The HVAC Tax Aspects of Post-Internet Retail Stores

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The U.S. Retail sector is rapidly converting from hard goods sellers in dry stores to service businesses requiring enhanced HVAC. HVAC is expensive and inefficient HVAC measurably increases operating costs. Retail category landlords and service business tenants need to carefully consider energy efficient HVAC design when designing and purchasing new and replacement HVAC products. Numerous categories of energy efficient HVAC are eligible for EPAct tax incentives.

The EPAct Section 179D Tax Opportunity

Pursuant to Energy Policy Act (EPAct) Section 179D, building owners and tenants 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 Section 179D $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 is every item on the building’s exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.

Post-Internet Leading Retailers

We are all familiar with the total demise of many major hard goods manufactures including Circuit City for electronics, Linens and Things for household goods, and Borders for books. These products are increasingly purchased on line and the remaining retailers in these categories are also shrinking their selling spaces.

The retail categories refilling these spaces that require improved HVAC systems include:

1.Restaurants1 - Capital Grille, P.F. Chang’s, Morton’s, and Houston’s

2.Health clubs and gyms2 - Some of the leading national chains include Gold’s Gym, Bally’s Total Fitness, LA Fitness, Town Sports International, and Curves

3.Pharmacies with medi clinics and refrigerated food products3 - Including the big three: Walgreens, CVS, and Rite Aid

4.Stand-alone medi clinics

5.Salons and spas

The Shrinking Dry Goods Retail Sector

Numerous dry goods retailers have recently announced systematic store closings. For example, Abercrombie & Fitch will close 180 stores by 2015, Blockbuster is to eliminate 300 stores, Barnes & Noble will close 200 locations (20 per year over 10 years), and Sears will close 62 locations.

Radio Shack will be closing 450 to 550 locations, Game Stop will get rid of 500 to 600 stores, and pre-merger Office Depot indicated they will close 125 to 150 locations and Office Max will be closing 150 to 175 locations.

Medi Clinics

This already growing retail category is on the rise as pharmacies branch out into healthcare services. Rite Aid plans to open 58 locations with in-store medical clinics that will use web cams to provide virtual doctors. Rite Aid executive Robert Thompson says “Health care in the future is certainly going to require a multifaceted approach”, he adds the virtual medical clinics are “a very efficient way to bring acute-care services to a pharmacy”.4

CVS’s chief healthcare officer, Helena Foulkes, says “We have to reinvent pharmacy”. CVS announced in December 2012 that there would be acceleration of MinuteClinics openings, from 100 per year to 150. CVS will have over 1,500 MinuteClinics by 2017. Medi clinics should utilize more advanced HVAC systems with more frequent ventilation air changes.

Energy Efficient Retail HVAC Technologies

The HVAC categories that typically qualify for the EPAct tax incentive include:

1. Coolerado units5 (In the south and western portions of the U.S.)

2. VRF6

3. Energy Recovery Ventilation

4. VAV in buildings less than 75,000 square feet

5. Chillers in buildings less than 150,000 square feet

6. Geothermal7

7. McQuay bearingless chillers8

8. Thermal Storage9

9. Very efficient package units

Long standing shopping mall and shopping center owners are often not familiar with today’s high energy efficiency HVAC equipment and tenants will often need to request and negotiate upgrades if they want to manage their operating costs.

Conclusion

The retail sector is going through a major dry goods to replacement retailer transformation where typically more HVAC is required. Knowledge of highly efficient HVAC technologies can reduce tenant operating costs while utilizing tax incentives.

1 - Charles R. Goulding, Jennifer Pariante, and Raymond Kumar, “The EPAct Tax Aspects of High Growth Specialty Restaurants”, ETSI Publishing, July 2012.

2 - Charles R. Goulding and Andrea Albanese, “EPAct Tax Incentives for Energy Efficient Fitness Centers”, ETSI Publishing, July 2011.

3 - Charles Goulding, Amelia Aboff, and Taylor Goulding, “Special Tax Savings Opportunities for Pharmaceutical and Biotech Campuses”, Corporate Business Taxation Monthly, October 2009, at 13.

4 - John W. Miller, “Drugstores Expand Walk-In Clinics”, The Wall Street Journal, March 1, 2013, at B5.

5 - Charles R. Goulding, Daniel Audette, and Jacob Goldman, “Tax Savings for Cooling Your Building with Sweat”, To be published in Corporate Business Taxation Monthly.

6 - Charles R. Goulding, Andrea Albanese, and Jacob Goldman, “New HVAC Hotel and Apartment Technology Obtains Large EPAct Incentives”, Corporate Business Taxation Monthly, August 2012, at 25.

7 - Charles Goulding, Joseph Most, and Spencer Marr, “The Energy Tax Aspects of Geothermal Heat Pumps”, Corporate Business Taxation Monthly, December 2010, at 13.

8 - Charles R. Goulding, Jacob Goldman, and Gary Savell, “EPAct Tax Aspect of McQuay Chiller LED Lighting Combinations”, Corporate Business Taxation Monthly, January 2013, at 9.

9 - Charles Goulding, Jacob Goldman, and Taylor Goulding, “The Tax Aspects of Thermal Storage and Time-of-Day Pricing”, Corporate Business Taxation Monthly, November 2009, at 13.

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