Obama plan targets commercial spaces

Paul C. Connors

04/23/2011

Faced with rising energy prices and pressure to reduce operating costs, an increasing number of commercial real estate owners are considering renovating their buildings to make them more energy efficient. The Obama administration has proposed a plan designed to address commercial real estate owners’ cost concerns, jump-start the economy and reduce greenhouse gas emissions.
On February 3, President Barack Obama unveiled the Better Buildings Initiative, a program aimed at improving energy efficiency in commercial building spaces, including those occupied by schools, hospitals and other nonprofit organizations. The initiative’s three overarching goals are: to improve energy efficiency in commercial building space by 20 percent by 2020; to reduce commercial real estate energy expenses by about $40 billion per year; and to reform outdated incentives and stimulate a public-private sector partnership to achieve these energy-efficiency targets.
Inside the Initiative
According to the White House, in 2010 commercial buildings consumed roughly 20 percent of all energy in the U.S. economy. Of this, the Environmental Protection Agency estimates 30 percent was used inefficiently or unnecessarily. To address these issues and to achieve the president’s energy-efficiency goals in existing commercial building space, the initiative seeks to empower the public and private sectors through a five-point plan.
&#8226 Reform tax incentives. The initiative encourages Congress to convert the current federal tax deduction for commercial-building upgrades to a more generous tax credit. The proposed tax credits range from $.60 to $1.80 per square foot for improvements that result in energy reductions of 20 percent to 50 percent below the American Society of Heating, Refrigerating and Air-Conditioning Engineers standard.
&#8226 Increase access to retrofit-project financing. In conjunction with the initiative, the Small Business Administration (SBA) is encouraging existing lenders to take advantage of recently increased loan-size limits to lend to small businesses for retrofit projects. Additionally, the president’s proposed 2012 budget calls for a new pilot program in which the Department of Energy (DOE) would guarantee loans for retrofit projects at hospitals, schools and other commercial buildings. &#8226 “Race to Green” program. Part of Obama’s proposed 2012 budget, this consists of a series of new competitive grants to state and local governments that streamline standards, encourage upgrades and attract private-sector investment. Rather than mandating states to adjust their energy-efficiency standards and policies, the initiative uses access to federal funding as an incentive for state action.
&#8226 “Better Buildings Challenge.” To increase the visibility of the initiative and to garner private-sector support, the initiative’s “Better Buildings Challenge” urges companies and schools to commit resources to increasing energy efficiency in their facilities. In return, participants will be eligible for benefits such as public recognition and technical assistance.
&#8226 Training commercial building technology workers. Finally, the initiative seeks to better utilize existing authorities to provide more and improved work force training programs in commercial-building-technology fields such as energy auditing and building operations.
Opportunities and Challenges Surrounding Retrofit Projects
While the extent to which the public and private sectors will embrace the initiative is unclear, many parties stand to benefit, including small-business owners, schools, universities, other nonprofits, banks and contractors. On top of the tangible benefits to commercial real estate owners of tax incentives and loan guarantees, other potential opportunities include lower utility bills and increased real estate values. If the initiative takes hold, banks would also have increased lending opportunities. Furthermore, contractors would benefit from more retrofit projects in their work pools and enhanced training programs in commercial-building technologies.
These opportunities, however, will not come without challenges. First, in the coming year, states might begin taking advantage of access to new federal funding through the competitive grants under the “Race to Green” program. Thus, commercial real estate owners should watch for legislative changes providing for heightened energy-efficiency standards. Second, commercial real estate owners concerned with rising operating costs will have to determine whether it is prudent to undertake retrofit projects sooner rather than later.
If owners make energy-efficiency upgrades now, they could begin realizing cost savings, which may outweigh the benefits of waiting to see whether Congress responds to the initiative’s call to provide for stronger tax incentives for retrofit projects.
Some of the initiative’s opportunities are national in scope, such as the federal tax credit, increased access to SBA funding and the DOE loan-guarantee pilot program. Challenges associated with the initiative, however, such as heightened state and local efficiency standards, are more local in nature. As a result, commercial real estate owners will have to undertake a cost-benefit analysis to determine whether, and when, to renovate their commercial buildings in a given area. &#8226

Paul C. Connors is an associate in Hinckley, Allen & Snyder’s corporate & business law practice and is also a member of the firm’s Green Law Group.

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