Introduction

The substantial increase in the number of LEED certified buildings in the United States coupled with the large tax incentives typically available with LEED certified buildings means that property tax advisers can better serve their clients if they have a better understanding of the LEED process. Leadership in Energy and Environmental Design (LEED) is the fast growing marquee standard for sustainable buildings. LEED is the certification system established by U.S. Green Building Council (USGBC). Over 40,000 projects are currently participating in the commercial and institutional LEED process. Over 7.9 billion square feet is involved mostly in the United States. The four certification achievements start at the LEED certified level and proceed to the progressively higher LEED silver, gold, and platinum levels. It is crucial for tax advisers to get evolved at the onset of the LEED evaluation process. We have seen some companies choose to not proceed with LEED certification and later regret it when they learn how LEED integrates with tax incentives.

On April 27th 2009, the new LEED 2009 system replaced the previous LEED rating point system for certifying LEED buildings.

The major differences with the new LEED system are:

1. Adjustments to the LEED point rating system

2. Weighted credits with a focus on energy

3. Regional bonus credits

A comparison of the available LEED points in the original and new LEED system for each of the LEED sustainable categories is presented below:

The next table presents the new point range for each of the four LEED certification achievements:

As the tables illustrate, the highest percentage of LEED points is allocated to Energy & Atmosphere, which . This means that to achieve LEED certification, a building should utilize energy efficiency and incorporate renewable energy into its design. A building that fully employs both energy efficiency and alternative energy measures, not only will achieve a higher level of LEED certification, but may also qualify for large EPAct tax benefits and alternative energy tax credits.

The LEED Team

A LEED project requires the participation of at least one LEED Accredited Professional (AP). That professional can be any LEED AP and typically is the project's architect, the project's engineer, or a LEED design professional engaged just to handle the LEED process. Increasingly, many projects have multiple LEED AP's participating in the project. It is important to make sure that the main coordinating LEED AP understands the economic importance of the LEED tax integration process. Any professional can achieve LEED AP status as long as they have demonstrated experience working on a LEED project and pass the USGBC LEED certification test.

LEED Constantly Evolves

It is important to realize that the LEED system is constantly evolving and there is a major focus on both energy reduction and energy generation. The trajectory is for LEED platinum buildings to reach a net zero energy use standard by 2018 and to be regenerative by 2030. Net zero buildings achieve zero energy use by combining energy efficiency improvements with alternative energy generation. Regenerative buildings generate additional energy above their own individual building's energy needs.

The EPAct Tax Opportunities

EPAct

Increasing energy-efficiency and alternative energy generation are the main building tax initiatives supported by large tax savings.

Pursuant to Energy Policy Act(EPAct) Section 179D, properties making qualifying energy -reducing investments in their new or existing locations can obtain immediate tax deductions of up to $1.80 per square foot.

If the building project doesn't qualify for the maximum EPAct $1.80 per square foot immediate tax deduction, there are tax deductions of up to $0.60 per square foot for each of the three major building subsystems: lighting, HVAC (heating, ventilating, and air conditioning), and the building envelope. The building envelope is every item on the building's exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.

It is normally fairly easy for a building to qualify for the lighting EPAct tax deduction. The following table presents the range of tax deductions that are more probable with LEED 2009 buildings:

LEED Building

Potential EPAct Tax Deduction:

Sample Square Footage EPAct Deduction:

LEED measures the energy efficiency of a building by comparing it to the performance of an ASHRAE 90.1-2007 standard baseline building. Buildings that demonstrate a greater improvement over the standard are allocated more LEED points. The table below illustrates the relationship between energy efficiency percent improvement of new and existing buildings and LEED points.4

Alternative Energy Tax Credits and Grants

There are multiple 30% or 10% tax credits available for a variety of alternative energy measures with varying credit termination dates. For example, the 30% solar tax credit expires January 1st 2017 and the 10% Combined Power tax credit also expires January 1st, 2014. The 30% closed loop and open loop biomass credit expires January 1st, 2014. All alternative energy measures that are eligible for the 30% and 10% tax credits are also eligible for equivalent cash grants for the three years staring January 1st 2009 and ending December 31st 2011.

The Energy and Atmosphere LEED category awards points for utilizing renewable energy. According to the LEED definition, renewable energy technologies include solar, wind, geothermal, low-impact hydro, biomass and bio-gas. The table below illustrates the relationship between amount of renewable energy on a property and the LEED points awarded.4

% Renewable EnergyLEED Points

Note that alternative energy tax credits are available for a wider range of tax defined alternative energy measures, including but not limited to fuel cells and micro-turbines.

Benefits of LEED Buildings

The USGBC lists the benefits of LEED buildings as follows:

•Lowering operating costs and increasing asset value.

•Reducing waste sent to landfills.

•Conserving energy and water.

•Developing healthier and safer buildings for occupants.

•Creating compact and walkable communities with good access to neighborhood amenities and transit

•Protecting natural resources and farmland by encouraging growth to be located in areas with existing infrastructure.

•Reducing harmful greenhouse gas emissions.

