The Energy Tax Aspects of Discount Retail Stores

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The discount retail sector has been experiencing rapid growth which has actually accelerated during the economic downturn. In many shopping centers, discount retailers have assumed the critical anchor store role, as neighborhood supermarkets have been replaced by larger, stand alone big box retailers. By stepping into the available anchor store position during a weak commercial real estate market, discount retailers have the market leverage to obtain very favorable lease terms. After they secure the store space at reduced prices, discount retailers also have the leverage to use their increasing scale to obtain volume pricing for lighting and HVAC upgrades to obtain substantial reductions in energy operating costs. With proper tax planning major tax incentives are available to further support these already desirable objectives.

The EPAct Tax Opportunity

Pursuant to Energy Policy Act (EPAct) Section 179D, discount retail store owners or tenants making qualifying energy-reducing investments can obtain immediate tax deductions of up to $1.80 per square foot.

If the building project doesn't qualify for the maximum $1.80 per square foot immediate tax deduction, there are tax deductions of up to 60 cents per square foot for each of the three major building subsystems: lighting, HVAC 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.

The following chart illustrates the potential total EPAct tax deduction for several prominent discount retail chains:

Small Footprint Discount Retail Chains

Potential Energy Efficiency EPAct Tax Deductions

See Table

Notes:

1store square footage based on average store size of 7,100 square feet

2store square footage based on average store size of 16,600 square feet

Discount Retail Store Tax Planning

Lighting

Building lighting comprises a large portion of retail store energy use. Most retail stores that have not had a lighting upgrade to energy efficient lighting in the last 7 or 8 years utilize prior generation metal halide or T-12 fluorescent lighting. It is also important to realize that effective January 1, 2009, most probe-start metal halide lighting may no longer be manufactured or imported into the United States; and, effective July 1, 2010 most T-12 lighting may no longer be manufactured or imported into the United States. This means that retail stores that still have this lighting technology will soon be subject to large price increases for replacement lamps and bulbs.

This prior generation T-12 and metal halide lighting is very energy inefficient compared to today's LED lighting, and a lighting retrofit can easily reduce lighting electricity costs by 40 to 60 percent. The following chart shows when EPAct tax savings are applicable for typical discount retail store spaces:

Potential EPAct Tax Savings

See Table

It is widely presumed that virtually all buildings will eventually be converting to LED lighting. Many multi-location retailers are beginning the conversion now. Discount store facility managers should consider testing alternative LED lighting solutions at this time. For example, one retailer with over 800 locations recently tried LED applications in 10 beta locations before upgrading all locations. The best economic payback will come from those locations with high electricity rates and large utility rebates. For example, Connecticut is offering 50% rebates for the installed costs of LED and induction lighting.

HVAC

Discount retailers should take their most efficient store, combining the LED lighting discussed above, and the most efficient HVAC and have it modeled using IRS approved software to see if it qualifies for multiple EPAct tax deductions. With this approach, they could plan into $1.20 to $1.80 EPAct tax deductions for every store retrofitted to that energy efficiency level or better on or before December 31st, 2013. If they have any existing LEED (Leadership in Energy and Environmental Design) stores, they already have a store that has an energy simulation model and it could quickly be evaluated to see if multiple EPAct tax deductions are in the offing. For example, Family Dollar has a LEED certified store in Spartanburg, SC and Aldi has one in Ann Arbor, MI. This gives these organizations an advantage. These companies should first determine whether existing LEED models already qualify them for tax savings.

Distribution Center Tax Savings

Discount retail chains can also obtain large immediate EPAct tax deductions by retrofitting their distribution centers and warehouses. In addition to retrofitting lighting, installing new energy efficient Cambridge heating systems can provide energy cost savings of eight percent or more over the ASHRAE 2001 building code standards. There are multiple heater technologies suitable for the distribution center market, including direct fired gas heaters, unit heaters, and infrared (radiant) heaters. If feasible the heater should be mounted on an exterior wall to optimize the roof top solar P.V. space. As can be seen by the following chart, some of the retailers mentioned above have very large amounts of distribution center space that are potential candidates for EPAct deductions:

Discount Retail Chains Distribution Centers

Potential Energy Efficiency EPAct Tax Deductions

See Table

Conclusion

Discount retailers have become a very important property category that has recently experienced a large increase in store units. Even though the sector has enjoyed a period of success and growth during the recent economic downturn, building managers and owners need to closely manage all costs including energy cost and maintenance costs. Energy reduction investments are a great way to keep costs down in the long-term while receiving immediate tax deductions in the short-term. Installing energy efficient equipment, combined with the appropriate tax planning, will be a key for continued success in the discount retail sector.

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