The Deal That Gets Done: More Often Than Not It’s Green These Days
By Caitlin Jones & A. J. Johnson
9 min read
Tax Credit Advisor, April 2009: Green is now the color in developers’ eyes.
Whether it’s affordable rental housing assisted by the low-income housing tax credit (LIHTC), historic rehabilitation, or a new markets tax credit project, developing in a green and sustainable fashion has become almost essential to compete effectively for tax credits and other resources.
There are different possible paths you can take to reap the myriad benefits – and multiple opportunities. These include expanded or modified resources under the economic stimulus act; incentives in states’ LIHTC programs; governmental and utility incentives, funds, and rebates; and more.
Multiple Benefits
For affordable rental projects, there are multiple benefits, says Dana Bourland, Senior Director of Green Communities at Enterprise Community Partners, Inc. (ECP). ECP runs Enterprise Green Communities, a voluntary national green building rating and certification program tailored to construction and rehabilitation of affordable homes and multifamily rental properties.
These benefits include:
- Better odds of winning a competitive housing credit award, from the extra points under most state LIHTC qualified allocation plans (QAPs) for green and sustainable building features and construction practices. In some states, extra credits also can be gained. “Green and energy efficiency has become part of the allocation plan, and therefore new projects going forward have been very attuned to competing and incorporating green technology, green energy-efficiency approaches,” says Boston attorney David Abromowitz, partner in the law firm Goulston & Storrs.
- Reduced project operating costs, from lower energy and water usage.
- Healthy indoor air quality and possibly lower utility bills for residents.
- Enhanced marketing appeal.
- Less adverse environmental impact.
- Governmental and utility tax incentives, funds, and rebates to offset or help pay for the cost of green improvements.
- A possible smaller LIHTC utility allowance, to boost net operating income.
- Expedited design review and approvals. San Francisco, for instance, has priority permit processing for certain green affordable housing projects.
“From an owner/operator perspective, there’s real financial benefits,” says Bourland. Referring to retrofits of existing multifamily properties under Green Communities, she notes, “We’re seeing, in some of our calculations, expected savings of 20 to 30 percent for energy, as well as water savings.”
Different Rating Systems
General contractor Rick Cheverton, vice president of Knoxville, TN-based Empire Corporation, said there are more than 100 green and sustainable building rating systems nationwide.
Under the Green Communities system, housing projects are evaluated against a checklist of criteria in categories relating to design, water conservation, indoor air quality, energy efficiency, and other areas. Those that score high enough earn certification. Since the program’s inception in 2004, 338 residential properties with 14,500 units – including 54 projects in 2008 alone – have been certified under Green Communities. The units break down to 78% new construction, 21% rehabilitation, and 1% a mix.
Other major national green building rating systems include the popular Leadership in Energy and Environmental Design (LEED) run by the U.S. Green Building Council; the National Association of Home Builder’s National Green Building Standard; the U.S. Depart-ment of Energy’s Energy Star for Homes program and a subset multifamily pilot; and EarthCraft.
Under LEED, different levels of certification, based on score, are possible, ranging from basic LEED-certified up to LEED Platinum. There also are multiple LEED rating programs, for different types of buildings and construction, plus one for neighborhoods. Multifamily housing generally has used LEED New Construction or LEED for Homes – the latter also has a pilot for multifamily buildings of 4-6 stories set to run through year-end.
Many state QAPs reference one of the national green building rating systems.
Common, High Payoff Features
Cheverton defines sustainable building as having three components: (1) energy efficiency; (2) water savings; and (3) air quality.
He said the most common features in LIHTC projects built by Empire have included things like on-site recycling centers for tenants, sidewalks designed to tie in with public sidewalks that link to public transit, bike racks, and Energy Star appliances.
Cheverton noted water-savings devices often are overlooked but can reap huge returns. “We found that we saved $30,000 a month on one of our properties just in water usage, by switching everything to the low-flow toilets and water-efficient faucets on both sinks and showerheads.”
Another big boost can come from installing Energy Star lighting and light fixtures. One approach is to replace the existing incandescent bulbs in standard light figures with energy-efficient compact fluorescent lights (CFLs). But Cheverton suggested a wiser path is to replace the standard light fixtures with Energy Star-rated light fixtures. If not, he warned that tenants usually will replace the initial CFL, once it burns out, with a cheaper but less efficient incandescent bulb, defeating the purpose.
Abromowitz said common steps he’s seen by owners of federally-assisted rental properties include some “very mundane but cost-effective” improvements such as caulking, upgraded insulation and windows, and the like. “Nothing fancy or sexy, but very cost-effective,” he said.
