Introduction

With rising fossil fuel prices, increased energy regulation and a constrained real estate market, our clients are looking for ways to reduce costs and make their facilities, whether commercial, industrial, retail or residential, more marketable. Although energy efficiency improvements and renewable energy systems save money over time, many are costly to install. There are, however, numerous financing tools available to make it easier to invest in green facilities. With the passage of the American Recovery and Reinvestment Act of 20091 and other energy-related legislation, numerous federal and state incentives have been extended and expanded to help businesses finance energy efficiency improvements and renewable energy systems for their facilities. (Click here to view prior Perkins Coie Updates on the federal stimulus package.)

If your company owns or controls real property, you may have untapped energy capacity, including potential to retrofit your facility with solar, microturbine and small wind turbine systems, all of which may qualify for one or more of these financing programs. Whether you are a tenant seeking a healthy, sustainable workspace, a developer enhancing the marketability of your projects, or a building owner trying to reduce operating costs, tax incentives, other federal, state or local government programs, nonprofit or foundation grants, or private financing may be available.

Identifying the Right Tool Requires Gathering Project Facts

The specific facts of your proposed project will dictate which of these green financing tools fit your needs. Counsel can help you examine development scenarios, identify financing options, and develop project designs and documentation that suit your financing objectives. Here are a few examples:

Q: Our company owns and operates retail outlets and related distribution centers. We would like to retrofit our existing buildings with solar panels to reduce energy costs. What incentives are available to help defray capital expenditures?

A: Until recently, many solar systems were too costly to install. The American Recovery and Reinvestment Act of 2009, expands renewable energy incentives to businesses that install certain qualified "energy property" and place it into service by December 31, 2016. Taxpayers may claim either an investment tax credit or apply for a Treasury grant equal to 30% of energy property expenditures, including installation costs. In addition to providing incentives for wind, biomass, geothermal and fuel cells, the federal incentive includes all solar systems used to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar-lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are also eligible.

Alternatively, you could lower your initial investment costs by contracting with a solar supplier. For example, some facility owners have leased real property and hired private companies to build, own, operate and maintain solar systems for up to 20 years. Depending on the contract, owners can significantly lower up-front costs while still saving millions in electricity costs over the life of the project.

The U.S. Department of Energy ("DOE") provides technical assistance grants as well. Under its Solar America Showcase program, the DOE provides quarterly technical assistance grants of up to $500,000 for market transformation projects that involve cutting-edge solar technologies, novel applications of solar systems, high-visibility sites or projects with a high likelihood of being replicated. Installations must have a total capacity of 250 kW or greater. For example, in 2008, Forest City Enterprises received a technical assistance award under the Solar America Showcase program to develop the photovoltaic system for the U.S. Navy's Halsey Terrace neighborhood community center in Hawaii. In 2009, the Hyatt Regency Resort in Scottsdale, Arizona received a technical assistance award to retrofit its parking garage with a 115-kilowatt solar electric array to provide shade for cars and connection for charging electric vehicles.

Q: My company invests in large commercial properties. With tenants broadening their sustainability mandates, the demand for including green buildings in our investment portfolio is growing. We would like to increase our "green" portfolio, but with all of the competing factors (waste, water, lighting, HVAC, building materials), how do we know how "green" a facility really is compared to others?

A: The real estate industry is taking the first steps to factor "green" criteria into its financial underwriting. Among other factors, energy efficiency, building location, water consumption and indoor environmental quality are increasingly important to owners and lenders making long-term capital investments. In 2008, a coalition called the Capital Market Partnership2 created a "Green Building Investment Underwriting Standard" accredited by the American National Standards Institute for both commercial and residential properties.

This standard establishes a common definition for financially tangible green attributes, including the U.S. Green Building Council's Leadership in Energy and Environmental Design ("LEED") certification, the Environmental Protection Agency's ENERGY STAR certification, and the Climate Neutral Certification. The standard incorporates these attributes into the underwriting process at all levels of the real estate investment chain, including direct lending, underwriting, purchasing, private equity investing, real estate investment trust analysis and upstream investor reporting. It aims to limit uncertainty by providing the real estate industry with a "CMP Green Value Score," a means to value various green attributes and include them in property valuation analysis, real estate equity and debt underwriting, secondary market securitizations, and portfolio analysis.

A green underwriting standard has many benefits. It can provide an accounting method for green building values within existing underwriting criteria and increases the quality of investment underwriting by using third-party certification. It provides additional opportunities to invest in clean energy and green investment product. Finally, it aims to increase investor security and profitability.

Q: As a residential home builder, I look for ways to "green" my projects to gain market advantage over other builders. What incentives are available for residential projects?

A: The Energy-Efficient New Homes Tax Credit is the most comprehensive federal financial incentive for green home builders. Although originally set to expire at the end of 2008, Section 304 of the Emergency Economic Stabilization Act of 2008 extended tax credits through 2009. Home builders are eligible for a $2,000 tax credit for a new energy efficient home that achieves 50 percent energy savings for heating and cooling over the 2004 International Energy Conservation Code and supplements. At least one-fifth of the energy savings must come from building envelope efficiency improvements. This credit is also available for manufactured homes that conform to federal Manufactured Home Construction and Safety Standards.

