Going Green Without Going Broke - Combating the Green Premium
Leigh Poltrock is an attorney in the affordable housing, business and real estate practice groups at Cohen & Grigsby, P.C. - About the Author
Builders who want to go green should not be discouraged. A smart green developer can be financially successful and environmentally conscious at the same time. Green premiums can often be offset through numerous government incentives, private grants and financing, expedited building processes, and by the general appeal of green building's long term savings.
One of the most significant and accessible methods of overcoming the green premium is through federal and state incentive programs. These programs include tax rebates, deductions and credits, loans, and grants. The federal government provides a laundry list of tax benefits for individuals and businesses willing to incorporate an element of green into their building projects. As an example, individuals can utilize a federal loan program to receive Clean Renewable Energy Bonds ("CREBs") to finance renewable energy sources such as solar power and irrigation projects. CREBs are issued with a 0% interest rate and a borrower pays back only the principal. The bondholder gets tax credits rather than interest.
The commercial and construction sectors can obtain corporate tax deductions of up to $1.80 per square foot for installing energy efficient fixtures that reduce a building's total energy and power cost by 50%.2 Even if an owner initially pays more for a green building, these programs offer long-term savings when compared with traditional, non-green building techniques. Being able to understand, explain, and utilize these tax ramifications can be an invaluable weapon in any green builder's arsenal.
Along with these federal tax incentives, there is a growing state-wide movement urging, and in many cases forcing, the adoption of green building in the affordable housing market. States generally award Low Income Housing Tax Credits ("LIHTC") based on the state’s pre-established Qualified Allocation Plan ("QAP"). To generalize the process: a builder submits a proposal and the state evaluates it using its QAP criteria. The higher the builder’s score, the more likely the developer is to receive LIHTC's. With this process in mind, states have begun inserting "green criteria" into their QAP's in an effort to encourage and reward builders willing to build green.
For example, Pennsylvania allots up to 10 extra points to reward building characteristics that promote energy conservation. Of these 10 potential points, up to five can be awarded when a building's exterior exceeds the requirements of the 2006 International Energy Conservation Code. The remaining five are based on a proposed plan's compliance with Pennsylvania's "Green Building Criteria." Recognized criteria include water saving fixtures, timed lighting, Energy Star appliances, and drought tolerant landscaping. A builder can gain a 10 point advantage, which although up-front costs are more, will lead to a much larger long term return and an increased LIHTC reward.
New York's QAP goes so far as to require that certain green measures be implemented before even giving consideration to a development's tax credit eligibility. Beyond these requirements, owners and developers are given added incentives because New York offers extra points for any additional green features including favorable site locations, surface water management plans, and the use of safe and non-toxic work materials.
Maine goes one step further and gives priority to development projects that "incorporate green design and construction methods which create healthy, economical and durable buildings that are efficient to operate and maintain." Understanding and working to maximize these potential points enables builders to gain a financial and competitive edge in an already very competitive affordable housing market.
In addition to government programs, there are also a variety of private organizations that owners, developers, and builders can utilize. In an effort to promote green building, these groups are willing to provide substantial grants and financing to those willing to go green. A leading example of green-steered capital comes from Enterprise Community Partners. Under its "Green Communities" program, Enterprise provides over $550 million in grants, financing, tax-credit equity, and technical assistance to builders willing to incorporate "Green Criteria" into their housing developments. It has been estimated that this technical assistance alone can drive costs down by as much as 30 percent. As a specific example, Enterprise has joined with The Florida Community Loan Fund and the Florida Green Building Coalition to form Florida Green Communities. This program offers Florida green builders access to more than $2.5 million in discounted "green" loans, $200,000 in grants, and free technical assistance to facilitate the initiation of green building strategies. Acquiring this type of private financial assistance can be more than adequate to overcome even the highest of green premiums.
In addition to these financial advantages, going green can cut through development-related bureaucratic red tape. Chicago recently initiated its "Green Permit Program" which is intended to expedite the process of securing building permits when a project complies with the city's pre-established green criteria. Similar programs have been enacted in cities and counties in Florida, California, Virginia, Washington, and Washington D.C. In the case of a time sensitive project, such as LIHTC projects with placed in service requirements, a faster permit process can be an invaluable resource.