Cheverton said green and sustainable equipment or improvements that pay for themselves in five years or less are a “no-brainer” and should be done. Energy Star lighting and water-saving devices, for instance, each have a payback period of 2-3 years, he noted. Cheverton advised careful evaluation of items with payback periods longer than five years, such as high-efficiency HVAC systems with a Seasonal Energy Efficiency Ratio (SEER) rating of 15 of 16. He explained that the expected savings for items with payback periods of 5 to 10 years may be trimmed by excessive maintenance after year 5.
Cheverton said one way his firm helps developers choose from among the many possible green and sustainable menu options on a national rating system checklist is to develop an estimate of the per-point cost for each item. For example, if the menu offers five points for a stormwater redistribution system, if the system would cost an estimated $250,000, the per-point cost would be $50,000. With this method, it is easier to compare items and determine a mix of specific features that will achieve certification at the least cost or within a certain budget.
Cheverton suggested the smartest thing developers can do is hold an integrated design meeting – called a charrette – at the outset. This can help sharpen the developer’s goals for the project, identify possible green/sustainable building features and practices and the cost/limitations (budget, technical) of each, and develop a better design. Typical attendees include the developer/owner, general contractor, major subcontractors, energy consultant, and others.
Funds may be available to help pay for these. Enterprise, for example, each month awards $5,000 charrette grants to sponsors planning to develop affordable housing projects to Green Communities standards. Enterprise also offers no-interest loans of up to $35,000 for early pre-development costs, and larger planning/construction grants of up to $75,000. The 2009 application deadline for these larger grants is 4/20/09 (go to http://www. greencommunitiesonline.org).
Incentives, Funding Sources
A variety of governmental and private-sector incentives are available to developers and owners to help defray the costs of green and sustainable features and renewable energy equipment incorporated into real estate projects, including multifamily rental housing.
At the federal level, a tax deduction is available to owners of new or existing commercial buildings, of up to $1.80 per square foot for the cost of efficiency measures placed in service before 2013 that reduce by at least 50% the annual energy usage of a building. These can be improvements to a building’s heating, cooling, hot water, or interior lighting systems, or the building envelope.
There are also federal energy tax credits, which can be used by the developer or owner or syndicated to raise equity.
One of the most popular incentives has been the solar investment tax credit (ITC). This credit is equal to 30% of the cost of qualified equipment (e.g., solar panels) that uses solar energy to generate electricity (photovoltaic, or PV systems), to heat or cool, to provide solar process heat (such as solar thermal, to heat water), or to power fiber optic lighting distribution systems. Solar equipment to heat swimming pools or hot tubs is ineligible.
Additional types of renewable energy equipment are eligible for the 30% ITC (e.g., small wind turbines), and others are now eligible for a 10% ITC (e.g., geothermal heat pumps, combined heat and power systems), some due to changes made by the American Recovery and Reinvestment Act (ARRA).
ARRA also repealed a prior $4,000 annual credit cap for the 30% ITC for small wind property, as well as a prior requirement that any ITC be reduced if the energy property is financed by tax-exempt private activity bonds or a subsidized financing program.
Also available is a federal energy production tax credit (PTC). Unlike the ITC, which is claimed all in the first year and pegged to the cost of the equipment, the PTC is claimed annually over 10 years and based (a specified number of cents per kilowatt hour) on the amount of electricity produced during the year by qualified renewable energy facilities (e.g., wind, geothermal, hydropower, biomass). ARRA extended the placed-in-service deadlines to year-end 2010 for wind and year-end 2013 for other facilities.
Abromowitz said one owner of multiple assisted rental housing projects is exploring the possibility of installing small co-generation equipment at the buildings “to capture more energy efficiency.” Co-generation entails capturing the heat and steam that would otherwise be lost or wasted to create electricity that can then be used at the property or – if state law permits – sold back to the grid.
In addition to federal incentives, many states offer tax incentives or rebates for energy conservation improvements or for renewable energy. In addition, many utility companies offer rebates. A comprehensive listing may be found at http://www.dsireusa.org.
Federal Funds
ARRA also provides large new sums of federal funds that may be used to finance energy efficiency improvements in public housing properties and assisted private rental properties under programs administered by the U.S. Depart-ment of Housing and Urban Development (HUD). (For details, see Tax Credit Advisor, March 2009, p. 1, also go to http://www.hud.gov/ recovery)
For instance, HUD will be holding a competition to award $1 billion to public housing agencies (PHAs) for eligible activities that could include energy retrofits to public housing.
In addition, HUD has until 4/17/09 to publish a notice that will spell out the application process and other details for a competition it will hold to award $250 million as loans or grants to owners of eligible HUD-assisted rental projects (e.g., Section 202, 811), to make energy and green retrofit investments.
