to issue regulations in the near future. State and local governments must nominate projects for designation by the Secretary of Treasury as qualified green building and sustainable design projects within 180 days of the issuance.
Wind Energy Credits
Congress approved a bill in 2004 that will extend the wind energy Production Tax Credit (PTC) through the end of 2005. This credit offers 1.5 cents per kilowatt-hour (in 1992 dollars, adjusted for inflation) for power produced by wind turbines. According to the American Wind Energy Association (http://www.awea.org), the PTC extension will allow wind energy investments of close to $3 billion to move ahead over the next several years. Some states also provide tax-exemptions and incentives for the purchase of wind energy equipment (for resources, see http://www.windustry.com).
Renewable Electricity Credits
The Renewable Electricity Production Credit (REPC) is a per kilowatt-hour tax credit for electricity generated by qualified energy resources. Section 710 of the "American Jobs Creation Act of 2004" (HR 4520) signed into law on October 22, 2004 expands REPC to include additional eligible resources. The credit formerly applied only to energy from wind, closed-loop biomass, and poultry-waste energy projects and now also applies to solar energy, open-loop biomass, geothermal energy, small irrigation power, and municipal solid waste. The REPC provides a tax credit of 1.5 cents/kWh for ten years. Adjusted for inflation, the credit amount is 1.9 cents/kWh for 2005. The rate and duration of the credit does vary depending on the energy source. For example, electricity from open-loop biomass, small irrigation hydroelectric power and municipal solid waste resources receive half the rate. In addition, solar and geothermal projects claiming the 10% federal business energy tax credit are not eligible for the production tax credit. Forms 8835 "Renewable Electricity and Refined Coal Production Credit" and 3800 "General Business Credit" must be filled out with the IRS in order to receive the credit (http://www.irs.gov).
Business Energy Tax Credit
The federal government provides a 10% tax credit for the purchase of or investment in solar or geothermal energy property. This includes equipment that generates electricity, heats, or cools using solar energy as well as any equipment used to produce or distribute energy from a geothermal source. The maximum credit is $25,000 per year plus 25% of the tax balance to be paid after the credit is applied. This credit cannot be claimed if the business has already claimed the REPC. Furthermore, if the project has been subsidized by tax-exempt bonds or energy financing, the credit is reduced.
Renewable Energy Systems and Energy Efficiency Improvements Program
The 2002 Farm Bill required the U.S. Department of Agriculture (USDA) to create a program to make direct loans, loan guarantees, and grants to fund renewable energy projects. The Renewable Energy Systems and Energy Efficiency Improvements Program (http://www.rurdev.usda.gov/rbs/farmbill/tools.html) provides grants from $2,500 to $500,000 to agricultural producers and rural small businesses to finance renewable-energy systems and energy-efficiency improvements. Renewable-energy grants range may not exceed 25% of an eligible project's cost. In 2003 and 2004, over $15 million was awarded to 73 wind projects and $16.5 million was awarded to 67 anaerobic digester projects. Additional renewable energy funding supported solar, biomass, hybrid, and geothermal projects.
Green Communities Initiative
The Green Communities Initiative, a program of the Enterprise Foundation, has committed $555 million to build 8,500 environmentally-sound and affordable homes over a five-year period. The first Green Communities Initiative is Denny Park Apartments, a 50-unit affordable housing community in Seattle, Washington. Developers across the country can apply for grants, loans, and competitively priced Low-Income Housing Tax Credit (LIHTC) equity through the Enterprise Social Investment Corporation (ESIC). Eligible applicants include 501(c) (3) nonprofits, public housing authorities, tribally designated housing entities; for-profit entities; and for-profit entities participating through joint ventures with qualified organizations. Additional information, grant applications, and technical assistance can be accessed online (http://www.enterprisefoundation.org/resources/green/index.asp).
State Tax Credits
Several states offer tax credits and incentives for green building projects. For example, New York State recently authorized $25 million in green building tax credits to be issued from 2005-2009 (http://www.dec.state.ny.us/website/ppu/grnbldg/). The Database of State Incentives for Renewable Energy (DSIRE) is an excellent resource for information on state and local renewable energy policies and economic incentives (http://www.dsireusa.org/). DSIRE was established in 1998 by the Interstate Renewable Energy Council (IREC) and is funded by the U.S. Department of Energy and managed by the North Carolina Solar Center. States around the U.S. have funds available to promote renewable energy through clean energy technologies. Twelve states (California, Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, and Wisconsin) are members of the Clean Energy States Alliance (http://www.cleanenergystates.org).