When a builder decides to go green, a few minutes of online research will reveal access to a wide variety of programs and organizations whose sole purpose is to facilitate a green transition. The Environmental Protection Agency ("EPA") and Department of Energy have a joint Energy Star Program which works with over 12,000 public and private sector organizations to improve energy efficiency. By certifying energy efficient products and helping builders establish plans that maximize energy efficiency, Energy Star not only protects the environment, but facilitates significant financial savings for organizations who utilize its programs and products. Another resource available to builders is the United States Green Building Council's Leadership in Environmental and Energy Design ("LEED") certification program. This program promotes and educates builders on sustainable site development, water savings, energy efficiency, materials and resources selection, and indoor environmental quality. LEED gives builders the tools to have an immediate and measurable impact on any building's positive environmental performance. Although probably the most prominent, these two examples are certainly not the only programs available. In most cases, builders need only express the slightest interest and environmental groups will be eager assist in implementing these cutting-edge techniques.
It is, however, inevitable that some projects cannot avoid paying a green premium. Even in these circumstances, potential green builders must not overlook a very important fact: if a builder is prepared to build green and knows how to do so, a client may be willing to pay the premium in exchange for the long term benefits associated with green building. For an increase of up to 5 percent in development costs, studies have shown that buildings could use 30 percent to 50percent less energy to heat and cool, 20 percent less electricity, and 10 percent to 20 percent less water. This equates to savings often far exceeding the 5 percent initial premium. The EPA has estimated that among the 2,500 buildings that earned an Energy Star in 2005, these buildings have saved a combined $350 million in energy costs. Putting aside financial savings completely, green buildings have incidental benefits such as improving the quality of life for asthma suffers because they minimize moisture and provide proper ventilation. These are issues that are important to prospective clients and must not be overlooked. As the potential for these benefits pique the interest of consumers, builders must be ready to answer the demand for more green.
Is anyone successfully building green? The answer is a resounding yes. Success stories are popping up all across the nation. In Scottsdale, Arizona, about one-quarter of the 900 homes built in 2007 focused on incorporating energy-saving and sustainable-building features. The result: The city reported that its green building program reduced greenhouse gas emission by roughly 2,700 pounds of carbon dioxide per home. To put that number in prospective, the average home produces roughly 30,000 pounds of carbon dioxide. 2,700 pounds fewer per home is a significant decrease when considering the magnitude of all the reductions taken as whole.
New York's Tiano Plaza in Brooklyn became the first multi-family green building in the area whose green characteristics played an important role in facilitating its development. The project's environmentally conscious design helped bring in funding from both The New York State Energy Research and Development Authority and various banks in New York. These groups were more than willing to help finance the socially responsible green project.
Philadelphia's Nellie Reynolds Gardens was able to speed through its permit process and obtain favorable financing for its green commitment. The senior citizen development is equipped with a green roofing system, Energy Star appliances, and environmentally friendly paints and carpeting.
Even celebrities are getting in on the act. In 2006, Brad Pitt teamed with Global Green USA to co-sponsor a competition aimed at developing affordable and earth-friendly housing for neighborhoods destroyed by Hurricane Katrina. The competition was a success and devastated neighborhoods will enjoy a rebirth that fosters environmentally responsible, healthy, and sustainable living.
As fads come and go, it is safe to say that green building is here to stay. Even in the face of its rapid popularity, the federal government and various state governments are not waiting around for the green movement to take hold. The environment is in jeopardy and green building is now a necessity. California was the first state to introduce mandatory green criteria into its building code. The goal of this unanimously approved legislation is to reduce water usage in residential and commercial structures by up to 20 percent and reduce water used in landscaping by 50 percent. The code also aims to cut the energy usage of all new structures by 15 percent and it strongly encourages development projects to adopt other green techniques such as using environmentally friendly construction materials.
Maryland's Montgomery County recently amended its building code to require a certain level of energy efficiency and environmental design for non-residential and multi-family residential buildings. The code requires these buildings to achieve at least some certified-level rating under the LEED rating system.
