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Planet-Profit Report, reporting on sustainable development in the Western United States.

Finding green for clean

Commercial real estate association offers primer on financing cleantech projects

Success in today’s commercial real estate market means knowing not only the ebb and flow of the real estate game but also knowledge of the myriad tax and other benefits flowing from Washington, D.C., to groups as diverse as alternative energy enterprises, their architects and designers, and their owners and investors.

NAIOP, the commercial real estate development association, recently wheeled in some big guns to explain some of the complexities of alternative energy taxation and financing. The audience was real estate professionals in Denver but the lessons were primarily national in scope.

NAIOP’s “Financing Renewable Energy & Clean Technology Facilities,” a 90-minute session hosted by the Brownstein Hyatt Farber Schreck law firm (with venue and breakfast provided by warehouse giant ProLogis), was part three of a five-part educational series on “How to ReENERGYze Your Real Estate” that addresses renewable energy and clean technology.

Lee Johnson, partner in the CPA firm of Clifton Gunderson, and Mike Noyes, senior manager with that firm, discussed the money-making implications of tax laws that are relatively new and undeservedly unknown.

The outstanding example, they said, is the federal tax code’s section 179D, which might qualify commercial property owners or lessees for tax deductions of up to $1.80 per square foot.

“We’re concerned because a lot of building owners are doing energy upgrades to their buildings and not taking advantage of some really nice tax reductions that they can get in connection with those upgrades,” noted Clifton Gunderson’s Lee Johnson.

Section 179D allows deductions for constructing or renovating energy efficient commercial buildings “yet very few people know about 179D and some of the other deductions available,” added Lee Johnson. Section 179D “has really flown under the radar even though it has been in effect for several years,” since 2005.

Knowing 179D could be a dealmaker or –breaker, but many builders and owners erroneously believe that scoring high LEED ratings has something to do with tax breaks, Lee Johnson said. But the real requirements are quite different than the U.S. Green Building Council’s Leadership in Energy and Environmental Design rankings.

In addition to 179D, Johnson said commercial real estate pros need to know about: other state and federal alternative tax credits and deductions; bond financing; rebates and their payback periods; Resource Smart Colorado programs; American Recovery and Reinvestment Act (ARRA) funds; and Department of Energy guarantees and grants.

Greg Johnson, partner in the Patton Boggs law firm and chairman of its construction, infrastructure, and public-private partnerships group, took the discussion another step, one in which federal tax credits can be used as leverage to finance a large renewable energy production project.

That means taking tools such as the tax credits and state subsidies explained by Clifton Gunderson’s Johnson and Noyes, and turning them “into a financing of one form or another, so that you can use other people’s money to build your project,” Greg Johnson said.

Historically, Patton Boggs’ Johnson explained, investment in larger projects has been driven by production tax credits, that is, a tax credit based on energy produced by facility in question.

That was then. Now, commercial lenders are lending less readily, and renewable energy financiers are turning from production tax credits to increased use of investment tax credits, “a tax credit not based on energy produced but by the qualifying capital investment in the project in question,” Greg Johnson said.

Typically the owner of such a facility is a special-purpose entity, meaning it has no history, no income, and no credit. “Therefore it seeks to monetize credits, meaning they want to create a structure whereby they use other people’s money -- people who do want credits -- and the structure monetizing those credits brings cash to the table to allow the sponsor of the renewable energy project to use that as equity as part of their overall capital program.”

That’s beautiful and so is, “a program currently whereby the IRS will pay you, as a project sponsor, money, cash, in lieu of an investment tax credit,” Greg Johnson said.
That way, “If you are a project owner and cannot use the ITC, once the project is completed and placed in service you are able to obtain a check from the IRS in lieu of that 30 percent investment tax credit.

“That program has been a very important element of successful renewable energy projects,” Patton Boggs’ Johnson noted.