» Summary  (April 2011)  
 

» Financial Incentives for Building Retrofits 

• Tax Incentives
• Loan Guarantees
• Green Appraisal Standard
• Federal Regulations – Building Codes, Labeling, and Data Sharing

» Environmental Regulations 

• Stormwater
• Lead Renovation Repair and Painting (“LRRP”) Rule in Commercial Buildings

» Infrastructure 

• Transportation
• Public Buildings

 » Summary (April 2011)

In the previous session of Congress, energy policy was synonymous with greenhouse gases heating up our planet beyond the point where we could cool it; ice caps melting and causing rapid rise in sea levels; hurricanes made especially fierce from warm ocean temperatures; and vanishing species losing their polar habitats. In this Congress, doom is still present. The quake-stricken Fukushima plant joins Three Mile Island and Chernobyl to form an inauspicious triad that taps into our worst nightmares about nuclear power. Waves of revolt in the Middle East renew fears that foreign dictators, who control the oil that helps keeps our nation running, could turn off the spigot at any moment. All of this, while images of the gushing Deepwater Horizon rig and petrol-coated seabirds are still fresh in our minds as the Department of Justice contemplates criminal charges against BP.

In short, the coming apocalypse continues to set the tone for the energy debate on Capitol Hill. But even if the policy discussion sounds and looks like a disaster movie, Congress and the Administration are considering proposals that could have real impacts — both positive and negative — on the commercial real estate sector.

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» Financial Incentives for Building Retrofits  

• Tax Incentives 

On the positive side, policy makers are giving careful thought to incentive programs that might leverage private investments to make commercial buildings more energy efficient. Most notably, President Obama has announced his Better Buildings Initiative (“BBI”), a multi-faceted program billed as a jobs-creation effort that also feeds into the theme of American innovation by making existing buildings more energy efficient through retrofit projects.
To facilitate a sluggish economic recovery, the BBI places emphasis on energy efficiency incentives rather than regulatory mandates. A central component of the BBI advocates for legislative reform to current tax incentives that, to date, have had only anemic effect in encouraging building retrofits. To this end, the White House suggests changes to the present Section 179D tax deduction for energy efficient commercial buildings. The BBI endorses in principle recommendations developed by The Roundtable, in collaboration with groups such as the U.S. Green Building Council and the Natural Resources Defense Council, such as:

 — Measure energy savings compared to the existing building baseline. 

Currently, Section 179D rewards buildings whose overall energy is reduced to 50 percent of the energy the building would use if it were built to a particular code (ASHRAE 90.1 as adopted in 2001). This is an arbitrary baseline for buildings constructed decades ago. Energy usage pre- and post-retrofit is a more appropriate point of comparison for existing buildings.

— Link the amount of the incentive to energy savings achieved.  

This would calibrate the tax benefit to the value created. We recommend that the minimum amount of the incentive correspond to 20 percent total energy savings compared to the building’s baseline energy consumption; the maximum incentive should correspond to 50 percent savings. The amount of the incentive would increase for every 5 percent increase in energy savings within this range. This will encourage ambitious projects while also rewarding projects that achieve meaningful (yet more moderate) levels of energy savings.

— Allow owners or tenants to claim some incentive for improving a substantial space within a building. 

There is significant opportunity and appetite for building owners and tenants to improve energy efficiency during tenant build-out of office space, although current landlord-tenant arrangements seldom seize that opportunity. Similarly, there is appetite and opportunity for building owners to improve the efficiency of a large space within a building, but where they do not necessarily have access to all tenant space. To encourage these objectives, the Department of Energy (DOE) should be directed to develop guidance for how the tax incentive can be used for efficiency improvements for large, defined spaces within an existing building.

— Make the tax incentive useable for a broad range of building types and owners, including REITS and multifamily buildings. 

To gear a tax incentive for optimal benefit by Real Estate Investment Trusts (REITS), the full amount of the incentive should be available for a REIT that considers such entities’ special tax requirements. Furthermore, building owners should be permitted to allocate the incentive to other parties related to the transaction, such as the contractor, a tenant, or a source of financing. Additionally, multifamily buildings should remain eligible for any commercial building incentive — given their similarity to commercial buildings with respect to ownership, structure, and application of energy codes. It will also be critical to ensure that the incentive complements the rules of the existing low-income housing tax credit to encourage energy efficiency upgrades in the affordable housing stock.

• Loan Guarantees 

In addition to tax incentives, The Roundtable is working through a coalition that supports the Administration’s ideas to create a loan guarantee product designed to provide credit enhancement for building retrofit loans. Under current law, at Title XVII of the 2005 Energy Policy Act, DOE administers a loan guarantee program geared to support debt that underwrites nuclear, large scale solar, wind farm, and other renewable projects.

