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State and Local Financing and Incentives for Green Development
By Douglas Porter
Urban Land InstituteCopyright © 2011 Urban Land Institute
All rights reserved.
Toward Sustainable Development
According to the U.S. Energy Information Administration, buildings now account for about 40 percent of the nation's total energy use, 70 percent of its electricity use, and 40 percent of its carbon dioxide emissions It is estimated that buildings consume about 40 percent of the nation's raw materials and are responsible for about one-third of all waste output. Moreover, as much as 80 percent of new development in some communities is projected to occur on greenfield sites outside suburban areas that offer urban services.
Many states and localities have adopted programs to spur more efficient use of energy in new and renovated buildings, and many developers have responded to the long-term financial benefits that may be gained from energy-efficient structures. In addition to paying greater attention to conserving the natural qualities of development sites, designs for green buildings are geared to enhancing energy efficiency in the construction process and in the qualities of the building's structural shell and skin, materials and equipment, fixtures and appliances, and lighting and finishes. Green building methods can be applied in developing single buildings or multibuilding projects, in renovations of existing structures as well as new construction, and in replacement of equipment and fixtures.
Green Development: Connecting to Context
Designs and public incentives to spur construction of green buildings frequently focus more on structural qualities than on consideration of their relationships with surrounding development. Unlike "green building," which may suggest a focus on structures' vertical dimensions, "green development" emphasizes horizontal relationships to the urban matrix. In this book, the term "green development" embraces a comprehensive concept of urban sustainability, suggesting that sustainable development requires green building technologies to function within a complementary context of neighborhoods, communities, and even metropolitan regions. Green buildings and projects should offer access to adjacent neighborhoods, a range of housing types and jobs, retail shops and services, transit opportunities, parks and walking trails, and educational and cultural facilities. To be truly green, in other words, green buildings should relate to the whole urban pattern, to participate as part of a larger community, contributing to sustaining energy efficiency, water conservation, landscape protection, and equitable economic and social opportunities throughout an urban region. Buildings should be urbane as well as physically functional.
In this book, "green development" also encompasses the qualities of green building that are expressed in the criteria and standards of LEED, EarthCraft, and other rating systems, but that also incorporate the sustainable development measures recognized in green development programs such as those in Austin, Texas, and Scottsdale, Arizona. That is, green development encourages:
* providing proximity or connectivity to residential and business services, transportation options, a range of housing types and jobs, and educational and cultural facilities;
* selecting sites that promote conservation or restoration of ecosystems, streams and floodplains, habitats of threatened or endangered species, prime farmlands, and historic artifacts;
* designing sites to minimize disturbance of soils and vegetation, preserve and restore native vegetation, control invasive species, retain and infiltrate stormwater, achieve solar orientation, and control external noise and lighting effects;
* enhancing energy efficiency in heating and cooling technology, use of solar and geothermal power, lighting and daylighting, insulation, and reflective roofs;
* using durable, low-maintenance, renewable, locally available materials; recycling construction waste; reducing potable water consumption by use of low-flow plumbing fixtures and low-maintenance landscaping; and
* enhancing indoor air quality by moisture control, adequate ventilation, and use of low-VOC paints and finishes.
As we continue to obtain a greater understanding of the factors involved in sustainable development, it is likely that this list will be expanded and improved.
Challenges for Green Development Practices
Many developers and builders are wary of adopting technologies that they — and often their clients — regard as experimental, still evolving, and unproven over time. They are especially concerned about who pays the higher costs often associated with innovative development practices. Does the developer front-end the cost, hoping to be repaid by higher prices and rents for the product? Are consumers willing to pay more for green features? Or is it appropriate for public entities to invest in some of the costs of green development, recognizing the long-term returns fostered by a higher quality of life, more attractive communities, and other improvements in community environments? Recycling construction waste and using local materials may make sense to the community at large, for example, but can add more costs than profits for the builder. Use of solar energy has been promoted for decades as a desirable alternative to nonrenewable energy sources, yet solar installations generally remain more costly to end users than traditional sources of energy. Also, builders of commercial buildings often discover that tenants are reluctant to pay more than standard market rents for green features despite potential savings from reduced energy and water consumption.
