“Section 179D – “Fiscal Incentive for Building Owners in the New Sustainable Economy”

California Center for Sustainable Energy

May 2011

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“Section 179D – “Fiscal Incentive for Building Owners in the New Sustainable Economy” ► Eric Scheidlinger, LEED AP

Manager, Reno Efficient Sustainable Practices (ESP)► Terry Hudgins, Ernst & Young LLP

Senior Manager, Climate Change and Sustainability Services

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Disclaimer

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► This presentation is © 2011 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

► Any US tax advice contained herein was not intended or written to be used, and cannot be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

► The views expressed by speakers at this event are not necessarily those of Ernst & Young LLP.

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Green Building (LEED®)

► LEED is a green building certification. ► The LEED rating system is a voluntary, consensus-

based national standard for high-performance, sustainable buildings.

► Members of the U.S. Green Building Council (USGBC), representing all segments of the building industry, developed LEED and continue to contribute to its evolution

► The USGBC is not associated with the federal government and is a non-profit organization

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Four Levels of LEED®

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Green Building (LEED®)

► Direct incentives for LEED certification► Based upon the level (Certified, Silver, Gold, Platinum)► Based upon the program (EB, NC, CS)

► Indirect incentives for aspects of LEED► Energy efficiency ► Renewable energy► Water conservation

► Match incentives to green building attributes. ► Reduce cost of going green!

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Direct Incentives for LEED Certification

► Various forms: legislation, executive orders, resolutions, ordinances, policies, and incentives ► 45 states► 194 localities ► 130 cities ► 36 counties ► 28 towns► 34 state governments► 13 federal agencies or departments► 17 public school jurisdictions► 39 institutions of higher education

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Direct Incentives for LEED certification

► Grants/Tax Incentives - States, counties, local jurisdictions ► Property tax credits/exemptions, grants equal to cost of LEED registration

with USGBC, state tax credits► Virginia, Pennsylvania, Oregon, New York, New Mexico, Maryland, Illinois,

DC, Nevada, Ohio

► Example:► City of Cincinnati offers property tax abatement for LEED certified

buildings► 100% property tax abatement for 15 years (new construction) or 12 years

(existing building renovations)► Owner must enter into an agreement with the local Board of Education

district to pay the board an amount equal to 25% of the avoided property taxes

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ACEEE State Energy Efficiency Scorecard

WA6

OR3

CA1

NV19

ID26

MT33

WY48

UT12

AZ18

CO19

NM22

TX32

ND51

SD39

NE47

KS46

OK43 AR

41

LA42

MS50

AL49

GA37

FL30

SC40

NC24TN 35

VA34KY

36MO43

PA16OH

27IN31

IL10.40

IA12

MN8

WI11 MI

27

NY4

MN10

AK37

HI12

VT5

NH22

MA 2

RI 7

CT 8

NJ 12

DE 27

MD 16

DC 19

Ranks 1 - 10

Ranks 11 - 20

Ranks 21 - 30

Ranks 31 - 40

Ranks 41 - 51

WV43

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Correlation between electric rates and incentive programs

WA7.24

OR8.13

CA14.37

NV11.82

ID6.35

MT8.72

WY7.73

UT8.17

AZ9.66

CO9.18

NM9.03

TX12.41

ND7.28

SD8.01

NE7.52

KS8.25

OK8.59 AR

8.73

LA9.38

MS9.40

AL9.24

GA9.07

FL11.20

SC9.18

NC9.35TN 7.79

VA8.72

WV6.63

KY7.19

MO7.57

PA10.96OH

9.51IN8.12

IL10.40

IA9.34

MN9.02

WI10.26 MI

10.72

NY17.05

MN14.81

AK15.12

HI24.13

VT14.13

NH14.13

MA 16.33RI 14.02

CT 18.67

NJ 14.44

DE 13.17

MD 11.77

DC 11.17

Residential average price (Cents per KWh)

6.35 to 8.01

8.12 to 9.03

9.07 to 9.66

10.26 to 13.17

14.02 to 24.13

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Direct Incentives for LEED certification

► Rebates – States, Utilities ► Cash incentives per sq ft LEED certified► Washington, Nevada, New York, Oregon

► Example:► Avista Utilities in Washington State LEED Certification Incentive

Program► $1.25 per conditioned square foot (for LEED certified NC or EB

buildings)► Must achieve a minimum of 4 points for optimized energy

performance and comply with all LEED whole building modeling requirements

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Four have pending regulations – four have efficiency goals►WA: all cost-effective conservation (~10%) by 2025►OR: save 256 aMW 2010-2014►CA: save 1,500 MW, 7,000 GWh; reduce peak 1,537 MW: 2010-12►NV: 0.6% annual saving (~5%) to 2015; EE to 25% of RPS►UT: PUC examining 1% energy savings by 2020►AZ: at least 22% cumulative energy savings by 2010; peak credits►NM: 10% electric savings by 2020►OK: EE up to 25% of renewable goal►TX: 25% annual savings in 2012; 30% in 2013 and beyond►HI: 30% electricity reduction by 2030►MN: 1.5% annual savings to 2015►IA: 1.5% annual, 5.4% cumulative savings by 2010►WI: task force recommended 2% annual savings►IL: 2% energy reduction, 0.1% peak by 2015►MI: 1% annual energy savings►IN: 2% electricity savings by 2019

