The recent report “The Imminent Commercial Real Estate Crisis and The CRE Solution” from Architecture 2030, recommends a three-year federal tax deduction for energy retrofits, to raise commercial property values while creating construction jobs.  While other policies have been proposed for large commercial buildings, this proposal would address small and medium size commercial buildings–helping community and regional banks, and property owners who act quickly.

The U.S. Senate might pass legislation for clean energy this summer or fall.  Energy efficiency retrofits in commercial buildings offer one of the most cost-effective ways to enhance the nation’s energy independence, reduce greenhouse gas (GHG) emissions and create green jobs.  With “The CRE Solution”, the commercial real estate market will also benefit from energy retrofits.

Since 2007, commercial property values have dropped 40%, CRE transactions have dropped 90%, and the construction industry for commercial buildings has lost more than a million jobs. Between now and 2014, $1.4 trillion in CRE loans will come due; more than half are underwater, with loan value higher than property value. 

Energy retrofits offer a win-win investment in construction jobs, because (unlike new construction), renovation does not glut the CRE market with additional vacant space.  On the contrary, energy retrofits raise the CRE market because energy efficiency raises individual property values.  For example, at a cap rate of 8.5%, annual energy cost savings of $1.00/sf, documented over 2 years, increase the property value by $11.76/sf.  Certification with the ENERGYSTAR Label or Leadership in Energy & Environmental Design, Existing Buildings, Operations & Maintenance (LEED EBOM) can increase the value in less than 2 years, as described in the soon to be updated report from Pike Research, “Energy Efficiency Retrofits for Commercial and Public Buildings”. 

At present, a tax deduction of $1.80/sf supports retrofits that generate energy savings in the range of 10% to 20%.  The CRE Solution would provide tax deductions for larger investments ($4.50 to $9.00/sf), for energy savings of 30% to 100%.  Energy savings at these higher levels are in the public interest, because commercial buildings account for almost 20% of the nation’s energy consumption and GHG emissions. Such investments are rare at present, because energy cost is a minor consideration for most commercial property owners.

Will the proposed tax deduction inspire a large pool of property owners to invest in “deep” energy retrofits, creating hundreds of thousands of construction jobs?  If the deduction becomes available and publicized soon enough, then pro-active property owners will have time to complete energy retrofits immediately, and document 2 years of cost savings, before their loans come due. After 2 years, the retrofits will raise individual property values in the range of $10 to $30/sf (even higher in some cases), reducing losses and bringing some properties back above water.  Further, a bank could require an energy retrofit in a loan renegotiation package, to ensure that a property’s value will rise 2 years later (or sooner, with the ENERGYSTAR Label or LEED EBOM certification).