Green business incentives for commercial property and rental apartments

As many people know, in February of 2008 the federal government implemented an economic stimulus package. We all are aware of this because we received checks for hard cash in the mail. What many people don't know, is that it also contained an incentive program for commercial property and rental apartments. This incentive program allows for owners of rental properties to take accelerated depreciation of Leasehold Improvements. In fact, it allows them to depreciate 50% of a tenant installation in the 1st year. Wow! What does this mean? Well if you are a smart real estate developer or owner, this means free electricity to your building for 25 years. ... Ok, backup a little here. That's a pretty tall leap and a pretty brash statement to make. If we assume that we're talking about a 10,000 s/f single story office building, current utility costs are in excess of $3 per s/f. If we assume a moderate escalation of that cost at 4% per year for the next 25 years, that's $1.25 million worth of electricity. Take a look at fuel prices right now. If I had to wager a guess, I'd say 4% per year in utility increases were fairly conservative. So how on earth do we get from 50% accelerated depreciation of Leasehold Improvements to over a million dollars in free electricity over 25 years? We add in incentives on a new solar electric system. We're talking a lot of cash, and numbers that you'll need your accountant to tighten up. Using our same 10,000 s/f example, let's assume you just lease your building to a credit worthy tenant for 10 years. At today's costs, your new tenant fit out is going to run you $30 per s/f, or $300,000, if you take depreciation of half that cost in year 1, in a 50% bracket that's worth $75,000 in year one. Beaucoup! The government did this for a reason. They want cash pumped into the economy NOW. But think green. Think bigger. If you wanted to install a solar electric system in your building, it would actually cost about $800,000 for a system to power 10,000 s/f. A LIPA rebate on a system like this would run about $35,000. The federal tax credit for this 30%, or $240,000, bringing your system cost down to a little more than half a million dollars. Financed for 10 years at 7% you will find your cost to carry this system over the 1st 10 years will be more than twice the cost of what regular electricity would cost you. But a system like this in a commercial building is also subject to 5 year accelerated depreciation. So if you use the up front tax break on your leasehold improvement, and the accelerated depreciation of your solar installation to compensate for the fact that the carry cost is higher than your electricity would have cost, and you bank that value over the 10 years your system is financed for, there will be virtually no net impact to the bottom line. Now here's the last bonus kicker. The expected life expectancy of a solar electric system is twenty-five years. During your first 10 years the electric you bill to your tenant pays for half the carry cost of your system. The banked tax incentives pay for the other half. After that, it's free electric. And here is the last bonus of the whole thing. The cost of sun does not go up. So even if your conventional $3 per s/f electric charge today escalates to $7.70 in 25 years. It's still all free to you. Impact on the environment? More than 2,600 tons of greenhouse gases kept from the air we breathe. Michael Stein is a managing principal for Windsor Commercial Real Estate Inc., Melville, N.Y.