Mandatory green building is also becoming prevalent in the affordable housing market. On January 17, 2008, the House of Representatives passed the Hope VI Improvement and Reauthorization Act of 2007. This act requires projects to incorporate a variety of green measures, as identified in the Green Communities Criteria Checklist, to qualify for any affordable housing grant. The bill was referred to the Senate Committee on Banking, Housing, and Urban Affairs, but never made law. However, new measures that require builders to think green are being introduced in Congress every day.
Recently, Representative Edward Perlmutter introduced a potentially historic piece of legislation that could dramatically accelerate the push for green building nationwide. The Green Resources for Energy Efficient Neighborhoods Act of 2008 ("GREEN Act") provides incentives for lenders that provide lower interest rates to consumers who improve the energy efficiency of their homes or business. It establishes minimum Housing and Urban Development ("HUD") energy efficiency standards, which would reduce energy consumption by at least 30 percent. It also creates a variety of grant programs and ensures mortgage insurance for buildings that are energy efficient and in eco-friendly locations. The bill is so full of green programs that an entire article can be written on it alone. The GREEN Act was passed by the House of Representatives on September 16, 2008 as part of the Comprehensive American Energy Security and Consumer Protection Act, but has not yet been approved by the Senate. As this piece of legislation – and others like it – move through Congress, builders should be poised and ready to handle an increased demand in the green housing market.
The American Recovery and Reinvestment Act of 2009, otherwise known as the Stimulus Bill, was signed into law on February 17, 2009 by President Obama. The Act contains unprecedented spending and incentives for green building and retrofitting. The new law appropriates $4 billion for the Public Housing Capital Fund, of which $1 billion is earmarked for "competitive grants" to housing authorities for investments that, among other things, improve energy efficiency or reduce energy costs in existing buildings. An additional $250 million is set aside for grants and loans for "energy retrofit investments" in properties that receive project-based assistance, like Section 8 projects. The Act also requires many state and local government agencies receiving stimulus funds to use a portion of those funds to improve energy efficiency. For instance, public schools receiving funds under the Act must spend at least 25 percent of the funds on energy efficient modernization, improvement, or repair of buildings, as certified by LEED Green Building Rating System or Energy Star. The Act also provides numerous tax incentives to individuals and businesses for going green. The American Recovery and Reinvestment Act is so full of programs promoting energy efficiency and green building, it could be the topic of an entire article. Especially considering the benefits of the new Stimulus Bill, prudent builders and developers should take the opportunity to go green at a lower cost.
Green building is here to stay. By changing building techniques today, builders can positively affect the planet for generations. Builders and developers that can incorporate green building techniques into their plans will be rewarded with tax benefits, private grants and loans, expedited permitting, and even consumer good will. Although the green premium is a factor, numerous programs and incentives are available to reduce the costs associated with green building. Understanding and utilizing these programs can help builders keep profitable while embracing the future of green building.
1 Study conducted by New Ecology Inc., a Cambridge, Massachusetts sustainable development organization.
2 These are only two brief examples of the many federal incentives available for going green. For a more complete listing, go to www.desireusa.org.
About the Author - Leigh Poltrock
Leigh Poltrock is an attorney in the affordable housing, business and real estate practice groups at Cohen & Grigsby, P.C. (www.cohenlaw.com), a business law firm headquartered in Pittsburgh, PA. Poltrock focuses her practice on general corporate matters and administrative law, as well as affordable housing and commercial real estate, and non-profit organizations. In addition to representing private sector corporate clients in a variety of matters, Poltrock represents housing authorities across the country in statutory and regulatory compliance, the defense of housing discrimination cases, and the financing and renovation of large public housing communities. Prior to joining Cohen & Grigsby, Poltrock served as the General Counsel of the Philadelphia Housing Authority.
More like this
Comments on: "Going Green Without Going Broke - Combating the Green Premium"
Search Our Buyer's Guide
Professional Remodeler’s annual Market Leaders list, which identifies the top...
With demand for custom design, remodeling, and renovations at its highest level since 2005, ...
Normandy Remodeling converts confined kitchen into sprawling galley.
Each year, the National Kitchen and Bath Association surveys its members to identify the latest...
Each year, the National Kitchen and Bath Association surveys its members to identify the latest...