Numerous programs exist that provide real financial benefits and market positioning opportunities for commercial and certain multi-family building owners looking to benefit from improvements in energy efficiency. In fact, some owners are finding that the cost of modest capital improvements can be accounted for through reduced future utility expenses. If these improvements allow an owner to then capitalize on available federal tax incentives, possibly save their tenants money and position themselves in the marketplace, the benefits can be substantial.
Section 179D Tax Deductions
Building owners, management firms and tenants evaluating ways to reduce the operating costs of their commercial and multi-family buildings should consider the potential benefits of improving building energy efficiency. Federal tax deductions of up to $1.80 per square foot for certain energy efficiency investments in new existing commercial buildings are available under Internal Revenue Code Section 179D.
Commercial office buildings, retail buildings, warehouses and rental properties with four or more stories are eligible for this tax deduction. Critically, parking garage areas may also qualify for the tax deductions. Certification must be provided demonstrating that:
- Interior lighting systems, heating, cooling, ventilation (HVAC) and hot water systems, and building envelope systems incorporated or planned to be incorporated in the building will reduce the total annual energy and power costs for those systems by 50% or more compared to a standard reference building for the full $1.80 per square foot deduction; or
- Buildings that save or are planned to achieve less than the full 50% reduction can obtain partial deductions of $0.60 per square foot for each of those eligible building systems meeting certain targets compared to the reference standard: 10% in interior lighting cost savings, 20% for HVAC and hot water systems and 20% for the building envelope.
When such investments are made to commercial buildings owned by local, state or federal governments, these tax deductions may be assigned by the owner to the designer of the energy efficiency systems who may then utilize the tax deductions for their own purposes. Savvy parties have been known to incorporate the savings possible through Section 179D in their bids for such government work.
Energy Star Certification
As many property owners know, the EPA’s Energy Star long-running program applies to more than just washing machines and refrigerators. In fact, it applies to commercial buildings and now, to certain multi-family high rise buildings. In late August the EPA announced it was expanding the Energy Star program to new and substantially modified high rise residential buildings with: 1) four and five stories and five or more dwelling units and a central HVAC and hot water system or 2) those with five or more dwelling units and six or more stories.
Qualifying buildings must certify they are designed to be no less than 15% more energy efficient than a standard reference building. Building features that qualify under this analysis include insulation systems, HVAC systems, a tight building envelope and ductwork, Energy Star-certified lighting and appliances and high-performance windows.
Improvements made under the Energy Star certification process allows a building owner, manager and its tenants to not only achieve significant long-term savings in their utility expenses, but it also allows them to position themselves as leaders in an increasingly challenging marketplace.
Improvements in energy efficiency can come on many levels. Even modest and relatively simple improvements, such as those to lighting systems, can reap huge rewards in utility cost savings in a relatively short period of time. When significant tax deductions and achieving Energy Star certification are also readily possible, building owners and their managers should consider what’s possible. After all, who doesn’t want to save money? .