[GBLU Note:  Awhile back, I had the pleasure of hearing Darren Prum speak at the William & Mary symposium, "It’s Not Easy Building Green."  Darren’s presentation regarding Nevada’s problematic green building legislation was fascinating.  I asked Darren to write something up for Green Building Law Update on the topic.

Darren’s post is very timely.  State and local governments throughout the country are currently drafting new green building regulations to take advantage of incoming stimulus funding.  The "Nevada Green Building Incentive Experience" provides a warning of what can happen when green building regulations are not drafted and implemented carefully.]

By Darren A. Prum, MBA, JD

In 2005, the Nevada Legislature passed a poorly considered green building incentive package in an effort to spur private developers in the state. The hastily written legislation in conjunction with little direction to state agencies and minimal financial analysis forced the next session of the Nevada Legislature in 2007 to rethink and modify the program because it created a financial crisis of epic proportions (developers figured out quickly that they could receive up to $3 for every $1 spent meeting the LEED requirements). 

In brief, the 2005 legislation required the state to construct 2 LEED Silver or higher structures during each 2 year budget cycle while it provided a sales tax reduction down to 2% for all materials and fitting used in construction and a 50% reduction on all property taxes for 10 years to the owners of private constructed buildings. 

While the concept had the best of intentions, the agencies charged with administrating the program drastically altered the legislative intent.  The Nevada Tax Commission was supposed to only authorize projects that broke ground before December 31, 2005; but instead, it allowed those “in existence” prior to the date to qualify.  Then, Nevada Governor Gibbons’ newly appointed Director of the Office of Energy changed the application of the LEED building standard for eligibility to evaluate a project based on an entire development rather than by each individual building.  This modification allowed casinos to permit smoking and still gain the tax break.

As a result of the legislation, LEED projects in Nevada jumped from 14 in 2005 to 97 in 2007.  As the 2007 legislative session approached, budget forecasters projected a minimum loss of $940M to state revenue over the next biennium.  Clark County (Las Vegas area) would lose 10% of its tax base and the Clark County School District would lose $700-900M over the next 10 years (which the state must still fund through other sources).  The biggest winners of the breaks included:  MGM-Mirage’s Project City Center ($80M already and  $900M over its life), Venetian’s Palazzo Tower, and Boyd Gaming’s Echelon Place (currently stalled).

In 2007, a very wild legislative session resolved the financial impact but grandfathered 6 projects under the old system.  The current incentives repealed the sales tax abatement revised the property tax incentives.  The property tax reductions no longer applied to education levies and strictly enforced compliance to the adopted LEED standard.  These changes limited the state’s exposure now to approximately $493M.

In evaluating already existing incentive programs, New York, Oregon, and Maryland preceded Nevada but utilized their state income tax code as the primary tool to further green buildings.  In an effort to avoid similar results to that of Nevada, many other jurisdictions created their own unique programs.  Virginia followed the Nevada model by allowing property tax abatements at a local level, New Mexico used the income tax credit approach, and Hawaii tried a new method by requiring a green building to receive priority processing during governmental reviews for project approvals, which should not impact the state’s revenue stream at all. 

Because Nevada does not impose an income tax, a well-developed incentive program should try to offer nonfinancial incentives first, followed by abatements in taxes that do not create lasting effects to the state’s fragile revenue stream.  Accordingly, the Nevada experience provides an example to other jurisdictions considering a green building program on how incentives may offer too generous a benefit to developers and others and may place a state in financial crisis despite the noble intentions.

Darren A. Prum is a Visiting Lecturer in Business Law and Finance at the University of Nevada, Las Vegas.  A more detailed version of Nevada’s Green Building Incentive Experience is expected to appear in an upcoming issue of William & Mary’s Environmental Law & Policy Review.  Mr. Prum has other green building related articles previously published and forthcoming in the Real Estate Law Journal.