On June 25, 2012 the Internal Revenue Service (IRS) released Notice 2012-44 (2012-28 IRB 45) (the “Notice”) that provides interpretative guidance on qualified energy conservation bonds (QECBs) under Section 54D of the Internal Revenue Code of 1986, as amended (the “Code”). The Notice uses a question and answer format to clarify, among other things, what types of projects might qualify for two of the multiple eligible financing purposes (also known as “qualified conservation purposes”) under the QECB statute: capital expenditures incurred for purposes of (i) reducing energy consumption in publicly-owned buildings by at least 20 percent and (ii) implementing a “green community program.” Click here to read background material on QECBs and click here to see a list of all qualified conversation purposes under Section 54D(f). Below is a brief summary of certain portions of the Notice.
Reducing Energy Consumption in Publicly-Owned Buildings by at Least 20 Percent
With respect to this qualified conservation purpose, the guidance seeks to clarify what constitutes a publicly-owned building, how an issuer measures the reduction in energy consumption and the period of time over which one must measure the reduction.
- A publicly-owned building is a building or buildings owned by a state or local government or any instrumentality thereof. If the unit measuring the reduction (called a “measurement unit,” as described below) is a unit other than a building or buildings, the building or buildings encompassing the unit must be publicly-owned.
- The following “measurement units” may be used by an issuer to measure the reduction in energy consumption: (a) single publicly-owned building; (b) multiple publicly-owned buildings; (c) one or more building system components (i.e., a system that serves one of the following functions: heating, ventilation and air conditioning, hot water system, lighting, building envelope or electricity “plug load”) of one or more publicly-owned buildings; or (d) a combination of (a) or (b) and (c). The measurement unit must include the publicly-owned building or buildings, or building system component or components, with respect to which the capital expenditures financed with QECBs are incurred.
A reasonable expectations standard applies for purposes of determining whether the QECBs have reduced energy consumption by at least 20 percent. To satisfy the 20 percent test, the issuer must reasonably expect that the capital expenditures incurred for the project will result in a 20 percent or greater reduction in energy consumption for the selected building, buildings or building system during the selected measurement time period and using a common energy unit.
- An issuer may rely on an independent expert to establish its reasonable expectations with respect to the 20 percent test. Such expert must, no earlier than 60 days prior to the issue date of the QECBs, certify under penalty of perjury that the capital expenditures for the project are reasonably expected to result in a 20 percent or greater reduction of energy consumption in the measurement unit during the measurement period.
- A “measurement time period” is any reasonable and consistent time period of not less than one year that may to be used by an issuer for purposes of the 20 percent test. The issuer must also use a consistent method of measuring energy use. The first time period must begin immediately before, and the second time period must begin immediately after, all capital expenditures are incurred for the project. Energy use during such two periods will be compared to determine compliance with the 20 percent test. Energy use during the construction period is not considered.
Green Community Program
As described in the Notice, a green community program is a program that meets the following two requirements: (a) the program’s purpose is to promote one or more of the purposes of energy conservation, energy efficiency or environmental conservation initiatives relating to energy consumption, including, but not limited to, energy savings through retrofitting initiatives for heating, cooling, lighting, water-saving, storm-water reducing or other efficiency measures, distributed generation initiatives or transportation initiatives that conserve energy and/or support alternative fuel infrastructure, and (b) the program must (i) involve property that is available for general public use or (ii) involve a loan (or other repayment mechanism) or grant program that is broadly available to the member of the general public, including individuals and businesses. It is not necessary for a green community program to affect the entire geographical area or all residents and businesses within the geographic jurisdiction of the governmental unit that implements the program so long as the program broadly benefits the general public, residents or businesses in the affected area. The Notice provides examples of “general public use,” “broadly available” and of a “green community program.”
The foregoing information is intended to be a brief summary of certain portions the Notice, and additional substantive rules under the Notice may apply in certain cases.