Many states and some local governments or special purpose districts also offer incentives for home builders. These may include state tax credits, state or municipal loan programs (with favorable municipal interest rates), or grants. For example, residential developers could avail themselves of the following state financing resources:

  • In Oregon, the Business Energy Tax Credit ("BETC") is the state's largest funding source for energy efficient and sustainable building projects. Originally offered for energy efficiency improvements in commercial buildings, the BETC is now offered to home builders via the Homebuilder Installed Renewable Energy Facility and High Performance Home ("HPH") programs. Builders can participate in both programs or pursue the renewable energy facility program independently. The maximum home builder-installed renewable energy system tax credit is capped at $9,000, and is primarily offered for solar system installations. Oregon home builders who construct homes to the HPH standard, which includes installation of renewable energy systems, a high-performance HVAC, ENERGY STAR certification, and specified building shell requirements, are eligible for a tax credit up to $12,000.
  • In California, many cities and counties offer incentive programs to expedite and provide financial assistance to green building projects. For example, the Anaheim Public Utilities Green Building Rebate program expedites the plan review process, waives plan check fees, provides design review assistance, and gives various financial incentives for homes certified by ENERGY STAR, LEED or other recognized green building raters. The California Energy Commission's New Solar Homes Partnership also gives rebates for installation of photovoltaics in new residential homes. For example, a builder of six or more homes that commits to installing qualified solar electric systems in a minimum of 50% of the project can receive an expected base performance incentive starting at $2.50/watt.
  • Washington state exempts consumers from paying sales tax on equipment used to generate electricity from fuel cells, wind, sun, biomass energy, tidal or wave energy, geothermal resources, anaerobic digestion, technology that converts otherwise lost energy from exhaust, or landfill gas sources. The exemption applies to labor and services related to installation as well as to the sale of equipment and machinery. This exemption was extended during the recent 2009 Legislative session to cover 100% of the tax rate from July 1, 2009 until June 30, 2011 and 75% of the tax rate from July 1, 2011 until June 30, 2013.

Residential financing incentives may also be provided by electric utilities, typically through programs approved by state utility commissions. For example, Washington's Puget Sound Energy ("PSE") offers a number of incentives for green homes. Among other provisions, PSE will pay up to $800 per home for qualifying light fixtures and up to $350 for qualifying heat pumps, natural gas furnaces and associated duct sealing. Incentives apply to single-family detached housing and any attached housing with four units or fewer. In California, utility Pacific Gas and Electric offers various rebate programs for home builders who construct energy-efficient homes. For example, builders of single-family homes that are at least 15% more efficient than California's 2005 Title 24 Energy Code requirements and meet all EPA specifications can receive a payment of up to $500 per unit. An additional $2,000 per unit is available for homes that exceed Title 24 standards by 35%, demonstrate a 40% reduction in cooling load and include solar generation as an option for buyers.

Practical Tips

This is an exciting time for green building projects, but like any emerging industry, amid the opportunities there are pitfalls to avoid and risks to manage.

  • Identify the Financing Tool That Suits Your Project. When contemplating a green building project, it is important to identify which incentive – federal, state or local, government or nonprofit/private equity, tax-based or grant-based – best suits your needs. Incentive eligibility requirements are key: participants must review project start and completion dates, renewable energy systems and efficiency requirements, certification standards and incentive expiration dates. Often, applicants may only claim one incentive, but in some cases incentives can be combined.
  • Start Early; Timing Is Significant! Incentives need to be considered in the early stages of planning in order to ensure that the project qualifies and to secure the funding. A project design element that is easy to change to assure qualification at the preliminary design stage may be too costly to adjust at a later stage. Qualification goals may also affect project structuring, contracts with builders or suppliers, and project schedules. Moreover, many of these green financing programs are limited in scope and allocated on a first come, first served basis. Completing applications and providing evidence establishing your qualifications early helps.
  • Address Your Financing Goals in Your Project Structure and Documentation. Because green building is a relatively new field, it is important to carefully define your "green building" goals. Choosing a corporate or other entity structure for a new development or selecting a certain type of contractor or supplier may also affect your project's eligibility. Developing contracts and securing underwriting that fit your specific project needs while minimizing your potential risk exposure are important for ensuring a successful project.

This Perkins Coie Update is the third in a series of updates designed to help you navigate the following topics: (1) green building, (2) leasing green facilities, (3) tax incentives and financing tools for renewable energy and energy efficiency efforts, (4) maximizing existing real property assets for energy production, and (5) corporate "green policies" governing facility development, advertising and management.

Footnotes

1. Pub. L. 111-5, 123 Stat. 115, enacted Feb. 17, 2009.

2. The Capital Markets Partnership ("CMP") is a nonpartisan, nonprofit coalition of investors, investment banks, insurers, city, state and federal government, countries, and non-governmental organizations whose goal is to create a market shift to sustainable investment. CMP was convened by the Market Transformation to Sustainability, a nonprofit public charity. http://www.capitalmarketspartnership.com/index.aspx?u=home.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.