As both the House and Senate push to green federal government buildings, the discussion over federal tax incentives for green building is coming to the forefront. Without these incentives, many green building proponents say the green movement will not be able to become the norm. During today's OnPoint, Michael Zimmer, counsel in the energy practice group at Thompson Hine and a member of the LEED Energy & Atmosphere Technical Advisory Group, discusses current and future incentives for homeowners and businesses to build green. He explains why he believes it is important for the federal government to take the lead with green building legislation. Zimmer also addresses why he thinks having multiple green building certification programs is an effective way to manage and promote the industry.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Michael Zimmer, of counsel in the Energy Practice Group at Thompson Hine. Mike specializes in the energy regulation and transactions and is also a member of the LEED Energy and Atmosphere Technical Advisory Group. Mike thanks for coming on the show.
Michael Zimmer: Thank you, pleasure to be here.
Monica Trauzzi: Mike, Senator Barbara Boxer is pushing for energy efficiency of U.S. government buildings. House Democrats are proposing greening the Capitol and they're also pushing a housing bill that would encourage communities to build energy-efficient homes. It seems like Congress is really jumping on the green bandwagon. Assess their work so far. Is it enough? Is it too little too late?
Michael Zimmer: Oh, it's just the start of really a long process that the Congress is weighing in. It's suddenly not too late. I think the attention that they're drawing to the issue is helpful. It is supplementing and complementing certainly a wide variety of initiatives that going on at the state, in the city and local level. We have a number of states that are adopting their own separate initiatives, 375 cities signing up in support of new initiatives to manage climate change issues going forward. Their focus is in providing, I think at the federal level, a new sense of leadership and direction, a focus by example in our federal buildings which are important. The federal buildings represent, including state buildings, 10 percent of the total U.S. economy today, 44 percent of LEED applications currently are from government-owned buildings for LEED certification. And that leadership provided is important. Finally, what they're doing in the tax area, in the way of incentives, is critical. What we need is more stability, more long-term commitments from the Congress to provide a more stable planning horizon. And finally, the initiatives in EPAct in 2005 are important to promote education and training and support at the state and local level, they need funding however. And they have been languishing, to date, in the appropriations process.
Monica Trauzzi: So you mentioned incentives. Let's say I'm an average, medium-sized company on here in Washington, D.C. How much help can I expect to get from the government if I want to make my business green?
Michael Zimmer: Right now, in so far as your business would qualify as a commercial building for sake of the discussion, the current tax incentives in place, which we could build upon once they expire in the upcoming year, they could be extended, for example, five years, would provide about 33 percent cost recovery of the incremental cost of basically greening that building. Our analysis is showing that that cost is about 2 to 3 percent higher than a non-green approach in the short term. But the costs are readily recovered because history is showing, in the operating cost side, once commissioned, that the utility costs can be reduced by 30 to 45 percent and recapture that capital investment upfront. Secondly, the government is providing a wide array of training and support through DOE, through EPA, through HUD, that is, I think, very important to provide technical assistance and support to the building and codes people, the housing personnel in our cities and states. As well as a certain support that is critical in markets that otherwise may not be served by the private sector.
Monica Trauzzi: What about if I'm a homeowner? Do those incentives impress you at all?
Michael Zimmer: Those incentives, again, I think labor under the same concerns. They are too short term in duration. They need to be in place for a minimum planning period of five years. I think I'd like to see probably secondly some integration in the definitions and a little more standardization with our federal set of incentives, as well as the definitions of what is being incentivized for recognition at the state level in the tax system, in the building code systems that are adopted at the state level. The third thing that could be provided that is also missing in that tax area, which is the most powerful tool that the federal government can use in terms of providing support to any one of these initiatives, one area that's lagging is the delay in providing critical guidance from the Treasury Department in the implementation of these requirements, which has a chilling effect and an uncertainty in terms of people being able to use these incentives, whether they're a private individual for purposes of their home or a choice of a vehicle or whether it's a commercial building owner or developer trying to avail themselves of some of those commercial incentives.
Monica Trauzzi: So do you think that the current incentives are enough to spur the green movement?
Michael Zimmer: I think they are a critical starting point for the green movement. The question is the longevity, the providing of clarified guidance. And then once that federal support takes place as well as at the federal building level, that is sufficient I think to transfer as a building block at the state level. Because ultimately these choices in the implementation is made at the state and local level in the privacy of the home, in the privacy of one's commercial or industrial building in the decisions that they make there.
