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Steve Barnes reveals the real value of energy incentives and credits.
In this episode, show host Jeff Nichols speaks with Steven Barnes, a Partner at Wipfli LLP, a top accounting firm that supports construction and real estate clients. Steve provides a straightforward primer on how energy incentives and credits can be materially significant and how they apply uniquely to commercial and not-for-profit buildings, and he explains how benefits can be allocated or used creatively to offset project costs and fund future initiatives. Find out what Steve means when he says building owners and operators must build green to get green.
Going deeper into this episode: It’s Not Always About Shielding Income
Savvy commercial building owners are drawn to these deductions and credits as they would be to capital asset depreciation and other familiar strategies that lower their taxable income. This tends to drive a higher level of awareness of these incentive programs in the private sector. However, many developers and designers who work on public or not-for-profit buildings are not as up-to-speed on what kinds of benefits are available or how to qualify.
Public buildings like schools, for example, may be looking to replace a dated and inefficient boiler with a renewable system like solar, geothermal, or biomass. These types of upgrades typically qualify for federal incentives under the Investment Tax Credit (ITC) and can range from 6% to 60% credit or cashback on a project.
So why aren’t more builders and building owners taking advantage of these incentives? Much of the reason has to do with the perceived barriers to energy tax incentive availability and qualification.
Here are a few of the top misperceptions:
- Building owners and developers often assume the work they’re doing to upgrade their properties likely won’t qualify or, that the scope of the upgrade wasn’t big enough. The fact is that most work does qualify for significant deductions or credits.
- The bar for qualification is too high so why bother? Actually, the standards for qualification are very achievable, especially for upgrades done within the prior 2-4 years. The main reason for this is that upgrades are compared with previously established ASHRE 2007 standards for energy use and efficiency. Many experts feel that the qualification benchmark is intentionally low to accelerate energy efficiency adoption.
- It’s just too expensive to have my CPA firm look into this and advise me. The reality is that many firms price these consultations at a fraction of the value of the qualified deductions or credits.
The Evolving Energy Tax Advisor
Full-service advisory firms are becoming more capable of navigating their clients through these perceived barriers and challenges. Having these conversations with your tax advisor upfront before the work starts allows for a more comprehensive vetting of upgrade options, CapEx planning, and comparison with current local, state, or federal incentive programs and energy standards.
Energy consultations are also important where a client may be looking to apply for a 179D deduction for example, but instead may find that by the time the work was completed, a more favorable asset depreciation opportunity was available. Another example is with buildings that have commercial space on the ground floor and residential units on higher floors, a properly advised building owner can apply 179D (deduction) and 45L (qualifying credit) thus taking advantage of several programs at the same time. In other scenarios that apply more to public buildings, energy credits can be donated to a scholarship fund or another charitable program and then written off as a donation– some may say ‘double-dipping’.
These are just a few examples of why energy advisory firms are interested in sitting down with their clients to have a more strategic conversion leading to a potentially more beneficial and profitable outcome.
Stay tuned for the next episode of Reframe and join show host Jeff Nichols on a journey of discovery to learn first-hand how the stakeholders and innovators across the building and construction industry are turning energy challenges into opportunities for sustainable growth.
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What is Reframe?
Reframe is the podcast about building sustainability.
Commercial and public buildings are among the biggest producers of carbon emissions. It’s a problem of massive scale. But, for building owners, engineers and contractors, solving it may actually be more of an opportunity than a challenge. That’s what the “Reframe” podcast is all about. Join host Jeff Nichols on an exploration of the forces driving sustainability in our built environment. And meet the people who are leading the charge.
Welcome to Reframe, the show about the people and the forces driving sustainability in our built environment. I'm Jeff Nichols. The opportunities for building owners to cover energy upgrades are numerous, and some of those incentives are incredibly generous, like 6 figure generous. But far too often, building owners and the businesses that serve them are leaving piles of money on the table because they're unaware or confused about the different incentive programs. And part of why this is confusing is because the benefits can come in a lot of different forms and formats, which we'll learn about today.
Jeff:In this episode of Reframe, I really wanna break it down and make it crystal clear. What are the main programs? Who are they for? Public or private entities, and who qualifies? When you wanna understand how energy tax incentives apply to commercial and public buildings, you wanna talk to a pro, someone who's been doing this for years years, knows all the details, but can keep things simple.