► OH: 22% energy savings by ‘25; 8% peak by 2018

► ME: reduce use 30%, peak 100 MW by 2010

► VT: 2% annual, 11% cumulative energy reductions by 2011

► MA: 2.4% annual electric savings by 2012

► NY: reduce electric use 15% by 2015► CT: 1.5% annual utility savings, 10%

peak► RI: cut consumption

10% by 2022► NJ: Energy Master

Plan proceeding

► DE: cut consumption 15%, peak 10% by 2015

► PA: cut consumption 3%, peak 4.5% by 2013

► MD: reduce electricity use, peak 15% by 2015

► VA: reduce electric use 10% by 2022► WV: EE & DR earn credits in A&RES► NC: EE to meet up to 25% of RPS to

2011► FL: 3.5% cumulative energy savings

by 2019

24 states have Energy Efficiency Resources Standard (EERS)

EE as part of an RPS law or rule Voluntary standards or in renewable goal

EERS by regulation or law (stand-alone) EERS regulations pending

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Indirect Incentives for LEED Certification

► Energy Efficiency - Utilities or State programs► Based upon technology installed

► Lighting ($ per lamp or fixture)► HVAC system efficiency ($ per ton)► Motor efficiency ($ per hp)► Appliance purchases (Energy Star)► Roofs with reflective coating or added insulation ($ per sq ft)► Variable Frequency drive ($ per kW)

► Example:► APS in Arizona

► Rebates cover up to 90% of the project cost, ► Program pays the rebate directly to the contractor, ► The customer’s return on investment is less than one year for most

projects.

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Federal tax deduction

► Section 179D – energy-efficient buildings deduction► $0.30 to $1.80 a square foot of the building up to the total costs of

the energy-efficient property placed in service ► Accelerated depreciation of property that would otherwise be

treated as 39-year property ► Property installed meets energy efficiency targets for:

► Interior lighting systems► Heating, cooling, ventilation and hot water systems ► Building envelope

► Effective 1 January 2006 through 31 December 2013 ► The deduction for a government-owned building can be allocated

to the designer of the building

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Federal tax deduction

► Government-owned building allocations► Federal, State, or local government or a political subdivision

thereof

► Able to be allocated a designer ► designer is a person that creates the technical specifications for

installation of energy efficient commercial building property► A designer may include, for example, an architect, engineer,

contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building

► Miscellaneous deduction► Required form, format, assignment letter

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Section 179D deduction

► The deduction will be allowed to the designer for the taxable year that includes the date on which the property is placed in service

► An allocation of the § 179D deduction to the designer of a government-owned building must be in writing

► The owner has discretion to allocate the deduction among several designers

► Can take this deduction for years 2006 - 2013

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17

Federal Tax Benefits

► Tax deduction equal to the cost of energy efficient building property

► Maximum amount of $1.80/sq ft► Part of lighting system, HVAC or building envelope as

defined by ASHRAE 90.1-2001, which is “certified” to reduce energy costs by 50% or more in comparison to reference building as defined by ASHRAE 90.1-2001

► Partial deduction of $0.60 per sq ft by meeting 16 2/3% reductions for lighting, HVAC or envelope systems seperately

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Brief overview and background of utility markets

Meets or exceeds ASHRAE Standard 90.1- 2007 or equivalent

Meets or exceeds ASHRAE Standard 90.1 - 1999-2001 or equivalent

State has adopted a new code to be effective at a later date

Meets or exceeds ASHRAE Standard 90.1 - 2004 or equivalent

No statewide code or precedes ASHRAE Standard 90.1 - 1999

NH

VT

MA

RI

CT

NJ

DE

MD

DC

AS

GU

MP

PR

VI

NOTE: These maps reflect only mandatory statewide codes currently in effect.

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19

Benchmark

► ASHRAE 90.1 – 2001 Energy efficiency standard for commercial buildings

► The standard has “prescriptive” requirements► This standard is the basis for most building codes► The 2001 version is older so buildings built to newer

(more stringent) standards have a better chance of qualifying

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20

Standards and Codes

► ASHRAE (American Society of Heating Refrigeration and Air-conditioning Engineers) sets the standards which become the basis for most building codes

► Building codes define the “worst building that can legally be built”

► Many buildings use technology to achieve energy efficiency results above code

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21

Federal Tax Benefits

► Energy-efficient commercial building property is defined as depreciable property ► Light fixtures and controls, not light bulbs► New or replacement HVAC systems and controls► New buildings or replacements windows, roofs and doors

► Example:► a building with a total square footage of 100,000 square feet could

have a maximum deduction of approximately $180,000. ► The deduction is allowed in the year in which the property is

placed in service and reduces the basis of the property at issue, consistent with Section 179D(e).