Monica Trauzzi: How should insurance companies be approaching the green building trend? Should there be incentives in insurance policies if a building or home meets certain standards?
Michael Zimmer: Outstanding question. The insurance industry is a critical missing piece in the puzzle right now. I would also note I think the lending community could provide some helpful assistance. And finally the appraisal community and the way buildings are appraised. Let me give some examples. Starting with the insurance industry we are seeing, for the first time, recognition and possible underwriting policies being advanced. A decision made by Fireman's Fund for example last year to provide actually lower costs of underwriting insurance where green building concepts are deployed or where climate sensitivity is undertaken by a commercial or industrial enterprise. So there is the opportunity to lower basically premiums and that continuing operating cost in recognition of the value and the risk benefits that are provided by green attributes. In the lending process for example, perhaps if one decided to build green that lender might provide interest rates for that loan at a lower level, maybe a quarter percent or a half a percent more beneficial interest rate associated with that choice. Because that would recognize a lower risk associated with the longer-term operating costs and the corollary value of that building as opposed to a building that did not make that green choice. And finally, in a similar outcome, we need to promote through additional education in the appraisal process. Once these buildings are commissioned and come online it's clear for the longer term that they should have a higher valuation than a building that has not made that choice. This is very important in conclusion because 50 percent of the new commercial buildings by 2030 are yet to have been built. And another 25 percent of our new commercial capacity is going to be rehabilitation and renovation of existing stock by 2030.
Monica Trauzzi: And all these incentives, they're all fine and good, but if the American people don't understand what it means to build green or what the USGBC's LEED certification program is, what good do they do? So do you think that the average American is in tune with this movement?
Michael Zimmer: The average American's understanding is escalating, I think, with the passage of time. And it's driven ultimately by the critical focus on cost and cost savings. That needs to be conveyed not in the upfront capital costs of the decision, but more of a lifecycle cost type of analysis of the cost of purchasing, procuring, and operating this asset, my home, my lease for two years, my rental space for my building for the next five years and having the benefit of solid comparative information. Secondly, I think our real estate industry is moving in the direction of increasing training. They are marketing buildings with these attributes and they are finding the opportunity to secure premiums in some instances. Or it is clearly, in my experience with clients, they are seeing that the buildings are leasing up quicker or faster in tight, difficult markets. Finally, I think that is a responsibility particularly of the industry as well as ultimately state and local government to give customers those analytical tools to make informed choices.
Monica Trauzzi: What's your take on these sort of competing green building certification programs? We have the USGBC. We have the GBI. Is it effective to have different programs or does it hurt the overall push to build green?
Michael Zimmer: You know, I think that the fact that there are separate programs are valuable for several reasons right now. They emphasize different attributes. They bring different strengths. Secondly, they all do have a common message of the importance of recognizing the economic as well as the operating and environmental and sustainable benefits associated with the green building choice. Thirdly, I think the competition is healthy in the sense that they force each other to ensure optimization and self-improvement on their procedures and processes and the costs of administering those programs. And adding new things, like some of the new certification programs that are appearing for residential buildings, which USGBC is advancing, that NEHB has their own set of programs coming out in place, new initiatives for schools. USGBC is going to be advancing, in the upcoming year, model codes for the state, again, to provide education, the benefit of expertise, in support of the common goal. We have more in common and the common goal is to achieve the benefits of the movement, not getting lost in unnecessary or unproductive competition.
Monica Trauzzi: But it does seem that the USGBC is at the forefront and that local governments who are signing on to building green in their communities are requiring that LEED certification be met.
Michael Zimmer: They are. Fourteen states have chosen LEED in their review of this issue. Two have chosen other alternatives. A number of cities are weighing LEED as a certification of choice, as occurred here in the District of Columbia last year, as also occurred in Montgomery County. Others have decided to provide more flexibility. It really boils down to the question of self administration and certification and the value of a third-party imprimatur and examination of that critical question. And, thirdly, I think the power of the brand and the commitment of resources to ensure that the standards are meeting the needs of interdisciplinary communities. The important point here is the result. And the important point is I think our taxpayers and citizens want to ensure that if they're providing incentives, tax support, state government support, that the critical goal or attribute that they are encouraging is in fact going to be provided.
Monica Trauzzi: OK. We're going to end it right there. Thanks for coming on the show.
Michael Zimmer: Thank you.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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