We advocate that a loan guarantee should be created for less risky, less expensive and more cost-effective building retrofit projects. The idea is to scale such a program so that it is attractive to the lending community writ large (such as through pooling or securitizing retrofit debt), while also preserving the prime lien interest of first mortgagees in properties encumbered by prior financing. We will continue to work with stakeholders and the Administration to determine whether Congress might support such loan guarantee legislation.

• Green Appraisal Standard 

Currently, there is no standardized metric for the real estate appraisal industry to value the energy efficiency attributes of buildings. The federal agencies in charge of financial regulation already have existing legal authority to enact such a green real estate appraisal standard. A green appraisal standard can help provide data and property comparables, to draw the connection between higher-performing buildings and increased asset values. In turn, this can help banks release capital for retrofit project financing.

Under existing authorities, a green appraisal standard must be developed through a public comment process. This is critical to ensure buy-in from stakeholders in the real estate, financing, appraisal, and energy services industries. The Roundtable will continue to encourage the Administration to start the process and formally accept stakeholder input towards development of a green real estate appraisal standard.

• Federal Regulations – Building Codes, Labeling, and Data Sharing 

While The Roundtable will continue to encourage Congress and the Administration to favor “carrots” in the energy policy arena (like the financial incentives discussed above), we also find it necessary to advocate against “sticks” that some policy makers continue to try and whittle.

In this regard, we expect that ideas from the previous session of Congress for a federal energy efficiency building code will continue to surface. The Roundtable will continue its alliance with other national real estate organizations in opposing efforts to create a first-ever federal building code bureaucracy administered by DOE in Washington, D.C. “One-size-fits-all” energy codes for new construction, which do not account for varied building types, tenant plug-load uses, and regional climatic variations, are bad policy.

Rather, we encourage legislators to consider how current laws, defining DOE’s role in the codes-development process, might be improved. DOE has much to contribute as a technical advisor to codes and standards setting bodies like the International Code Council (“ICC”) and the American Society of Heating, Refrigerating, and Air Conditioning Engineers (“ASHRAE”).

But the agency’s participation should be more open and transparent, grounded in sound economic cost-benefit analyses, highlighted by data sharing with regulated industry stakeholders and reporting to authorizing committees in Congress. Accordingly, The Roundtable is working with industry colleagues to recommend improvements to the present codes-development process instead of creating a brand new regulatory environment with a federal building energy code as its centerpiece.

Along with federal codes, mandatory building “labeling” laws are a persistent presence in the energy policy field. Regardless of whether Congress considers federal requirements in 2011 as it did several years ago, we see a burgeoning trend at the state and local level in adopting labeling mandates (particularly in gateway cities). While this wave is hard to roll-back, The Roundtable is working with the Building Owners and Managers Association (BOMA) International and other stakeholders to encourage adoption of a resolution by the National Association of Regulatory Utility Commissioners (NARUC) that would push utilities to provide whole-building energy consumption to owners of multi-tenant facilities.

Indeed, how is an owner to comply with a requirement to measure and disclose consumption throughout a building, when that owner does not have access to energy data in tenant spaces? The Roundtable thus encourages more widespread adoption of platforms such as the Energy Usage Data System (“EUDS”) developed by Commonwealth Edison (the utility that serves Chicagoland). EUDs provides whole-building usage data to owners can upload that data into the Portfolio Manager benchmarking tool administered by the Environmental Protection Agency’s (EPA) ENERGY STAR program. We are seeking widespread support for systems like the EUDS through the Obama Administration’s Better Buildings Initiative.

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 » Environmental Regulations

In the environmental arena, we do not predict that the 112th Congress will reauthorize the sweeping statutes that govern regulation of air and water (although it might consider laws regarding regulation of toxic substances). Rather, most of the action will occur at the administrative level. The Roundtable expects that EPA will pursue an aggressive regulatory agenda that will impact many industries, including real estate development and building management. And, as a result, most congressional action here will take the form of EPA oversight —mostly from the Republican-controlled House —through the Oversight & Reform and Appropriations Committees.

• Stormwater 

In the next two years, major changes are anticipated in EPA’s program to regulate stormwater runoff. The agency intends to issue new regulations that could result in first-ever federal Clean Water Act permits for stormwater discharges from re-developed and already-developed properties. Concurrently, EPA is developing far-reaching standards for Chesapeake Bay water quality, and will use these pollutant-load restrictions as a model for export to other watersheds nationwide.

EPA is exploring permits that could impose land use controls so that post-construction runoff mimics pre-construction storm flows in terms of amount, velocity, and temperature. Expensive and unproven retrofits of existing properties to control stormwater discharges are on the table, as EPA enters unchartered waters for post-construction run-off regulations. Retrofit measures could include installation of rain gardens and vegetated roofs, underground cisterns to capture and re-use runoff, and removing impervious pavement in parking lots and installing pervious surfaces that absorb stormwater.