Jeff:So my guest today is Steve Barnes, a partner at Wipfli who's focused on construction real estate. And Steve is not just your typical accounting partner. In fact, his background is actually in designing these energy efficient spaces. So with that, let's get into it. Steve, thanks for joining the podcast.
Steve:I'm glad to be here, and hopefully, you know, hopefully, we can educate and provide some insight on these different topics to your listeners.
Jeff:I'm thrilled to have you on. And you know what? It's all your fault.
Steve:I'm thrilled to be here, but I'm curious to understand how it's all my fault.
Jeff:It's all your fault because this was your idea. You were the one who was like, you know, we should do a podcast on these things because it's like, you know, you you end up repeating yourself over and over again. And, this was
Steve:Oh, yeah.
Jeff:The the genesis of this was was really from a conversation you you and I had. So
Steve:Well, you owe me is is, like a like a Bill Maher kind of lifestyle where we're 2 guys sitting next to each other talking about something with a cigar and a whiskey. That's that's that's that's where maybe maybe when when I thought of a podcast, I'm like, yeah. That's what I wanna do.
Jeff:That's right. Have a drink in hand. I wanna start actually back at the beginning. So, Steve Barnes, give us, like, your title. Like, who are you?
Jeff:What do you do?
Steve:Oh, man. Yeah. I got, like, kinda like a Forrest Gump story. You know? Or we could probably spend a whole podcast talking about how how did how did Stevie b get to this point in time.
Steve:But, yeah, I'll I'll kinda give give to give the brief version of it. You know? So, you know, I'm a I'm a partner here at Wifly, which is a, you know, top 20 accounting firm. I lead our cost segregation and energy incentives team, particularly, but we
Announcer:get we have pulled in all sorts of different things, but, you
Steve:know, particularly, we have a a group of, you know, a little over a dozen engineers that work for us, and, you know, that that's we support these installation services. And, you know, my background is in architecture. You know, I graduated in architecture major, found my way into the accounting world. I was actually very fortunate. I worked for 2 individuals that came from a company called American Appraisal, which is no longer, and kinda taught me this work, very experienced.
Steve:They taught me this work. You know, coming out of architecture school, going into an accounting world was really weird for me, you know, learning depreciation, all these incentives, you know, and, you know, I've been doing it for 16 years, and I've actually I I I can say, you know, I've had some struggles, you know, because I'm not building anything. You know, I'm not building a bench. You know? I I don't have anything tangible that I could show.
Steve:Like, here here's the building or house or thing I made. You know, I'm moving numbers around. And I think that probably is my been my biggest struggle working in the industry. But helping clients, you know, there's so many stories that I have, you know, whether it's the mom and pop manufacturing company where I saved them a few $100,000, which, you know, was able to make more investments in their company, hire more people, and how grateful they are, or helping, you know, new new and upcoming, you know, real estate, professionals educating around all these different tax strategies. It's been really cool to get to know those individuals, getting to know these not for profits, getting, you know, that's even cooler too, trying to help and educate them and get them more dollars to support their programs.
Steve:You know, so there there is a lot of actual meaning within what I do, and that's what, you know, what keeps me driving. So
Jeff:Well, it's the exciting world of energy tax incentives. You know, today, it really is how do we break it down. Right? And especially by kind of the 2 major sectors, you know, public buildings and private buildings. So that's really what I wanna pick your brain about is is just kinda give us a lay of the land and an overview, especially for how these incentives apply to, you know, the public sector and then which incentives and which programs may apply to the private sector, and then we'll dive into some examples.
Jeff:So just break it down for me. Talk to me about what's the difference between public and private. What's the difference?
Steve:Yeah. So, you know, when we're thinking of, you know, building owners that are for profit, you know, your commercial, your industrial, your residential properties, you know, they they can capture these incentives, and it's usually, you know, some type of credit, tax credit, you know, tax deduction, shielding taxable income. So that's the way that they're able to capture these a lot of these incentives. And even even thinking of, you know, going from the federal programs to even local, same thing. Sometimes it rolls into, like, an actual rebate where they're getting cash back, but it's usually something to shield taxable income from uncle Sam.
Steve:We're, not for profit, a tax exempt entity, you know, they they are getting benefits either through a direct payment or some creative structure, that's being hashed out between the designer and builder, to try to to try to allow that tax exempt entity to capture it. So, you know, 2 different, you know, same programs, you know, that they're they're they're getting involved in, but really different structures. And we get involved in both sides of it, and it's it's really it's interesting. You get to be creative with it. You know, and I would say that it's equally popular, you know, these not for profits.
