At a time when the building industry is principally concerned with the impact of COVID-19 and the luster is off green building, the Montgomery County Council last Tuesday unanimously approved legislation “to accelerate the construction of highly energy efficient buildings and green retrofitting of existing buildings.”
Bill 10-20 dramatically upgrades the Maryland county’s existing green building real property tax credit, prioritizing energy reduction in the name of GHG emission reduction, in new and existing commercial and multifamily buildings and ensuring incentives are now given only for buildings that surpass requirements of the County’s building code.
While some think tax law is just boring, others have hailed this tax credit scheme as being a superb model ordinance for government incentivizing green building, despite that Montgomery County was among the first jurisdictions in the country, in 2008, to adopt a mandatory green building law for private building, requiring most new construction be LEED certified. Delivering victory to the environmental industrial complex, through a triumph of method over magic, Montgomery is today touted as the county in America with the most LEED building.
This new property tax credit should be viewed against that backdrop, but moreover that the County is on the cusp of being the first to adopt the 2018 International Green Construction Code, as a mandatory code (including that LEED will no longer satisfy the County’s green building mandate).
All of this must be considered in light of the County’s earnest commitment to reducing GHG emissions by 80 percent by 2027 and 100 percent by 2035. “Energy consumption in commercial buildings accounts for 26 percent of greenhouse gas emissions in the County,” according to the most recent GHG inventory. Significantly reducing energy usage and emissions also requires retrofitting existing buildings.
“We need to reduce the energy consumption of our buildings if we are to ever have a chance of meeting our climate goals,” said Councilmember Hans Riemer. “Reducing energy use is expensive and complicated work, and it will take time. The changes to the green building tax credit proposed in this legislation will incentivize our private-sector partners to go further than ever before in designing energy-efficient buildings.”
Under current law, the green building tax credit is tied to the LEED or its equivalent. New and existing buildings meeting higher levels of LEED certification receive increasingly higher levels of the property tax credit for five and three years, respectively. The County caps the overall tax expenditure for this credit at $5 million annually. Since its inception, the County has awarded $33.4 million in credits, across 62 buildings (.. yes, 62 buildings!).
However, the credit has been regularly oversubscribed in the past few years.
To make the credit more effective and better align it with the County’s GHG effort, not green building more broadly, Bill 10-20, as drafted by a broad based work group, makes the following changes to the green building tax credit:
The new law creates a new two-tier structure for the credit. The first tier ties the amount of the credit to the energy reduction level relative to the existing building code. The bill defines “energy reduction level” as a level of energy performance, expressed as a percentage, that the Director of Environmental Protection finds to be at least 10% better than the level of energy performance that would be achieved under the current Building Code. The higher the energy reduction level, the higher the credit.
The second tier assigns a bonus credit. The amount of the credit, in addition to the new building energy reduction tax credit, is: (A) 25% of the property tax owed on the building for 4 years if the building achieves the most recent version available of LEED Gold, NGBS Gold, PHIUS+/PassiveHouse, BREEAM-NC Excellent or an equivalent standard; (B) 75% of the property tax owed on the building for 4 years if the building achieves the most recent version available of LBC Petal Certification, LEED Platinum, NGBS Emerald, 297 BREEAM-NC Outstanding or an equivalent standard; and (C) 75% of the property tax owed on the building for 5 years if the building achieves the most recent version available of Living Building Certification.
Interesting is that Green Globes is not recognized despite that the Montgomery County public school system is pursuing Green Globes certified school buildings.
With respect to existing buildings, the credit would be based upon the ENERGY STAR improvement of the building over a 12-month period. The greater the amount of ENERGY STAR improvement, the greater the amount of the credit. For example, a building that improved its ENERGY STAR score by 25-49 points would receive a higher tax credit than a building that improved its score by 1-24 points.
Significantly, the new law removes the annual cap on the credit for new buildings and maintains a $5 million cap annually for existing buildings. The County Office of Management and Budget estimated that removing the $5 million dollar cap on credits for new construction would result in approximately $2.6 million in additional tax credits, for a total of $7.6 million in credits.
The new law sets a four-year limit on the credit for new buildings and a two-year limit for existing buildings, so the monetary worth and usefulness to a property owner is capped.
Property tax credits are considered by many as the ideal incentive for green building (.. okay, maybe it is adulterated in a jurisdiction with a mandatory green building law?) and this variation is a mature version of that incentive. The ramifications of adopting this incentive at a time the County is in the final stages of adopting the 2018 IgCC as mandatory for all building are not clear beyond that buildings qualifying for this tax credit will be expensive to build. But Montgomery County is not only the most populous county in Maryland and one of the most progressive jurisdictions in the nation, but dramatically it has also been ranked by Forbes as the 10th richest in the United States and as such first construction costs may not have major implications.
This sophisticated property tax credit program, weighted heavily to minimizing energy use in the name of reducing GHG emission, may be a model for jurisdictions across the country that want to advance green building in an effort toward repairing the world. Read Bill 10-20.