• Lead Renovation Repair and Painting (“LRRP”) Rule in Commercial Buildings 

In addition, EPA has begun the process of regulating renovation and remodeling activities in commercial buildings, arising from purported lead-based paint hazards. The Roundtable has joined the real estate community in insisting that EPA distinguish between lead hazards that may arise in commercial as opposed to residential buildings. The agency must also avoid arbitrary final regulations over commercial building renovations that simply impose requirements developed in the residential sector.

In March, Roundtable President and CEO Jeff DeBoer testified before the Senate Environment Committee regarding serious obstacles that the LLRP Rule could pose as the General Services Administration (GSA) seeks to dispose of underutilized federal buildings and to sell them off to private owners and investors. Also last month, The Roundtable joined industry colleagues in briefing key Capitol Hill staff on anticipated impacts of the lead rule on commercial real estate. We will continue to encourage legislators to closely monitor and oversee regulatory actions as they develop at EPA.

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» Infrastructure

• Transportation 

In February, President Obama released his ambitious FY2012 transportation budget, which included funding to capitalize a permanent infrastructure bank that would pool federal tax dollars with private, state, and local capital to invest in transportation projects. This approach would represent a significant departure from the federal government’s traditional infrastructure spending through earmarks and formula-based grants. Rather, the infrastructure bank would base investments on performance measures as conducted by a panel of experts, who would conduct merits-based review of competing proposals. The President’s 2012 budget would also de-emphasize highway funding and instead create a new “Transportation Trust Fund,” to include current accounts for highway and mass transit funding, while creating a new funding pool for high-speed passenger rail projects to emulate those in Europe and Asia.

It is hard to quibble with the policies underlying the Administration’s proposal, but the House Transportation and Infrastructure (T&I) Committee – now controlled by the Republican majority – dismissed it out of hand because of its price tag. Through its own analysis, submitted to the House Budget Committee, the T&I Committee rejected the Administration's $556 billion reauthorization proposal and its $50 billion request from the General Fund because it "does not identify a way to pay for these increases without increasing the deficit."

We can thus expect business as usual for transportation funding for the foreseeable future, with an emphasis on building and repairing roads as federal spending on surface transportation remains aligned with the highway trust fund and revenues raised through the gas tax. The total sum available to fund the next six-year authorization of the nation’s transportation laws (FY 2012-2017) will be about $254 billion (or an average of $42 billion/year) – about the same it has been since 2005 when the transportation laws were last fully authorized.

• Public Buildings 

Compared to its transportation proposal, President Obama has taken a more fiscally austere view with regard to federal real estate controlled by (GSA). The Administration’s FY2012 budget sets a $3 billion savings target that could be realized by the disposition of 14,000 vacant government buildings by year-end 2012, as a measure to cut government waste and spending. Toward that end, the White House is forming an independent board of private- and public-sector leaders who will work to overcome financial, regulatory and political barriers with a streamlined property disposal process. Office of Management and Budget (OMB) deputy director Jeff Zients, who is also federal chief performance officer, will oversee these efforts.

Yet again, the Administration’s plans to eliminate excess or underutilized federal properties have triggered active congressional oversight. A bipartisan group of House lawmakers on the T&I public buildings subcommittee has asked GSA for a complete database of federally controlled properties, including estimated market value, maintenance costs, square footage, building addresses, and other information. According to a February 10 report by the Government Accountability Office (GAO), “[t]he federal government holds many excess and underutilized properties that cost billions of dollars annually to operate. In fiscal year 2009, 24 federal agencies including the Department of Defense reported 45,190 underutilized buildings that cost $1.66 billion to operate.”

In March 2011, the Senate Environment and Public Works Committee held its own hearing to examine GSA’s plans for unneeded real properties. Roundtable President and CEO Jeff DeBoer testified, impressing upon Senators the significant opportunities that the sell-off may present for deficit reduction, boosting the real estate sector’s recovery, and re-purposing obsolete properties. However, words of caution were also warranted to ensure that the federal government does not inflate earnings from or over-value unwanted real estate, and to encourage an efficient process for identification and sale of available properties in a manner that keeps complex legal and regulatory barriers to a minimum.

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This year the Sustainability Policy Advisory Committee (SPAC) is led by co-chairs Dennis Oklak (Duke Realty Corp.) and Fred A. Seigel (Beacon Capital Partners, LLC) and Brenna Walraven (USAA Real Estate Company) serving as vice chair. 
 

For additional information on energy and environment issues, please contact Roundtable Vice President and Counsel Duane Desiderio at The Real Estate Roundtable at (202) 639-8400.