Steve:And and that's probably where where it's the lacking most in is these not for profits don't don't, don't really understand this, and they they haven't really captured it in the past. So they're trying to get their arms around it. They're like, well, wait a minute. You you know, if we do x y z with these expansions and renovations and upgrades, we can get these dollars. Well, we didn't know that.
Steve:You know, how can you help us?
Jeff:That's right. Yeah. I I think most not for profits are not thinking about how they shield income. Right? They're not thinking about taxes really at all because they don't pay taxes.
Jeff:So, that that can maybe be a little, a little bit of
Announcer:a mind.
Steve:Construction real estate. Right? So, you know, a developer contractor is in that world, you know, that they're they're either having a CPA or consultants around them that are hopefully advising them on this stuff for a not for profit. You know? That's their space, and they have those consultants around them.
Steve:And they're they're not thinking about how how are we structuring this entity, you know, that's owning this building and how we're capturing all these incentives, what incentives are available to us. They don't they have no idea. They have no nothing in place to help them with that. The best part of it all is it could be a a win win for both both the tax exempt entity and designers and builders and developers of that project.
Jeff:So tell me more about that. How how is it a win win?
Steve:So these incentives, you know, there's as I mentioned, some there's direct payments. We start looking at things like solar and geothermal, you know, previously and this is newer stuff. Right? So previously, they weren't able to capture this, but 23 going forward, the IRS is now allowing these taxes and entities to get a direct payment. So what they're saying is, hey.
Steve:If you install this energy efficient system such as solar, geothermal, wind, and, you know, it gets even more creative down to thermal storage, combined heat and power, What else? You know, battery Hydrogen. Hydrogen. Oh, yeah. Biomass.
Steve:I mean, I think there's over I think there's 13 or 14 different types of systems that we know of. I mean, that's there could be other things that are developed in the, you know, coming years. So they're able to get this direct payment in in ranges. There's a wide range of 6% to 60%. And so they're getting this direct payment back.
Steve:So think of now if you're if, let's say, I'm I'm representing a mechanical contractor that's trying to make a pitch to a to a hospital, for example, and they're saying, hey. This tree we're gonna upgrade your boiler system. There's some incentives locally and federally to do that. But, hey, if you install this thermal storage system, we're pairing with this, it's gonna cost you more. But you're going to get 50% of that back from the IRS.
Steve:So if you spend $1,000,000, they're gonna give you $500,000 to offset that, plus you're saving energy and utility costs. So there's really a return on your investment across the board here. And, yeah, you have to upfront that capital, but you're getting a lot back. And what we're doing so now we're helping our mechanical contractor communicate that to that hospital, which in turns, the hospital is like, woah, that sounds really great. We should go forward with that.
Steve:So then that mechanical contractor wins the work, right, on this more robust system, and the hospital gets, you know, gets all these credits and direct payments back. You know, ultimately, it's, it's the goal is to, to create more sustainable systems for these buildings. So that's the main objective, right, you know, to incentivize, building owners and designers and builders to create these systems and pay for them.
Jeff:I think that's a really interesting point, right, in the public sector or not for profits that they can allocate, is my understanding, the tax benefit, the depreciation, or, again, it comes in a lot of different formats to the designer of that system. So for, you know, mechanical contractors that do design build, like you said, from what I've seen, it's the designers that are bringing that to the table when they're, you know, making their pitch for the project and really demonstrate a competency that's giving them an edge because they're showing their clients or prospective clients how these projects pencil out, easier with these different incentives. So I find that really interesting.
Steve:That's one more layer. Right? So you're talking about sexual and semi ID where where that's another incentive. So in that same scenario where I'm talking about a boiler replacement, for example, right, that still would trigger that program and incentive. Now that incentive is a deduction, which that hospital couldn't capture because they're not filing a tax return, or they don't have taxable income.
Steve:So they are then the IRS allows them to allocate that program to a designer of the project and that designer could be the architect. You know the engineer could be the mechanical contractor because they're doing the design build of that mechanical system. And that's where if we are representing a hospital, in that scenario, we're saying, you know, hey, you can allocate this, you know, $5 per square foot of your 100,000 Square Foot Hospital deduction to, you know, ABC Mechanical, and they can get a $500,000 deduction. Ask them if there's ability for them to share that with you in some form. You know, that could be a reduction of a contract, right, with with on that project.
Steve:We've seen it really successfully done where it's a credit on future work.
