Jordan Ramis pc. Attorneys at law
Capital Gains or Ordinary Income — A Developer's Choice?
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This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

By Doug Cushing
From the Jordan Ramis Archives

Kermit says, "it's not easy being green," but that's changing rapidly in the evolving world of environmentally friendly construction. Newspaper and magazine articles report the opening of new environmentally sound buildings, and industry conferences tout the virtues of "green" development and environmentally sensitive building products. Yet some construction professionals remain reluctant to adopt green building strategies. They question whether green building is just a passing fad. There is also a general sense that green building is, by definition, more expensive than conventional construction. This article discusses the growing acceptance of green-building, analyzes some of the economic benefits, and concludes that this fast-moving industry sector has a bright future, based on both growing acceptance and sound economic realities.

Not Just a Fad
Green building is growing — in part because government entities are beginning to mandate some form of green building for new construction. These agencies rely largely on programs like the Leadership in Energy and Environmental Design (LEED™) program developed by the U.S. Green Building Council as a standard for required construction practices. Projects evaluated under the LEED™ system are awarded points based on several categories, including integrating energy- and water-efficient systems, using recycled building materials, purchasing building supplies manufactured locally and in environmentally sensitive ways, utilizing natural airflow and ambient light, reducing stormwater runoff, and using nontoxic adhesives and paints. The U.S. Green Building Council awards certificates (certified, silver, gold, or platinum) based on the number of points accumulated during design and construction of the project.

The City of Portland requires all new construction and major retrofit projects undertaken by the City or its contractors to be certified under the Portland LEED™ Green Building Rating System and that all projects seek the highest possible certification, regardless of funding source or amount. Portland has also adopted the Tenant Improvement Green Building Guidelines for interior tenant improvements undertaken by the City or its contractors. Similarly, the Portland Development Commission works with development and construction stakeholders to promote green building practices and adopted the Portland LEED™ Green Building System in September 2001.

Other governments are also adopting LEED™-based standards. The City of Seattle requires all new construction and major remodels for buildings totaling over 5,000 gross square feet of occupied space to achieve a LEED™ Silver rating. Similarly, Vancouver, B.C. recently adopted policies requiring LEED™ BC for all new publicly funded buildings greater than 500 square meters. Cook County, Illinois, requires that all new construction earn a LEED™ Silver rating under each updated version of the program. All projects must seek the maximum points awarded for energy efficiency. San Mateo County, California, has adopted a policy requiring LEED™ certification for all new construction and additions to existing buildings where the gross occupied area is over 5,000 square feet. Frisco, Texas, has adopted a green building strategy utilizing the EPA's Energy Star program as the minimum standard for new home construction. In 1998, the U.S. Naval Facilities Engineering Command adopted a policy requiring sustainable design and development of naval facilities. Other county and local governments adopting or encouraging green building policies include Arlington County, VA, Austin, TX, San Antonio, TX, San Jose, CA, Boulder CO, King County, WA, Kansas City, KA, Scottsdale, AZ, and Pittsburgh, PA.

Green Building Costs
Building owners and contractors often presume that integrating green building technology is expensive. But when green building is adopted during the design stage, the project costs are comparable to traditional construction. One study recently reported that for three new green buildings completed in Portland between 1995 and 2000, each of which earned a LEED™ silver rating, the increased cost of adopting green building was between zero and 2 percent over conventional construction financing. Another study shows that green buildings and retrofit projects are being completed regularly without any cost premium over traditional construction financing.

Furthermore, there are several bottom-line reasons to incorporate green building technology and construction methods. First, there are financial incentives offered by the Oregon Department of Energy ("DOE"), energy companies, and other organizations that reduce cost of design and/or installation of energy-efficient technology. Chief among these is the Business Energy Tax Credit, which allows those investing in energy conservation, renewable energy, low-emission transportation, and recycling to qualify for a tax credit of up to 35 percent of the extra cost of energy-efficient products over the standard practices. The DOE also manages an Energy Loan Program, offering low interest, fixed-rate loans to pay costs related to design, permitting, loan fees, and construction management for projects incorporating energy conservation measures. Additional incentives are available through the Oregon Energy Trust for both commercial and residential projects.

In addition to these up-front incentives, recent data demonstrate that the savings resulting from resource efficiency can be substantial. Green buildings can reduce energy costs up to 30 percent over conventional buildings. Techniques to decrease energy use include high performance fixtures, windows that open, efficient use of ambient light and solar power, increased insulation, and high efficiency HVAC units. Generally, these techniques are easily integrated into a project at the design stage, can be constructed affordably, and do not require uncommon technical expertise to utilize.

Additional savings can be realized through reducing water usage. Green buildings have been shown to use up to 50 percent less water. Low-flow fittings are common today, and other water-saving ideas are gaining notoriety. Some projects recapture rainwater and "grey-water" (waste water from showers, sinks, and drinking fountains) for flushing toilets. On other projects, irrigation systems are being fed by rainwater capture systems, not only avoiding the expense of buying water for irrigation, but also reducing runoff. Reducing stormwater runoff through rainwater capture and other creative landscaping reduces a project's impact on the local storm sewer system. If adopted on a sufficiently large scale, this could lead to a reduction in system development charges or the elimination of permit-related utility upgrades.

Combined with the potential for reduced maintenance costs associated with newer equipment, these measures can increase the value of a building significantly. One study estimated that adopting green building techniques may increase a building's 20-year present value by up to $50 per square foot.

Green buildings also have tangible marketability attributes. Many developers and builders who successfully integrate green technology and building methods are receiving enviable press coverage, particularly in the Pacific Northwest. This relates directly to tenant and buyer interest, early lease-up or sales, and an early return on investment. Further, these tenants and buyers typically appreciate a project's environmental efficiencies, which can translate into tenant loyalty and owner satisfaction.

There are intangible benefits as well. In the Pacific Northwest, where water and energy shortages are becoming common and there is a large population of environmentally aware consumers, companies adopting a green building focus can earn substantial community goodwill. Also, green building is typically a collaboration among the owner, design professionals, general contractor, and subcontractors. Members of the project team apply their skills and experience toward improving the project's overall efficiency. Through this collaboration, the project team learns to address problems and implement solutions effectively. This increased communication can reduce the threat of litigation among the project team and therefore reduce everyone's stress when problems arise. Finally, integrating interior furnishings that do not emit gas or other pollutants (i.e., low VOC paint and wheatboard cabinets) are believed to reduce the threat of sick-building claims and increase worker productivity.

As with all new ideas, there are potential risks associated with green building. The cost premium for integrating green building techniques after the project is under construction can be steep; the savings discussed above are most likely to be realized when the owner, design professionals, and contractors begin with the idea of utilizing high performance and energy-efficient systems and technology. Also, some of the technologies being used to reduce energy costs are innovations with short market histories. It can, therefore, be difficult to assess the possibility of product defects or problems related to unproven technology. This risk can be mitigated by consultation with consultants and local utilities.

Conclusion
Assuming that building owners and communities continue to see the financial and other benefits of green development, the green building trend will continue to grow. Its recent growth, the attendant economic benefits, governmental action, and media coverage represent all the hallmarks of a strong industry sector that appears likely to keep growing.