As concerns over climate change and the demand for clean energy grow, there has never been a better time to invest in energy-efficient commercial properties. You, property developers and real estate investors, can reap substantial financial benefits on top of helping to reduce carbon footprint. Various tax credits and efficiency incentives are now available to those who commit to the development of green buildings and projects. In this article, we explore these financial incentives, their eligibility requirements, and how they can enhance the value of your investment.
1. Energy Efficiency Tax Credits
The concept of energy efficiency doesn’t just appeal to the environmentally conscious, but also the financially savvy. The Internal Revenue Service (IRS) provides a tax credit to commercial property owners who install energy-efficient improvements to their buildings.
The Energy Policy Act of 2005, renewed and extended several times, offers a deduction of up to $1.80 per square foot for commercial buildings that achieve a 50% energy reduction. The tax credit applies to a variety of improvements, including upgrades to the building’s envelope, lighting systems, and heating and cooling systems.
To qualify for this credit, the energy reduction must be certified by a qualified third-party. The IRS also sets specific standards for each type of improvement, and the upgrades must meet these standards to be eligible.
2. Renewable Energy Tax Credits
In addition to energy efficiency, the IRS also encourages the use of renewable energy sources in commercial properties through the Renewable Energy Investment Tax Credit (ITC) and the Renewable Energy Production Tax Credit (PTC).
The ITC offers a tax credit for commercial properties that install renewable energy systems such as solar panels, wind turbines, or geothermal heat pumps. The size of the credit is based on the type of system installed, with credits ranging from 10% to 30% of the system’s cost.
The PTC, on the other hand, provides a per-kilowatt-hour (kWh) tax credit for electricity generated by renewable energy systems and sold to third parties. The credit lasts for ten years after the system is placed in service.
Both credits have specific eligibility requirements, including the system’s size, its installation date, and the type of renewable energy it uses.
3. State and Local Efficiency Incentives
In addition to federal incentives, many states and local governments offer their own energy efficiency programs to promote the development of green commercial properties. These programs often take the form of grants, low-interest loans, or additional tax credits and can significantly reduce the cost of energy-efficient improvements or renewable energy systems.
For instance, the New York State Energy Research and Development Authority offers the Commercial New Construction Program, which provides technical assistance and cash incentives for the integration of energy-efficient components into the design of new or substantially renovated commercial buildings.
Eligibility for these programs varies by location and the specific details of the energy-efficient or renewable energy project. It’s recommended that you research the programs available in your area and consult with a tax or energy professional to ensure you’re meeting all of the requirements.
4. Utility Energy Efficiency Programs
Many utility companies also offer incentives for energy efficiency in commercial properties. These programs are typically designed to help the utility company meet state-mandated energy reduction targets, and they can provide significant savings for commercial property owners.
These incentives may include rebates for energy-efficient appliances and systems, discounts on energy audits, or even free energy-efficiency improvements. Some utilities also offer "demand response" programs, which provide financial incentives for businesses that reduce their energy use during peak demand periods.
Eligibility for these programs typically depends on the utility’s service area and the specific energy-efficient improvements being made. It’s worth contacting your utility company or visiting their website to see what programs they offer and how you can take advantage of them.
5. Green Building Certification Incentives
Finally, many cities and states offer incentives for commercial properties that achieve green building certification, such as Leadership in Energy and Environmental Design (LEED) or ENERGY STAR. These programs certify that a building is designed and operated to be energy and resource-efficient, providing a recognized standard of sustainability.
Incentives for these certifications can include tax credits, expedited permit processes, or even increased floor area ratios for new construction. These incentives recognize the additional value that green certification brings to the property, both in terms of energy savings and increased attractiveness to tenants and investors.
Achieving these certifications requires meeting high standards of energy efficiency and sustainability, but the potential financial rewards can make the investment well worth it. Green building certification not only provides immediate financial incentives but also enhances the long-term value of the property.
6. Bonus Depreciation for Green Energy Properties
The federal government also provides an added incentive known as bonus depreciation for energy-efficient commercial properties. This provision allows property owners to write off a larger portion of the cost of energy-efficient improvements in the first year, thereby reducing their tax burden.
Under the Tax Cuts and Jobs Act of 2017, commercial property owners can take a 100% bonus depreciation on the cost of qualified energy-efficient improvements made to their buildings. This deduction applies to any improvements made after September 2017 and before January 2023, with a phase-down of the bonus depreciation rate for improvements made in 2023 and later years.
Qualified improvements include energy-efficient heating, ventilation, and air conditioning systems; energy-efficient lighting; energy-efficient roofs; and solar energy systems, among others. To qualify, the improvements must meet the energy efficiency standards set by the IRS.
This bonus depreciation can be a significant financial incentive for commercial property owners to invest in energy efficiency. It not only reduces the upfront cost of these improvements but also accelerates the return on investment by allowing property owners to recoup their costs more quickly through tax savings.
7. Prevailing Wage and Apprenticeship Requirements
In addition to the direct financial incentives, energy-efficient commercial properties can also benefit from indirect incentives in the form of prevailing wage and apprenticeship requirements. Many states and local governments require that workers on publicly funded construction projects be paid a prevailing wage, which is typically higher than the average wage for similar work in the same area.
This requirement applies to many energy-efficient and renewable energy projects, providing an additional financial benefit to commercial property owners. By paying a prevailing wage, property owners can attract highly skilled, experienced workers, thereby ensuring that their energy-efficient projects are of the highest quality and durability.
Similarly, some state and local governments require that a certain portion of the workers on publicly funded construction projects be registered apprentices. This requirement can provide additional financial benefits to property owners, as apprentices typically earn lower wages than fully trained workers. By hiring apprentices, property owners can reduce their labor costs while also contributing to the training and development of the next generation of skilled workers.
Conclusion
In conclusion, developing an energy-efficient commercial property can offer numerous financial incentives. From significant tax credits and deductions, grants, low-interest loans, to bonus depreciation provisions, the benefits are immense. Moreover, complying with prevailing wage and apprenticeship requirements can provide indirect financial benefits, attracting skilled workers and ensuring the high quality of energy-efficient projects.
However, to reap these financial incentives, property owners need to navigate a complex landscape of federal, state, and local regulations and requirements. Therefore, it’s highly recommended to consult with tax or energy professionals to ensure all the requirements are met.
By investing in energy-efficient commercial properties, not only do property owners contribute to reducing carbon footprint, but they also stand to gain from substantial financial incentives. This, in turn, enhances the long-term value of the property, making it an attractive investment option for real estate investors.