Jeff:You know,
Steve:if you're gonna work with them, you know, in the future, and a lot of these mechanical contractor, particularly, they are maintenance repair, you know, and other projects down the down the line. You know? You give them a credit on that and say, hey. Here's some ghost money that you don't have to account for later on. You know, when you wanna do x y z project, you come to us, and there's gonna be this credit they can capture.
Steve:Schools love that. You know, they don't they don't have to worry about it. This this money that's this ghost money sitting out there, they love that kind of stuff. And crazy love that. Yeah.
Jeff:Ghost money. I think you just invented a new term.
Steve:I I have a habit of doing that. But yeah. So going back so you had that option, or the easiest, what we've seen is is a donation. You know, usually, you know, usually these contractors, the designers are are are involved with this this tax exempt entity already. You know, whether it's a not not for profit, you know, boys and girls club, whatever it may be, They might be a board member.
Steve:They may be already donating in part of that that organization and, you know, making a donation back for supporting you're giving us this deduction. Here's a donation back to, you know, whatever, you know, program within that that not for profit or the hospital, same thing, or school scholarships. You know, we've seen that, and that's probably the most successful because then in turn, they can write that donation off. So it could you know, they get 2 bangs for their buck, you know, get that deduction through the program, and then they'd write off the donation. So you you could be really creative with it,
Announcer:and we've seen it all all over the board.
Steve:And that's where we just come in and say, hey. We're not brokering any of this stuff for you guys, but we're just educating you around, like, what are your options?
Jeff:Yeah. What's legal, what's possible within Yeah. The tax code.
Steve:Yeah. And that's the the other thing is there's so many gray areas to it too.
Jeff:Interesting. You and I bonded around, how do we supercharge some of this energy efficiency work? The technology has evolved for, you know, so many of these systems and, you know, the just the the common sense, you know, this thing is it's better for the environment. It's, you know, more sustainable and green. We all have kids, you know, kind of thing.
Jeff:Like, it's better for their future, but also just it just saves you green. Right? It saves you money. And so being able to kinda educate people on how you can take advantage of that is one of the things I know you're really passionate about. So
Steve:Yeah. I mean, that's that's that is exactly it. Some of these programs I I'm I'm a a huge critic on. You know, you could probably support those services. You know, Washington could could do a lot better in terms of other, you know, outlining of them and the real motivations behind it.
Steve:But I find it still encouraging that it brings awareness around the topic. You know, being in architecture, building my house, I've, you know, I've designed buildings in the past, is something that I'm really passionate about, and I want to see the industry change in how it constructs buildings. You know, there are a lot of simple things we could do. It doesn't need to be a complete geothermal system. And I have those conversations with clients, I love consulting with clients on those topics, you know, like, hey, just spending a little bit more money green, you know, we actually have a catchy term, we use, build green to get green, right?
Steve:You know? You have to put up a little capital, but you do get a return on that investment, whether it's through maintenance or utility costs. And I and I've seen a a huge huge uptick in, you know, I would say, if you asked me 5 years ago, developers had no interest in build as cheap as possible, as fast as possible, get those buildings up to get us income as soon as possible. And I've I'm seeing a slow a slow pivot where they're becoming more interest in this. You know, I have a lot
Jeff:more questions. Why do you think that is? What's is it the shift in interest rates or, like, what is it just a real real dollars in these programs? You know, it's not just 1,000. We're talking 100 of 1,000, 1,000,000.
Jeff:Like, what what is it that shifted
Steve:It's it's it's it's a lot of things. Right? It's culture. You know, there there's there's a lot of conversation around, you know, global warming, all of that, whether you believe it or not. There's the politics around that.
Steve:So there's a lot of conversation around that. There's state, you know, incentives. There's states starting to really start hammering in on property owners to to, you know, build and improve their buildings to be more energy efficient. It's only a matter of time, and I think we're gonna see this is that where these states start penalizing. You know, you look at California, they do a building audit.
Steve:You have to meet certain criteria. Now you don't get penalized. There's only a better time where you're gonna start they're gonna start taxing you if you don't hit certain benchmarks. So I think that's gonna that, you know, that's one piece of it. The incentives is a huge piece.
Steve:A lot of our tax dollars out there now to incentivize, you know, whether again, whether it's, you know, federal or local. And, you know, there's a lot of local incentives. I wish there was, you know, a database where we're gonna say, hey. Just go here. And this is where it just changes it.
