Energy efficiency measures for buildings, a government stimulus package and a raft of new regulations prove that sustainability is high on the US property agenda. Leanne Tobias explains
There are two schools of thinking on US sustainable real estate. The first school believes that green is dead, at least until the economy revives. "Everyone likes the environment, but commercial real estate professionals are just trying to hang onto their jobs. The real topic is distressed properties," one knowledgeable observer says.
The second school of thinking is that sustainable real estate will figure prominently in a US economic recovery. Observers in this camp point out that billions in economic stimulus funds approved by the US government are directed to energy-efficient building retrofits, and that only 30% of stimulus funds had been disbursed as of December 2009. Most of these monies are expected to enter the US economy in 2010, continuing into 2011.
Having just completed a new book, Retrofitting Office Buildings to be Green and Energy-Efficient, an international look at sustainable property retrofits in the US, the European Union and other parts of the globe, I tend to favour the latter view. The latest developments on the US sustainable property front can be summed up as follows.
US property professionals are taking a no-nonsense approach to sustainability in 2010. The dominant themes are energy efficiency (as opposed to the health-related aspects of green building), the cost-effective achievement of operating economies, and the retrofit of existing buildings - including properties bought, or about to be bought, for cents on the dollar by opportunity funds.
Low-cost approaches to improved commercial building energy use are the first line of defence on the green front, with emphasis on ‘load management' (translation: turn power off, if it is not being used), enhanced maintenance, commissioning (the fine-tuning of building equipment to optimise energy performance) and low-cost capital improvements, such as the retrofit of building mechanicals with variable-speed motors, which allows low-speed operation when appropriate. Not glamorous, but effective. A review of 25 retrofits certified by the US Green Building Council showed average project payback in 17 months and an average cost of just 21 cents/ft2.
The US economic stimulus package enacted in February 2009 dedicates substantial funding to building energy efficiency. The legislation included over $23bn (€16.95bn) for property retrofits, including $6.3bn for energy-efficiency grants to states and local governments; $5.5bn for the green modernisation of federal buildings; $5.25bn for making housing weather-proof to people on low-incomes; and $6.5bn for the modernisation of military facilities and housing and medical facilities for members of the armed forces and their families. An estimated 70% of US economic stimulus monies will be spent in 2010 and 2011.
As well, substantial national tax incentives have been enacted for investment in renewable energy technologies and energy-efficiency retrofits, including a 30% investment tax credit - convertible to cash - for investment in solar, wind, geothermal and other alternative energy technologies, and billions in bonding authority for state energy conservation programmes, community-based energy-efficiency retrofits, and school construction and renovation. Accelerated depreciation over a 10-year period (versus the usual 20) is available for smart electric meters and smart electric grid equipment, to help building owners track their energy usage, receive automatic communications with utilities, and optimise their energy usage in real time.
Recent regulatory developments bring energy-efficiency to the fore. US state and local governments are just beginning to follow the lead of the UK and Germany, which require the use of performance certificates detailing energy usage, and energy performance disclosures for rental, purchase and sale transactions. The state of California's disclosure law went into force in January 2010, and Washington DC is phasing in requirements between 2010 and 2013.
New York City passed a package of new building energy laws in December 2009 that are expected to set the pace for state and local reforms in 2010 and beyond. These include a new bill that would require most large, privately-owned properties to conduct energy-efficiency audits and undergo retro-commissioning— the testing and recalibration of building systems to ensure as-designed performance - once every 10 years. Additional bills require most large properties to annually benchmark their energy efficiency and to complete lighting upgrades and tenant sub-metering by 1 January 2025. A fourth measure establishes a New York City Energy Conservation Code that governs building alterations and new construction. The new laws underpin efforts to reduce New York City greenhouse gas emissions by 30% by 2030 and, according to the city's projections, are expected to create thousands of new jobs.
The use of public finance strategies to support loans for energy-efficient property renovation has aroused growing interest throughout the US over the past 18 months. Through 2009, 18 state governments, including California, Illinois, Maryland, New Mexico, New York, Texas and Virginia, have adopted enabling legislation for this purpose, or permit local governments to undertake this function as of right.
Berkeley, California; Boulder County, Colorado; Annapolis, Maryland; and Babylon, New York are among the first localities to have approved the creation of public programmes in which loans for retrofits are paid back as an assessment on a building's property tax or utility bill. If the retrofit loan becomes an obligation on the borrower's property tax bill, the mechanism is known as tax lien or property assessed clean energy (PACE) financing. If the retrofit loan becomes an obligation on the borrower's utility bill, the mechanism is known as utility bill financing. Together, the mechanisms are frequently referred to as ‘on bill' financing.
On bill financing programmes have become popular with retrofit capital providers because they create a superior lien for the energy retrofit loan which survives foreclosure and bankruptcy. In the event of property sale, the new owner is required to make the loan current if needed upon the transfer of title, and to assume ongoing payments. Property tax lien and utility bill financings also permit the use of long-term amortisation schedules (sometimes as long as 20 years), which in turn enhances the likelihood that monthly energy savings will exceed monthly debt service on the retrofit loan.
On bill financing programmes can be capitalised through public bonding authority (Berkeley, California and Boulder County, Colorado), other locally controlled funds (Babylon, New York), or with private capital supplied by local lenders (Annapolis, Maryland). Programmes backed with public bonding authority typically permit the use of longer amortisation schedules than those backed by private debt. Programmes for commercial buildings, in particular, frequently are combined with ESCO services.