Energy Tax Aspects of Achieving Class A Office Buildings Designation

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Landlords endeavor to achieve Class A office building status in order to attract the best tenants willing to pay a higher rent. When considering office space, tenants will find that office buildings are generally classified as being either a Class A, Class B, or a Class C building. Class A buildings represent the highest quality buildings. They typically are the best constructed buildings, possess high quality building infrastructure, and generally have the best building appearance. Class A buildings also are well-located, have good access, and are professionally managed. Therefore, they attract the highest quality tenants and also command the highest rents. Leading tenants seek Class A office buildings as part of their own imagining with the expectation these are qualitatively better and more cost efficient.

As building standards evolve the criteria for determining Class A status is constantly changing. The determination of whether a building currently meets Class A energy standards involves both objective and subjective standards. This article contains some subjective judgments based the authors own opinions. The Federal tax systems provides substantial tax incentives for many of the measures that will assist in accomplishing new era Class A office building status.

EPAct Section 179D

Under Code Sec. 179D, as enacted by the Energy Policy Act of 2005 (EPAct), building owners who make 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 of $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 and the Building Envelope. The building envelope covers every part of the building’s exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.

New Era Class A Office Building Criteria

1. LED's and Other Energy Efficient Lighting

Increasingly, most Class A buildings are in the process of installing long life energy efficient LED lighting.1 Regardless of the technology, office buildings must have energy efficient lighting.

2. Lighting Controls

In addition to energy efficient lighting Class A office building must have a comprehensive lighting controls system.2

3. Energy Efficient HVAC

Air conditioning is the biggest energy cost item in an office building. Office buildings must have modern highly energy efficient HVAC.

Old HVAC units become less efficient, so with HVAC it is particularly important that units be replaced at the end of their lives. Any unit older than 15 to 20 years should be carefully monitored.

Some of the most energy efficient HVAC technologies would include geothermal3, thermal storage4, energy recovery ventilation5, magnetic bearing chillers and chilled beam.

4. HVAC Controls

In addition to energy efficient HVAC, a Class A office building must have a comprehensive HVAC controls system.6

5. LEED Status

A Class A office building should either be LEED certified or be able to document that it has most of the elements of typical LEED certified building. LEED buildings are usually very well platformed for large EPAct tax savings.7

6. Bench Marking

A Class A office building must have bench marking data from the energy star system which should be made readily available to all existing and prospective tenants. Bench marking is mandatory in many office building intense markets including Austin, Texas, California, New York City, Seattle and Washington D.C. Our view is that a Class A office building should either have 90% Energy Star rating or be in the process of achieving 90% status.

Conclusion

Class A office building status is very important to both landlords and tenants. Knowledgeable office building and tenant tax advisers can offer valuable tax advice in this area.

Citations:

1 - Charles R. Goulding, Raymond Kumar, and Jennifer Pariante, LED Lighting Can Play A Key Role in Securing EPAct Tax Benefits, Imark Group, April 2012

2 - Charles R. Goulding, Spencer Marr, and Charles G. Goulding, The EPAct Tax Aspects of Building Control Systems, Corporate Business Taxation Monthly, 2012

3 - Charles R. Goulding, Joseph Most, and Spencer Marr, The Energy Tax Aspects of Geothermal Heat Pumps, Corp. Bus. Tax'n Monthly, December 2010

4 - Charles R. Goulding, Jacob Goldman, and Taylor Goulding, The Tax Aspects of Thermal Storage and Time-of-Day Pricing, Corp. Bus. Tax'n Monthly, November 2009

5 - Charles R. Goulding, Raymond Kumar, and Kenneth Wood, New Efficient HVAC Drives Large Tax Deductions for Buildings, Corporate Business Taxation Monthly, May 2009

6 - Charles R. Goulding, Raymond Kumar, and Kenneth Wood, New Efficient HVAC Drives Large Tax Deductions for Buildings, Corporate Business Taxation Monthly, May 2009

7 - Charles R. Goulding, Taylor Goulding, and Amelia Aboff, How LEED 2009 Expands EPAct Tax Savings Opportunities, Corporate Business Taxation Monthly, September 2009

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