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22

Additional Lighting Requirements

Such as ….► Bilevel switching requirement - defined as manual or

automatic control (or a combination thereof) that provides two levels of lighting power in a space (not including off) OR

► Automatic Lighting controls such as occupancy sensors

Screw-in lamps do not qualify, must be fixture changes – real depreciable property

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Qualifying Pathways

Property Energy Efficiency Benefit

Lighting (Interim Method) 25 – 40% LPD reduction Scaled $0.30 - $0.60 per sq foot

Lighting (Permanent Method ) 16 2/3% energy cost reduction modeled No Scaling – $0.60 per sq ft if target met

HVAC/HW 16 2/3% energy cost reduction modeled No Scaling – $0.60 per sq ft if target met

Building Envelope 16 2/3% energy cost reduction modeled No Scaling – $0.60 per sq ft if target met

Lighting + HVAC/HW 33 1/3% cost reduction modeled No Scaling – $1.20 per sq ft if target met

Lighting + Envelope 30% cost reduction modeled No Scaling – $1.20 per sq ft if target met

HVAC/HW + Envelope 30% cost reduction modeled No Scaling – $1.20 per sq ft if target met

Lighting + HVAC/HW +Envelope 50% cost reduction modeled No Scaling – $1.80 per sq ft if target met

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24

Certification Requirements

► Energy modeling► Model the building with the minimum requirements of

ASHRAE Std 90.1-2001 then compare to actual installation to calcualte % reduction in energy costs

► 3rd party site inspection► after the property has been placed in service ► confirming that the building has met, or will meet, the

energy-saving targets contained in the design plans and specifications

► Letter of certification► By “an engineer or contractor that is properly licensed

in the jurisdiction in which the building is located”

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Qualifying Pathways

1. Interim Lighting Methodology: 25 – 40% LPD reductionScaled benefit $0.30 - $0.60 per sq foot

2. Permanent Lighting: 16 2/3% cost reduction modeled3. HVAC/HW: 16 2/3% cost reduction modeled4. Building Envelope: 16 2/3% cost reduction modeled

Options 2-4: No Scaling – benefit is $0.60 per sq ft if target met

5. Lighting + HVAC/HW: 33 1/3% cost reduction modeled6. Lighting + Envelope: 30% cost reduction modeled7. HVAC/HW + Envelope: 30% cost reduction modeled

Options 5-7: No Scaling – benefit is $1.20 per sq ft if target met

8. All systems: 50% cost reduction modeled, benefit $1.80

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Best building types

► Parking garages, warehouses, distribution centers or manufacturing ► WHY – single light fixture type – large spaces► Significant improvement in high-bay lighting since 2001

► Hospitality► WHY - Multiples of the same layout► Transition to CFL’s (ballasted cans)► Renovations on a regular schedule

► Retail► WHY – Multiples of a similar design► Lighting retrofits en mass

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California example—City of San DiegoSustainable Building Policy

► New City and major renovations—► LEED Silver certification +15% better than Title 24► Qualifies for Savings by Design Program: SDG&E, SCE and

PG&E

► All newly constructed City facilities:► Minimum 15% self-generation► Power Purchase Agreement (PPA) takes advantage of federal,

state and any local incentives (Sec 45/48)► 179D Government Assignment for prime/designer

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California example—private development

► New and major renovations—► LEED Silver certification +10% better than Title 24► Qualifies for Savings by Design Program: SDG&E, SCE and

PG&E

► Stacking Federal, State and Local incentives:► Federal Section 45/48, 1603 Grant Opportunity for self generation► Utility Self-generation incentives from fuel-cells (Wal-Mart; Kaiser

Permanente, Safeway) ► 179D deduction for energy efficiency

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Government projects

► Government contracts► Energy efficient property must be installed “…on or in property

owned by a Federal, State, or local government or a political subdivision thereof”

► Able to be allocated a designer ► “designer is a person that creates the technical specifications for

installation of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D). A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building”

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Government projects

► The deduction will be allowed to the designer for the taxable year in which the property is placed in service

► An allocation of the § 179D deduction to the designer of a government-owned building must be in writing

► The owner has discretion to allocate the deduction among several designers

► Can take this deduction for years 2006 – 2013► Applies to “…property owned by a Federal, State, or local

government or a political subdivision thereof…”► Public secondary schools; public or state universities buildings;

airports; stadiums; arenas; city parking garages; corrections institutions (jails)

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Questions

Thank you

for your participation and feedback!