•Qualifying for tax rebates, zoning allowances, and other incentives in hundreds of cities.

•Demonstrating an owner's commitment to environmental stewardship and social responsibility."

We would like to add to this list the fact that LEED buildings typically generate substantial EPAct tax deductions and alternative energy tax credits. Increasingly, LEED certification has become the defacto standard for Class A office buildings and many jurisdictions expedite permitting for LEED buildings. Expedited permitting saves property developers substantial amounts of time, where time means money.

Superior Return on Investment (ROI)

Studies performed by McGraw Hill construction demonstrates that LEED buildings can reduce operating costs by 14%, increase building value by 10.9% and increase rate by almost 10%. LEED buildings have higher occupancy rates and support rent premiums.

Cost Benefit Analysis

LEED imposes comprehensive standards and meaningful specific additional project costs.

The amount of specific cost varies by building by LEED professional, building size and building complexity. In the initial years of the program, LEED certification added costs of $50,000 to $80,000 for some buildings. The general trend is for a decrease in LEED certification costs as more and more design professional are LEED certified and have more LEED experience. For example pricing for LEED building energy simulation modeling which is required key element of LEED has decreased rapidly. Complex buildings that used to cost $15,000 to model can now often be modeled for $7,500 or less.

LEED Project Cost Detail

The most direct cost related to LEED certification is the LEED certification filing fee which ranges from 3 cents to 5 cents per square ft depending on the size of the project and whether you qualify for a USGBC member discount. The actual cost of the LEED design will vary depending on whether an independent LEED consultant is utilized or whether one of the core design team members is also handling the LEED certification process.

Since LEED certification is a detailed complex process, experience matters, and design teams with prior LEED experience are a lot more cost efficient.

The issue of whether there will be increased design costs also depends on the LEED team's historical design level which is called baseline. Design teams who's previous projects have been at or near the LEED building design standards have a much shorter learning curve then those who have never designed at or near the LEED design level. LEED requires building "commissioning", which is a relatively expensive process requiring an engineering firm to make sure all the buildings systems are both operating properly and are properly integrated. Although commissioning can range from 50 cents to $1.00 per square foot, most building experts feel strongly that commissioning this is very worthwhile cost saving process for any building with new or renovated systems regardless of LEED objectives.

LEED Construction Costs

LEED projects can result in lower or higher construction costs depending on how one measures construction costs. LEED projects that use building energy simulation modeling to right size, meaning downsize HVAC systems to the smaller, less costly and appropriate sizes will save costs. It is known that most non modeled building oversize HVAC systems adding substantial unnecessary costs. LEED projects that count alternative energy measures as part of the LEED process will have markedly higher construction costs. However these same buildings will have markedly lower energy costs. There are some very common LEED elements where cost can be estimated. For example demand control ventilation adds about $1.00 per cfm which is an air volume measure. Bike racks will cost about $5.00 per full time equivalent employee. Showers and changing rooms will cost about $400 per full time employee. The USGBC has compiled a massive study analyzing LEED project costs which can be reviewed at:

http://www.wbdg.org/ccb/GSAMAN/gsaleed.pdf

The Federal Government LEED Building Sector

It is important to realize that with government buildings, the EPAct benefits go to the LEED design team. The federal government is the single largest energy user in the United States. It owns, operates, and leases about 500,000 buildings.3 Currently the federal government has approximately 187 LEED certified projects composing 24 million sq.ft. There are an additional 3,138 federal projects, representing 465 million sq.ft., currently in registration.

State and City LEED Building Requirements

Many states and cities mandate LEED certification for new government building construction and increasingly for commercial buildings typically at the greater than 50,000 square ft level. As of early 2010 34 states and over 200 municipalities had some level of new construction LEED mandate. More importantly increasingly some of the largest cities in the U.S have LEED mandates.

In the year 2,000 Seattle was the first city to mandate LEED silver certification for new civic buildings. San Francisco has a LEED Silver requirement for new construction and major renovations of existing buildings exceeding 25,000 square feet. Dallas mandated LEED certification for new construction as of 2011. Los Angeles mandates LEED certified status for all new buildings exceeding 50,000 square feet as of 2012. In Washington D.C. all new construction of commercial buildings greater than 50,000 square feet will require certification after January 1. 2010. These local LEED requirements constantly change and must be integrated with local building codes which also constantly change. The overall trend is for local LEED requirements to covering more building categories at higher certification level resulting in larger EPAct tax deduction opportunities. With state and local government building projects, the EPAct benefits also go to the LEED design team.

Conclusion

The EPAct building energy efficiency tax deduction tax provisions require building energy simulation modeling to secure the HVAC and building envelope EPAct tax deductions. The LEED new building system requires the same type of building energy simulation modeling to become LEED certified. With 40,000 LEED building projects in registration tax advisers for property owners and government building A & E firms should be helping monetize EPAct tax deductions related to tens of thousands of buildings. The nations current emphasis on tax supported alternative energy investments means that more buildings can easily qualify for LEED and hence even more EPAct tax deduction opportunities.

Article Citation list