The Proposed EPAct Section 179D Tax Opportunity

Under the proposed extension of EPAct Code Sec. 179D, effective January 1, 2014 building owners who make qualifying energy-reducing investments would obtain immediate tax deductions of up to $3.00 per square foot.
If the building project doesn’t qualify for the maximum of $3.00 per square foot immediate tax deduction, there are tax deductions of up to $1.00 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.
For the first time, the extension also includes benefits for Real Estate Investment Trust (REIT) building project designers and financers.
Figure 1 presents the EPAct benefits available for some of the major industrial REIT companies under the propsed legislation.

Lighting

Building lighting comprises a large portion of warehouse and industrial energy use. LED lighting technology has greatly improved and multiple lighting manufacturers now have LED lighting suitable for warehouses and industrial building applications. LED lighting is low wattage long life lighting that substantially reduces energy related operating costs and lamp replacement costs.
The proposed higher EPAct tax incentives will encourage all warehouse and industrial buildings to upgrade to higher first cost LED lighting.

Roofs

By far, the most popular use of larger warehouse and industrial building EPAct tax deductions is for new roofs and insulation, particularly for buildings that are preparing for rooftop solar P.V. installations.

HVAC

Non-conditioned, or non air-conditioned, warehouses and industrial buildings can utilize the $3.00 per square foot proposed incentive to upgrade to energy efficient natural gas heaters.Conditioned, or air-conditioned, warehouses and industrial buildings can use the larger $3.00 per square foot incentive to upgrade to energy efficient chillers, package units, and Energy Recovery Ventilation.

Energy managers who are engaged in new construction or retrofitting existing conditioned spaces should strongly consider engaging tax and engineering firms with computer energy simulation modeling capability. With an IRS-approved model, the engineering firm can help the warehouse/industrial owner optimize the utilization of energy efficient equipment to reduce energy operating costs and maximize EPAct tax incentives and utility rebates, particularly in jurisdictions that provide utility rebates for highly energy efficient HVAC, roofs, insulation, refrigeration, and freezer equipment.

Open Figure 1

REIT Tax Planning

REITs own most of the institutional grade property in the United States and in particular most of the nation’s largest warehouses and industrial building space. REIT's have large holdings in the State and City jurisdictions with newly enacted mandatory energy bench marking rules which provides them with a road map for buildings requiring energy upgrades. In particular, California, a warehouse intensive state, has statewide mandatory energy benchmarking laws.
No informed potential warehouse tenant is going to lease warehouse space at market rates if the building has a low energy performance rating.

Conclusion

REITs are one of the largest potential beneficiaries for the EPAct extension. Warehouse and Industrial owners can greatly benefit from reducing energy usage in their facilities under the proposed Energy Policy Act tax law changes.

References
“Complete Warehouse Tax-Enhanced Energy-Efficient Design”, Charles Goulding, Jacob Goldman, and Joseph Most, Corporate Business Taxation Monthly, August, 2010.
“Federal Energy Tax Legislation Update and 2013 Year End Planning”, Charles R, Goulding and Jennifer Pariante, To be published in Corporate Business Taxation Monthly.

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