With increased expectations from customers, attention from the media, and regulatory scrutiny, sustainability has made its way to the forefront of the hospitality industry. Sustainability has become a business imperative as lodging companies seek to improve operational efficiencies and respond to conscientious consumers as well as the actions of their competitors.
A recent survey conducted by Deloitte reflects the expectations of business travelers that hospitality companies will adopt green policies. Of the more than 1,000 travelers surveyed, 34 percent said they seek out hotels that are environmentally friendly, and 38 percent have researched green lodging facilities either online or by asking friends and relatives. Similarly, 28 percent said they would be willing to pay 10 percent more to stay in a green lodging facility.
In response, many hoteliers are implementing green retrofits to their properties to save money while improving brand image with their customers. The challenge in this economy is paying for the upfront costs of the retrofits and achieving a return on those investments. The answer in many cases can be found in the recent tax provisions from the American Recovery and Reinvestment Act of 2009 (“ARRA 2009”).
The act contains a number of tax provisions that provide significant value to lodging companies that are focused on reducing energy use through efficiency or producing renewable energy. The magnitude of funding, and the emphasis on energy efficiency and alternative energy usage, encourages renewed discussion around “going green” even during these challenging economic times.
Reconsider ROI on Alternative Energy Sources
The conversation about small-scale power sources, known as “distributed generation” for properties to create a source for their own sustainable electricity supply, becomes much more attractive when the cost is now offset by a new or extended federal income tax incentive.
The investment tax credit, under Internal Revenue Code 48, provides to the taxpayer an income tax credit between 10 percent and 30 percent of the total cost of expenditures for qualifying alternative energy property. Qualifying alternative energy property that is commonly used as a source of distributive generation includes:
• Solar property;
• Fuel cells with capacity of at least ½ kw and generation efficiency greater than 30 percent;
• Small wind turbines with capacity less than 100 kw;
• Geothermal heat pumps;
• Micro turbine property with capacity less than 2000 kw and generation efficiency greater than 25 percent; and
• Combined heat and power systems (CHP systems) with capacity less than 50 MW, mechanical energy capacity less than 67,000 hp, and efficiency greater than 60 percent.
The property must be placed in service by December 31, 2016, which provides for some stability around the incentive and time for companies to pilot installations, review success, and retrofit their portfolio of properties.
The credit amount is 30 percent of the cost for solar property, fuel cell property, and small wind property. The credit amount is 10 percent of the cost for geothermal heat pumps, micro turbine property, and CHP systems. There are maximum amounts for the credit associated with some of qualifying property. Fuel cells are limited to $1,500 per each ½ kw of capacity. Micro turbines are limited to $200 per kw of capacity. CHP systems are limited by virtue of a capacity ratio.
The ARRA 2009 also provided that there is no reduction in costs to which the investment tax credit can apply, attributable to grants, financing or incentives received from states or local governments.
More than a hundred financial incentives related to distributed generation also exist at the state level. The states vary as to the incentive level and the method: corporate tax incentives, sales or property tax incentives, or an array of grant and loan programs. The local jurisdictions may also provide for expedited permitting or discounted permitting costs, in addition to other types of incentives.
Don’t Overlook Utility Incentives
The utility incentives number in the hundreds as well for alternative energy usage, and they assist in a company’s ROI calculations when considering “green” investments. Highlighted below are a few examples to emphasize the variety and the methods of funding:
California—State Rebate Program for Wind & Fuel Cells: $1.50/W for wind and $2.50 to $4.50/W for fuel cells, depending on the fuel. The program is funded by each of the major utilities in the state—2008 funding was in excess of $80 million.
California—State Rebate Program for Solar Photovotaics: the incentive ranges from $1.10 to $1.50/W depending on the utility for the current year. However, the incentive decreases annually depending on the length of time the utility has been involved in the program.
Texas—Solar Photovoltaics Rebate Program in Austin: for residential and commercial customers, $3.75/W; and for equipment manufactured (60 percent minimum) in Austin, up to $5.60/W—with a maximum of $100,000 or 80 percent of the invoiced cost per customer, not to exceed 20kW. The latter requires a pre-installation inspection, which will determine rebate eligibility. The final rebate is determined upon post-installation inspection.
Texas—Oncor Electric Photovoltaic Incentive Program: $2.46/W, with a maximum incentive of $246,000. The program manager may perform both pre- and post-installation inspections. Projects are subject to performance verification up to five years after completion.
Re-evaluate Energy Efficiency Improvements
Space conditioning, water heating and lighting together account for almost 80 percent of the energy consumed in a typical lodging facility, according to the EPA’s Hotel Energy Use Profile. They are consequently the primary focus when considering energy efficiency incentives.
On March 26, 2009, the U.S. Department of Energy released a statement from the Obama Administration announcing how the $3.2 billion (included in the ARRA 2009) would be made available for funding local energy efficiency improvements.
Clearly outlined in the announcement was the support for energy efficiency retrofits in residential and commercial buildings, as well as the creation of financial incentive programs for energy efficiency improvements.
Many states have been out front of this money and have established significant programs incentivizing energy efficiency. As an example, in New York, the NYSERDA existing facilities program offers a broad array of incentives—both prequalified equipment rebates and performance-based rebates.
• Pre-qualified measures—The pre-qualified equipment includes lighting, HVAC, chillers, motors, variable frequency drives, natural gas equipment, refrigeration, commercial kitchen equipment, and commercial washing equipment. Pre-qualified application must be sent within 90 days of the invoice for purchase and installation of the equipment. The maximum incentive available under this category is $30,000 per project.
• Performance-based incentives—Performance-based incentives are oriented toward large improvement projects. They are available for electric efficiency, energy storage, natural gas efficiency, demand response, combined heat and power (CHP) systems, and industrial process efficiencies. Performance-based incentives are awarded as a one-time payment based on the expected first-year savings offered by a given improvement.
The dynamic world of state incentives provides funding sources in addition to the largest federal incentive currently available for energy efficiency. IRC Section 179D (Public Law 109-58) was enacted as part of the Energy Policy Act of 2005 and extended through the Emergency Economic Stabilization Act of 2008. It states that a taxpayer may claim a deduction for all or part of the energy-efficient commercial building property cost. These deductions have been broken down into two rules: the Permanent Rule and the Interim Lighting Rule.
• The Permanent Rule focuses on improvements to three major areas of building construction: HVAC/hot water heating, interior lighting, and the building envelope.
• The Interim Lighting Rule provides taxpayers with methods for determining the partial deduction for building lighting systems.
To qualify for the full deduction ($1.80 per square foot), the taxpayer must reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more compared to baseline standards. Partial deductions ($.60 per square foot) are available for individual building systems, including HVAC/hot water heating, interior lighting, and the building envelope.
Before the deduction can be claimed, the property must be independently certified to ensure compliance of the building with energy-savings plans and targets. An administrative point to note: building the certification requirements into the subcontractor-bid process—in the case of efficient lighting, as an example—will dramatically reduce this administrative burden by the property owner.
Looking Toward the Future
Now is the time to consider or reconsider alternative energy sources and energy efficiency upgrades during scheduled retrofits. Tax incentives should help improve current ROI calculations and as energy prices increase in the future, the investment today should pay dividends.
Shaya Schimel is Deloitte Tax Hospitality and Leisure Industry Sector Leader and Jenny Bravo is Deloitte Tax Enterprise Sustainability Leader.
This article does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences arising from the reader’s particular situation.
Copyright © 2009 Deloitte Development LLC. All rights reserved.