Economic Benefits of Green Building
The Rocky Mountain Institute website (http://www.rmi.org) includes an excerpt from the 1998 book Green Development: Integrating Ecology and Real Estate. The following specific economic benefits of green development are discussed:
Reduction in Capital Costs
There is a general perception that green building delays project schedules and raises costs. However, if done properly, green building can actually reduce capital costs. For example, landscaping costs can be significantly reduced by utilizing existing vegetation. The Island Preservation Partnership on South Carolina’s Dewees Island reduced capital costs for construction 60 percent by avoiding landscaping and impervious road surfaces.
Reduction in Operating Costs
Efficient energy, water, and waste systems reduce maintenance and operating costs. Green buildings generally use 50% - 75% less energy than conventional construction. For example, the Denver Dry Goods building saves approximately $75,000 in operating expenses per year through efficient energy design which increases the building’s capitalized value by $750,000. Therefore, owners do not necessarily have to suffer from reduced cash flow when energy efficient systems cost more to install up front. Project value should increase accordingly because loan levels are based on valuation. Energy savings can ultimately make the additional investment much more profitable over traditional designs.
Marketing Advantages
Advertising costs can be significantly reduced by utilizing press coverage of new green building projects. The media is generally interested in sustainable construction and will promote projects. The Dewees Island project received an estimated $5 million in free press. Travel and leisure publications look favorably on environmental construction and will often offer in-kind advertising opportunities which can help to increase occupancy rates.
Faster Approvals
Generating early community support for projects can significantly speed up approvals. In fact, streamlining approvals has become a driving strategy behind the green building movement. The Denver Dry Goods restoration received widespread public support due to its mixed-use, green building characteristics. Preserving on-site wetlands or natural areas and offering spaces as public parks, preserves, or community spaces can reduce maintenance costs, generate positive press, and enhance the project in the eyes of the community.
Reduced Risk and Increased Productivity
The EPA has ranked indoor air pollution as one of five top environmental threats to human health. Estimates of the annual cost of lost productivity related to indoor air pollution number in the billions of dollars. Juries have awarded substantial awards to litigants in indoor air pollution cases involving both private and public facilities. Green building reduces the risk of liability and can reduce insurance premiums for contractors and building occupants. RMI and other organizations have conducted studies on productivity gains from improved lighting, heating, and cooling. According to RMI, energy efficient buildings increase productivity anywhere from six to sixteen percent by decreasing absentee rates and improving the quality of work. Because most businesses spend much more on wages than on energy efficiency, incremental increases in worker productivity can produce savings in excess of total energy costs.
Staying Ahead of Regulations
It is generally more expensive to retroactively comply with new environmental regulations than to design structures which largely anticipate them. Energy sustainability could increase in relevance as a national security issue in the latter half of the decade, and indoor sickness prevention could eventually be recognized as a legitimate employer/property owner responsibility. It may be prudent for developers to consider green building as a viable tool to insulate investments from future regulatory and legal costs.
Steps to Successful Green Building
The following checklist is based on the state of California’s steps for successful sustainable design and green building (http://www.ciwmb.ca.gov/GreenBuilding/):
- Start with a clear vision, goals, and priorities based on sustainable principles and an integrated design approach.
- Include green building measures in the project budget. Include contingency funds for additional research and analysis. Identify sources of tax exemptions, incentives, sponsorship, and grant funds for green building.
- Select design professionals and contractors with a commitment to the project as well as some green building knowledge or experience.
- Allow time to test new construction and systems to ensure that buildings meet the desired level of performance.
Green Building Links
National Resources
American Wind Energy Association: http://www.awea.org
Building Green, Inc.: http://www.buildinggreen.com
Clean Energy States Alliance: http://www.cleanenergystates.org
Database of State Incentives for Renewable Energy (DSIRE): http://www.dsireusa.org
Green Building Program: http://www.greenbuilder.com
Green Communities Initiative: http://www.enterprisefoundation.org/resources/green/index.asp
Rocky Mountain Institute: http://www.rmi.org
Sustainable Building Sourcebook created by the City of Austin: http://www.greenbuilder.com/sourcebook/
U.S. Department of Energy Smart Communities Network: http://www.sustainable.doe.gov/financing/green.shtml
U.S. Green Building Council (USGBC): http://www.usgbc.org
Windustry: http://www.windustry.com
State and Local Resources
California Green Building Design and Construction: http://www.ciwmb.ca.gov/GreenBuilding/
City of Austin Green Building Program: http://www.ci.austin.tx.us/greenbuilder/
City of Boston Green Building Task Force: http://www.cityofboston.gov/bra/gbtf/GBTFhome.asp
New York State Green Building Initiative: http://www.dec.state.ny.us/website/ppu/grnbldg/
Seattle Sustainable Building: http://www.cityofseattle.net/sustainablebuilding/
This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.
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