These are only a few of the reasons that the potential markup of development costs for green development practices has been a major challenge for developers and local governments hoping to stimulate such practices. An examination of marginal costs for green development by California's Sustainable Building Task Force observed that "the cost issue was becoming more and more of a prohibitive factor in the mainstreaming of green building not only in California but across the country." Early word of mouth among members of the building industry suggested that green requirements might escalate development costs by 20 to 25 percent or more — certainly a major hurdle for any developer.
Cost projections, of course, are based on many assumptions, including the payback periods or rates of return for initial and long-term investors, the availability and cost trends of preferred technologies, and the benefits earned by green methodologies. A study published in 2008, commissioned by the city of Toronto, identifies several issues in estimating marginal costs for green development:
* The true value of green development is best indicated by life-cycle cost, rather than payback period or rate of return, a measure often resisted by investors unwilling to wait 25 years for earnings.
* For example, costs for renewable energy technology generally require at least a 25-year life-cycle period and present initial cost barriers, but can deliver significant benefits with well-orchestrated energy conservation measures and landscape alternatives, integrated design, responsive regulations, and creative financing.
* However, technologies for greening urban sites, such as on-site storm-water management, water conservation, and solid waste management, immediately perform well and are cost effective.
* At the citywide scale, water conservation and solid waste management necessitate reliance on social and cultural contributions, because the technology is only as effective as the intentions of users.
* Lighting requires initial cost premiums for the latest technology that are quickly recovered by energy savings and reduced maintenance.
Many designers also argue that introduction of an integrated design process can actually achieve higher performance at lower per-square-foot costs. Focusing on driving down technology costs or stimulating higher rental or sales premiums ignores the possibility of reducing real costs through integrated design. One designer summarizes a rule of thumb for the value of integrating the design process: by the time 3 percent of the design fees are spent, 70 percent of the decisions affecting building performance have been made.
The report for California's Sustainable Building Task Force concluded that "minimal increases in upfront costs of about 2 percent to support green design would, on average, result in life-cycle savings of 20 percent of total construction costs — more than ten times the initial investment."
A more recent study released by the University of San Diego concludes that "green does pay off," citing a net benefit over 20 years from $50 to $65 per square foot, more than half coming from employees' increased productivity and health. "Even without higher rents [and in] recalcitrant markets we observe higher occupancy rates and faster absorption," translating into higher values that "almost certainly exceed the marginal costs to go green." The study also predicts that buildings without green features will become obsolete much faster than green buildings.
Yet the marginal costs for much of the new technology needed to reach green standards, as well as consumer preference factors, appear to restrain some developers from wholehearted participation in green development methods. Even in locales that require green development, some developers are prone to choose quick and easy courses to achieve minimum standards. Many consumers remain ambivalent about demanding green features that appear to be comparatively costly.
Furthermore, the marginal cost issue is only one of the problems that developers and designers may encounter in proposing green development. They must obtain public acceptance of their proposals, including innovations that may be unfamiliar to local officials. Public agencies that regulate building practices have been slow to adopt new regulatory standards for construction and development. Building codes, for example, may preclude use of some effective green techniques by resisting allowance of new technologies such as use of recycled or alternative materials, graywater recycling, or green roofs. Zoning ordinances often throw up roadblocks to new methods of development. Subdivision regulations establish rigid site practices and building requirements that are often out of touch with today's understanding of conservation of natural resources.
Consumers can make green development more problematical. Some homebuyers continue to demand more energy-consumptive living environments: greater floor space and elaborate layouts, use of imported materials, and exotic site vegetation. They may shun such features as porous pavements and low-energy lighting. Residents of neighborhoods undergoing development that incorporates green technologies and design practices may gang up to block unfamiliar innovations.
But more and more, these concerns are matched by an increasing consciousness of the environmental impacts of the built environment. Both public and private sectors involved in the development process are recognizing and responding to needs for more sustainable forms of development.
The added cost of going green is being reduced — at least in part — by energy savings that green buildings provide compared to conventional buildings. The nationwide surge in energy costs has changed the balance sheet for many projects, increasing the cost effectiveness of energy-saving technologies of all kinds, from insulation and window treatments to reflective roofs. Other benefits noted by occupants of green buildings are improvements in ventilation and lighting, and greater hour-to-hour control over interior conditions. All of these technologies indirectly improve employee and resident health and productivity.
