FEATURE ARTICLE, OCTOBER 2006

THE LEGAL SIDE OF BUILDING GREEN
Green standards are beginning to be required by government entities.
Mark Polston

During the past few decades, efforts at reducing pollution and energy consumption have focused on motor vehicles. Such efforts have come in the form of tighter governmental controls on emissions and tax incentives for purchasers of low-emissions vehicles, among others. However, news of energy shortages, sky-high fuel prices, and local and global environmental problems have led to the development of a more comprehensive approach to energy conservation and reduction of fossil-fuel byproducts. 

Enter the green building movement. Once unknown in mainstream industry circles, the notion of green building has leaped from the fringe of the environmental movement to become the latest hot topic among builders and real estate developers across the nation, as energy shortages seem more acute.

In addressing energy and emissions issues, buildings have become likely targets of scrutiny. According to the Department of Energy and the Department of Transportation, as reported in a recent issue of Forbes magazine, buildings account for 39 percent of the total annual energy consumption in the U.S., while transportation as a whole (including cars) makes up only 27 percent. The estimated costs of operating the average commercial building during its typical 100-year life span are 10 times the costs of its construction.

In light of the increased focus on buildings, guidelines for green construction have been established. One of the most well developed and commonly used sets of criteria is the rating systems known by the term Leadership in Energy and Environmental Design (LEED). The U.S. Green Building Council first promulgated its LEED-NC (LEED for new construction and major renovations) in 1998, and since has developed separate rating systems for existing building operations, core and shell development, homes, and neighborhood development, among others.  While the LEED-NC standards were originally created for application to office buildings, they are also commonly used for schools, multifamily buildings, manufacturing plants, and other commercial and institutional projects.

LEED measures a construction project’s green-worthiness based on six categories. Those categories are: (i) sustainability; (ii) water efficiency; (iii) energy and atmosphere; (iv) materials and resources; (v) indoor environmental quality; and (vi) innovation and design process. Within each category are specific criteria by which projects are judged and awarded points. In the materials and resources category, for example, points are awarded for recycled content; use of materials extracted, processed and manufactured regionally; and reuse of existing walls, roof and floors. Storage and collection of recyclable materials is a required component.

A project with a total of at least 26 points can be certified as meeting LEED standards. Beyond this certified level, there are the silver, gold and platinum levels, with a maximum of 69 possible points. The most points can be earned in the areas of energy efficiency (up to 10 points) and use of energy that can be renewed onsite (up to 3 points). Points are also awarded for providing parking for bicycles and having access to public transportation (usually one point each).

Knowledge of green standards, including LEED, will become a necessity for developers, builders, and their advisors, as governmental entities are increasingly requiring that green standards be met for public building projects. At least 10 states require LEED certification for public buildings, some at the LEED silver level, in addition to requirements in numerous cities throughout the U.S. In total, nearly 20 states and even more municipalities mandate or encourage implementation of LEED standards.

There are signs that green requirements may also be in the offing for commercial and multifamily spaces. Under proposed legislation in the District of Columbia, green standards will apply to most commercial and private multifamily housing developments. The new law would apply to “all District-sponsored projects and all commercial projects … that include 20,000 gross square feet or more of conditioned space,” whether the building is new construction or a renovation project. Projects would be certified under LEED standards, and within 5 years, all projects would have to meet the criteria for the LEED silver level.

In Arlington County, Virginia, all site plan applications for commercial projects must include a LEED checklist, even if the project sponsors do not plan to seek certification. Such toothless legislation, however, is often a precursor for more stringent regulation.

Although green construction adds to the cost of construction, it routinely offers years of savings to building owners and tenants through reduced utility costs. Until now, however, developers and builders have resisted adopting green standards, which often subtract from a project's bottom line. But recently, the federal government, states and cities are lining up to provide generous tax incentives to nudge people toward green.

Pursuant to the Energy Policy Act of 2005 (commonly referred to as the EPAct), owners or designers of commercial buildings, whether new or existing, can claim a tax deduction of up to $1.80 per square foot for structures that save at least 50 percent of the heating and cooling energy of a building that meets prescribed efficiency standards. In evaluating the merits of a proposed deduction, the IRS looks to efficiency in such areas as interior lighting, building envelope, and heating, cooling, ventilation, and water systems. The EPAct also allows partial deductions of up to $.60 per square foot for system-specific efficiency. Deductions are available for buildings or systems placed in service from January 1, 2006, through December 31, 2007, but it is expected that these deductions will be extended. For information on other incentives under the EPAct and other federal energy efficiency programs, visit the DOE’s Energy Efficiency and Renewable Energy website at
http://www.eere.energy.gov/buildings/info/tax_credit_2006.html.

Almost every Southeastern state offers some tax break related to green building. Although many of those are directed to single-family homeowners, there are several that apply to commercial and multifamily spaces.

In North Carolina, solar, wind, hydro and biomass applications in commercial and industrial facilities, including photovoltaic, daylighting, solar water heating and space heating technologies can merit a maximum tax credit of $2.5 million. Expenditures such as equipment and associated design costs, construction costs and installation costs are covered.

North Carolina tax laws allow the credit to be applied to franchise or income taxes taken in five equal installments beginning with the year in which the property is placed in service. If the credit is not used entirely during these 5 years, the remaining amount may be carried over for the next 5 years. The credit cannot exceed 50 percent of the tax liability of a taxpayer, reduced by the aggregate amount of other credits.

In Maryland, a tax credit is available for businesses that construct or rehabilitate a commercial or multifamily building comprising at least 20,000 square feet of interior space, and situated in a priority funding area or qualified brownfields site and not on wetlands. If the building is not located in a priority funding area, other factors may be considered that may nevertheless merit a credit.

Among other requirements, a taxpayer must submit an eligibility certificate from a LEED-accredited professional architect or engineer licensed in Maryland. A taxpayer may take a credit in the amount of 6 to 8 percent of the costs of building, or credits can be taken for green components such as photovoltaics, fuel cell, and wind turbines, usually in the amount of 20 to 30 percent of the costs, including installation. Allowable costs may not exceed, in the aggregate, (i) $120 per square foot for that portion of the building that comprises the building; and (ii) $60 per square foot for that portion of the building that comprises the tenant space.

In other Southeastern states, there are a range of product-based exemptions. Florida offers an exemption from sales and use taxes for solar energy systems on buildings, and Georgia has a similar exemption for biomass products, which can be used in the production of energy for a building. Alabama offers up to $75,000 in interest subsidy payments to help defray the interest expense on loans to install approved biomass projects. Several other states permit deductions and credits for components such as ENERGY STAR-compliant hot water heaters.

While it is not surprising that three of the top five states in the number of LEED-registered buildings are the West Coast states of California, Oregon and Washington, two Southeastern states, Georgia and Virginia, are in the top 10. Given an increasing level of environmental awareness and the prospect of continued high energy costs, the green building movement seems poised to become a long-term force in the real estate development and building industries in all areas of the U.S. Governmental entities will increasingly offer a series of carrots and sticks that seem likely to push green building into the mainstream, on top of pressure from building owners and tenants for lower-cost energy alternatives.

Mark Polston is a Washington, D.C.-based associate at Womble Carlyle Sandridge & Rice, PLLC.


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