Steve:It you know, it's always being modified, but, you know, certain states like Colorado have great incentives, and it I don't think it's really well known. You know, if you're installing heat pumps and things like that, you can almost offset the entire cost of those systems. And I don't think even developers are are catching on to that and again those are just simple things that having a conversation with somebody that's in this world.
Jeff:So let's let's, touch on we explored a little bit of the public sector or not for profit side of this but what about private sector, you know, commercial warehouse? Like, give us a couple examples and and what are some of the programs that apply?
Steve:So there's different programs for different types of buildings, you know, and particularly the two differences, commercial And commercial could fall into residential and industrial depending on the type of property it is. When we start looking at commercial with residential, it's high rise, 4 stories, and Morris convert considered into that commercial bucket. So you have that section with some EID that they are able to capture, which is the deduction. So, for example, if you're building a multiuse development where it's, you know, commercial space on the 1st floor and it's, you know, high rise 28 stories of residential units, you know, whether it's condos or apartments, whatever it may be, they're able to capture not only the 170 ID, which is a deduction. And let's say that's off the bat, just easy math, 100,000 square feet, they're unable to get that $500,000 deduction potentially if they're meeting the certain criteria around that program.
Steve:The other program is 45 l, which they can also get a credit per unit. So if they're in that building, there's a 100 units, You know, that ranges from $25100 credit per unit to 5,000. And again, they have to meet certain criteria, and that one's really based around Energy Star. You gotta follow Energy Star to a t. If you don't meet any of those criterias in the Energy Star, you're disqualified.
Steve:You know, in 2022 and later, we saw a lot of, earlier, I should say, we saw a lot of 45 l because it wasn't attached to Energy Star. It was more of an energy model. Going into 23, it's attached to Energy Star. You know, I I don't know how they got their their foot in the door with the program, but they are in it now, and it must have some really good lobbyists. But we have to follow that program.
Steve:And what I've seen is, you know, I would say, in 2022, 70, 80% of our clients that were billing multifamily or single family qualified. I'd say it almost flipped. 25, 30% of them qualify now. And there, you gotta be careful. This is, again, where you gotta have you know, talking to a consultant that's experienced in the in the space is because you potentially spend and most likely gonna spend more money getting to there than they are gonna get credits and and incentives back.
Steve:So you gotta be careful with that. You you don't wanna force the issue. If your goal is to only to get the incentive, then it might not be right for you. But if your goal is to build an energy and well constructed building and be somewhat incentivized back, well, then Energy Star probably could be a good candidate because that's exactly what it is. They create some standards around the building, not only just energy efficiency, but the how you're framing and your closure of your building is gonna be constructed.
Jeff:Can we can we break that down even further? Like, what's a you know, we don't need a specific name, but what's an example of of, you know, private or commercial building? You know, how did they come to you? What were some of the challenges as they were trying to figure out how to navigate these programs? And then ultimately, you know, what were you able to do for them?
Steve:Yeah. I mean, larger developments, you know, they're trying to they fund these projects. Right? So they have investors. And, you know, if if they're our client, they're usually coming to us in that really early stage where it's, you know, they haven't designed an idea, and they come to us and, like, hey.
Steve:You know, we're trying to map this out for our investors and try to pull more investors in to get this building off the ground and and and and constructed. And what, what are the, what, how can we, again, encourage our investors to, to, to invest in this project? And that's where we say, oh, hey, these, these programs are available. And you're usually pulling in investors from, you know, that are in real estate that probably have a lot of taxable income. So the the incentive for them, you know, is to capture these deductions and credits to offset income that they're generating on other properties.
Steve:So that's maybe the the first start of it. But that's not always the case. Sometimes they come in after after the fact. They have a construct in this building. You know, what could be done?
Steve:And, you know, I've heard of this stuff. You know, I've heard webinars. You know, I have a smaller accounting firm, and that's fine. You don't need to have, you know, top 20 accounting firm doing this stuff for you. But that's maybe where the smaller accounting firms don't have those resources.
Steve:So coming to us and having us provide those services and then providing that data to your accountant, that's that's a lot of our relationships is around that. So, you know, back to your question is and there's a lot of tax strategy that should go into play. You were having a lot of upfront feasibility conversations, meet to learns with these clients to make sure that the stuff is valuable to them and that they're gonna be able to capture this. Because, again, it it may turn out that it may not be. And example I'll use is, let's say you had a a commercial space, and you renovated all the mechanical systems in that, you know, new boiler.