For example, an important goal of the PNC headquarters project in Pittsburgh, Pennsylvania (profiled in chapter 7), was to boost employee satisfaction, which translates into corporate savings on the cost of doing business. The company wanted to create a pleasant working environment by providing natural light, individual temperature control, and better air quality and furnishings. Anticipating occasional needs for altering workstations, the interior design included easily reconfigured systems furniture, accessible flooring, and recyclable carpet tiles. (The cost of reconfiguring a workstation was reduced from $3,000 to $300.) Other green features were also seen as valuable amenities for employees: window views, landscaping, multimodal transportation opportunities, a child-care center, and the new PNC Park next to the building. For PNC, an important result has been a 60 percent decrease in voluntary terminations in two of the largest business groups. Another is an 11 percent increase in employee productivity. PNC is one of many employers that appreciate the advantages of green development in improving employee satisfaction and productivity.
The development industry has recognized that green development is a major factor in decision making. The Jones Lang LaSalle/CoreNet Global survey conducted in 2008 found that respondents increasingly consider energy and sustainability issues as a major or "tie-breaker' factor in making locational decisions. It is striking that the percentage of respondents holding that view increased from 47 percent in 2007 to 78 percent in 2008. The survey shows that investments in alternative or improved technologies were also supported by continued improvements in the availability and performance of new technologies in response to market interest.
Architects, landscape architects, and other design professionals have been avid supporters of green development. Many have showcased green features in their own offices and persuaded clients to venture into green development territory. Designers have been instrumental in establishing green building rating systems such as LEED, and more than 30,000 have been registered as professional advisers on technical aspects of green buildings. The contributions of the design professions can be seen in cities and towns across America, and are portrayed in the project profiles in the final chapters of this book.
Public Incentives for Green Development
Mounting public concerns for promoting sustainable development have stirred state and local actions to encourage green development. In particular, federal programs of the Department of Energy and the Environmental Protection Administration have strongly promoted sustainable aspects of development. These laws and programs have laid the groundwork for state and local governmental commitments to promote more sustain- able forms of development. At the same time, states and communities have stepped forth to pursue policies and programs that support the purposes of green development. Their tangible advocacy for green development takes many forms:
* Establishing a supportive policy framework: States and local governments have adopted policies and regulations that give priority to green development, such as:
* Development policies, expressed in comprehensive or neighborhood plans, zoning ordinances, and other guides to community development, that endorse energy-efficient development patterns, conservation of environmentally sensitive resources, and equitable provision of housing, jobs, and public services;
* Green design standards and guidelines, either voluntary or mandatory or a mix of both, that promote incorporation of green practices in development, as described in chapters 5 through 8; and
* State directives establishing green standards for regions and local governments to reduce greenhouse gas emissions, such as California's acts in 2006 (AB 32) and 2008 (SB 375) setting statewide targets for emissions reductions and requiring regional and local land use plans to reduce vehicle miles traveled (described further in chapter 2).
* Providing financial aid: A variety of initiatives can reduce development costs to encourage green development:
* Tax reductions, abatements, and credits that reduce requirements for payments of property, income, corporate and gross receipts, sales, and other state and local taxes;
* Fee reductions of permit and impact fees levied on new developments;
* Grants and loans from various public agencies and utility companies to underwrite general development costs or costs of specific types of equipment, facilities, or fixtures;
* Rebates or discounts for fixtures, appliances, and systems such as solar or wind power that are frequently provided by utilities rather than local governments; and
* Energy and water efficiency special districts that allow homeowners to fund long-term renewable energy and water energy conservation retrofitting improvements with low-interest funds amortized over a long period and repaid through property taxes, such as California's AB 811 program.
* Adding value to projects that are designed as attractive and profitable ventures:
* Density bonuses that translate into viable projects that attract owners and tenants;
* Waivers or reductions of regulatory requirements, allowing potentially substantial savings on time and cost factors in the development process;
* Accelerated review procedures, which offer opportunities to obtain permits faster, reducing developers' front-end costs and improving certainty, thereby reducing cost of at-risk capital;
* Public improvements to support new development; and
Excerpted from State and Local Financing and Incentives for Green Development by Douglas Porter. Copyright © 2011 Urban Land Institute. Excerpted by permission of Urban Land Institute.
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