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Retrofitting Commercial Properties Towards Net-Zero Energy

Ray Evans and Jeff Weil, July 29, 2015

When we first began research for this topic, the thought was how we can determine by priority the most economically viable levels of commercial property retrofit towards zero-energy efficiency. What work has the biggest payback and what tax deductions or tax credits are available to facilitate economic justification of such a retrofit? An additional consideration is using cost segregation to gain potentially significant tax deductions from retired assets due to energy efficiency upgrades. According to Greg Gagon, Managing Director of Real Property Tax Incentives Company, Cost Segregation can add significant tax savings to a retrofit project. He cited a three million dollar project to redo all the windows to double-pane in a major commercial project where the retired asset value of $1.5 million was allowed as a deduction for taking the old windows out of service.

There appear to be two key tax credits still available to commercial property owners for property placed in service before January 1, 2017. The Business Energy Tax Credit encompasses fuel cells, microturbines, and small wind turbines. The small wind turbines must meet the performance and quality standards set by either American or International organizations. In general, the credit is equal to 30% of expenditures.  Property used to produce energy from either geothermal and or ground thermal sources can be eligible for a tax credit of 10%.

The Federal Solar Energy Tax Credit is 30% of the cost basis of qualifying energy property placed in service before January 1, 2017.  In addition, qualifying solar energy property is eligible for 5 year depreciable life.  Solar energy property includes equipment and materials that use solar energy to directly (1) generate electricity, (2) heat or cool a building or structure, or (3) provide hot water for use within a building or structure. Ted van der Linden, Director of Sustainability for DPR, said the three key areas to focus on are lighting, plugs and HVAC in energy reduction. Plugs and process loads (PPLs) account for 33% of U.S. commercial building electricity consumption, according to the National Renewable Energy Laboratory. Quicker economic paybacks can be found in window film to reduce heat loads. Solar panels today are many times more efficient than those just 7-10 years ago, but the roof structure and integrity must be carefully considered.

What was hoped as an easy instruction manual for the most economically viable commercial property retrofits turned out much more complex.

  1. What are the owners’ objectives?
  2. How large is their budget?
  3. Is this a multi-phased project or a one-time endeavor?
  4. Is the energy efficiency government-mandated, triggered by a certain level of tenant improvement work?
  5. Is this part of a long-term investment strategy?
  6. Is the building fully leased or is the work part of re-tenanting?
  7. Are the building systems at the end of their life cycle and require replacement (i.e. HVAC system)?
  8. Do available tax credits or tax deductions determine whether or not the retrofit project is economically viable?
  9. Is the investors’ ‘culture’ helping dictate the desire for energy efficiency and sustainability?

One thing is for certain. Technological advances will ensure future economic viability for commercial property energy efficiency retrofits as solar panels continue to become more and more efficient and less costly, as windows become solar collectors, as roof systems are integrated with not just solar but mini-wind turbines which may become commonplace on commercial roofs and exteriors, LED lighting and controls cause energy usage to plummet and universal software platforms that allow various building systems to integrate to provide synergistic energy savings will become commonplace. It will be in the not-too-distant future when commercial property will not only be net zero energy, but will actually provide excess energy back to the power grid.

Original article can be seen here.

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