I am publishing a series of posts on the Destiny USA Debacle — the federally sponsored Green Bonds project that has failed to incorporate promised green building features. To read all of the posts, you can select the Destiny USA tag to review all of the published posts on this topic. Or check back later in the week for an e-book that includes all of the posts, plus bonus coverage.
Today, we will take a closer look at the very important role played by the Internal Revenue Service (IRS) in the Destiny USA Debacle. This post is paramount to the entire story because it foreshadows the $122.3 million dollar question that the IRS will soon decide.
As part of the Green Bonds legislation, the IRS was tasked with ensuring that the federal taxpayer received its end of the bargain: a green building project. In response, the IRS issued Internal Revenue Bulletin 2005-27 to provide “guidance on the requirements a project must meet in order to be eligible for designation as a qualified green building and sustainable design project.”
What were the green building requirements to qualify for Green Bonds?
In order to receive $238 million in Green Bonds financing, the Destiny USA developer had to meet three primary requirements:
1. The applicant had to “demonstrate, and provide written assurances” that the project would receive LEED certification.
2. The project had to include “a brownfield site as defined by section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980.”
3. The project had to meet a number of “goals for conservation and technology innovation.”
The conservation and technology goals relate to the following four items:
- the “amount of electric consumption (in megawatt hours) reduced by the project,”
- the “amount of sulfur dioxide daily emissions reduced by the project as compared to coal generation,”
- the “amount of the gross installed capacity of the project’s solar photovoltaic capacity measured in megawatts,” and
- the amount, “in megawatts, of the project’s fuel cell energy generation capacity, which includes the fuel cells’ generation of thermal and electrical energy used by the project.”
Because I tend to focus on regulations addressing LEED certification, lets take a closer look at the IRS’ requirements for LEED certification.
“At least 75 percent of the square footage of commercial buildings that are part of the project is registered for United States Green Building Council’s LEED certification and is reasonably expected by the applicant (at the time of the designation) to receive such certification, based on all the facts and circumstances, including statements of the United States Green Building Council, opinions of independent experts in green building and sustainable design, and relevant experience of the project developer.
The developer was also required to submit LEED Letter Templates, documentation demonstrating the design and construction of a LEED-certified building, information regarding LEED Accredited Professionals working on the project and other supporting information.
What is the penalty for not satisfying the green building and renewable energy requirements?
According to the IRS Bulletin, the bond issuer was to maintain a reserve account equal to one percent of the net proceeds, which would be forfeited if the project failed to comply with the Green Bonds program’s requirements. For the Destiny USA project, the bonds totaled $238 million so an account somewhere, so the IRS required that a reserve account contain $2.38 million plus interest. If the IRS determines that the Destiny USA project failed to comply with the Green Bonds requirements, then “amounts in the reserve account, including all interest, will be paid to the United States Treasury.”
But Why is this Coming to a Head Now for the Destiny USA Project?
The IRS Bulletin also requires the bond issuer to submit reports to the IRS on the qualifying projects 48 months after Green Bonds are issued. The reports must specify whether the project has complied or will comply with the Green Bonds requirements.
Since the Green Bonds were issued for the Destiny USA project late in February 2007, the bonds issuer — the Syracuse Industrial Development Agency — must submit its report not later than the end of February 2011. That was yesterday.
The IRS is not messing around when it comes to these reports as the Bonds issuer must include the following certification language in the report:
“Under penalties of perjury, I declare that I have examined this document and, to the best of my knowledge and belief, the document contains all the relevant facts relating to the document, and such facts are true, correct, and complete.”
Next time, we will look at the past history and present state of the Destiny USA project.