Renovating Retailers with Vacant Stores

The severe economic downturn is resulting in record levels of vacant retail space in standalone stores spaces, strip malls and mall spaces. Major categories of vacant retail space include general retail, restaurants and banks. Many of these vacant stores will be absorbed by new businesses and other existing retailers.

Regardless of the amount of anticipated renovation, vacant spaces require some level of energy related investment. Electrical, Heating, Ventilation and Air Conditioning (HVAC) and Roof systems need to be inspected, where it is often determined that repair and or replacement is required.

It is important for tax departments and facilities managers to work together from the outset to optimize the intersection of recent building energy code and product legal changes, energy savings, utility rebated and tax savings.

The Current Economic Environment

An unprecedented number of large retailers have recently either gone out of business or shut down a large number of stores. What is particularly unusual about this economic downturn is that struggling retailers are finding they are unable to use the first step bankruptcy restructuring provisions and obtain so called DIP or debtor in possession financing and are instead being forced into complete liquidation.

The result is a large number of vacant retail spaces. As of the end of November, the following store closing counts were available:

See Table

Missing from this chart are the well publicized shut down of numerous smaller retailers, over 1,000 car dealerships and numerous consolidating bank branches. It is estimated that at least 6,000 retail locations will close in 2008.

These developments are providing the strong retailers with some unique opportunities to purchase or lease some prime locations.

Review Current Building and Product Legal Changes

Substantial renovations normally require compliance with current building energy codes. As a result of major recent technology improvements, current building codes mandate the use of products that use considerably less energy. For example, for some facilities, 2007 building energy code compliance may require a 40% energy reduction as compared to 2001 building energy codes. Even if a renovation doesn't legally require current building energy code compliance, it is a good idea to use current code standards as one of the benchmarks for energy savings opportunities. Certain mainstream prior-generation lamp technologies, such as T-12 lighting and various incandescent bulbs, are subject to federally mandated manufacturing phase out. Although it will still be permissible to buy replacement lamps and bulbs for these fixtures, the prices will be going up as the finite supply of previously manufactured product declines.

The Energy Tax Opportunities

Pursuant to the Emergency Economic Stabilization Act of 2008, signed by President Bush on October 3rd, 2008, the Section 179 (D), immediate commercial building deductions for Lighting, HVAC and building envelope were extended for 5 years through 2013.


Section 179 (D) provides a 60 cent per square foot immediate tax deduction for energy efficient lighting. The recommendation for renovating retailers is to set their lighting standards at the better of local building energy code, local utility rebate requirements or EPAct watts per square foot standards. With this approach, the retailer should be positioned to maximize economic return by minimizing electricity energy charges at the lowest after-tax cost.

HVAC & Building Envelope

To minimize energy uses and position themselves for the extended Section 179 (D) 60 cent per square foot tax deductions for each category, the renovating retailers should have a knowledgeable engineer provide building simulation model reflecting his or her recommendations including the new lighting described above. The renovating retailers should direct the engineer to uses IRS approved software as required under Section 179 to be eligible for HVAC and building envelope tax deductions.

The list of IRS approved software to date is:

See Table

Multi-Store Retailers Opportunity

Multi-store retailers can work with an engineering firm to model into the most appropriate energy efficient store prototype. Once the multi-store retailer establishes a computer model based prototype, that store design and its section 179 (D) tax attributes can become the required standard.


Vacant stores present voluntary and mandatory opportunities for tremendous energy cost reduction. Upgrading to energy efficient lighting eligible for tax deduction should almost be perfunctory. Tax and financial executives should assist facility managers at the renovation stage by recommending IRS approved modeling software. The real goal is to reduce energy operating costs, and tax modeling is the tool and tax savings is the reward for doing so.

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