Steve:You spent a few $1,000,000, and you're like, hey. I have this outside vendor trying to talk to me about doing a once a week ID, which they probably qualify for. But you really gotta dive deeper into it because it's like, well, let's say it was done in 2022. We had some really favorable depreciation rules around capital improvements being done to a property. So in that scenario, they might be able to write all of it off through depreciation, which would make 170 ID a moot point to take because you didn't have any more basis to reduce the the 170 ID with.
Steve:So that that, again, that's the key is the tech that tax strategy. You know, unfortunately, we're not gonna do the 170 ID for them, but we found them a more favorable method to offset income through writing that off. So being proactive is probably the one thing that I preach the most about is, hey. If you can get in front of somebody that understands all of this stuff, and talk about it upfront and strategize, we can figure out what makes sense and what you can do and what you shouldn't do. And then they can kind of take that road map going forward and utilize it.
Jeff:You wanna get the max benefit. It needs to be planned versus after the fact. You're only gonna, you know, probably be able to capture so much.
Steve:What are your goals to that? Right? There's different strategies. Are they selling it right away? Are they keeping it, holding it, you know?
Jeff:Right. Right. So when you kind of exploring more the mindset of these building owners, what do you think are some of the top misperceptions about these energy efficiency programs?
Steve:You know, a lot of time, it's it's well, I'm not gonna qualify, because my building's not energy efficient. I didn't do anything, you know, outside the box. And that's kinda where, you know, I'm going back backtracking to where I I have criticism for the programs. Right? You know, particularly 1 SME ID, it looks at a 2,007 ASHRAE energy standard.
Steve:So for, you know, for individuals listening to this podcast that may not understand what that means is, you know, we're taking something that's being built today in 24 or 25 and comparing it to a 2,007 standard. You're going to meet and exceed that. So it's really not hard to achieve. The one thing
Jeff:It is. It's a layup. Right? I mean, any new modern system is gonna beat the 2,007 standard handily.
Steve:Yes. Easy. And it's, it's it's kinda silly because it's it's, you know, when clients hear that, they're like, well, okay. That makes sense. It's like, all you have to do I mean, state standards meet and exceed it.
Steve:So, you know, when when I hear somebody saying, for example, even with 45 l, you know, we look at, homes being built in or units even being built in Illinois, for example, the state standards meet and exceed it. So the federal government's really not setting a huge bar that you have to jump over. Now the one thing, and you know where I'm gonna go on this, is that they've not only included just the energy piece of it, okay, you have to make these things energy efficient, they've also added a lot of labor requirements. Certain systems, certain programs, based on the project size, don't need to meet it. For example, single families don't have to meet it.
Steve:Certain sizing on these solar and geothermal don't need to meet it. But when you think of larger projects, they have to meet labor requirements, and that's gonna be prevailing wage and apprenticeship. So not only do the cost of the energy components you're gonna pay paying, but you also have to meet this PWA as we refer to it. So that could also increase the cost of the project by trying to meet that.
Jeff:So the the misperception that a lot of, you know, pros you know, building owners that you engage with is that they just they don't qualify. They don't think that they did some, you know, crazy lead type thing. You know, it's like we just did a standard boiler replacement. And so the way they should see it is, you know, if you do anything that kinda qualifies in the, you know, lighting, building envelope, heating, cooling, hot water, there's probably an opportunity. Right?
Steve:Yep. And you we're looking at 45 l. They've might you know, some some counties and states require all of the criteria to be met, so you may be meeting it and just not capturing the credit. You know, there's there's been a lot of times where I get in these home home builders where they're acquiring these energy star ratings, the HERS rate or go out and rate these these homes, and they need it, but they're not capturing the credit. And it's just me getting into the in deep into it and saying, hey.
Steve:You're just not capturing this credit. Let me help you compile the information that you need to capture these on your tax forms. You know, and that's what you're gonna pay me for, that time and material around that. And that's key too is that my other criticism out there in the industry is that there's a lot of contingency. Oh, if you get x amount of dollars, you're gonna pay us x amount of dollars.
Steve:You know? Working at an accounting firm that we can't structure things like that, nor should you. You know? It should just be a time and material. You shouldn't be charged at, you know, taking a slice of those incentives out.
Steve:And then, you know, that's there's a lot of that coming out of the woodworks right now. You know, again, every time you see money being dropped in, you know, from the federal government, you get all these guys coming out of the woodwork, trying to trying to help and consult and and navigate these incentives. You know? And it should just be, you know, here's and that's that's the other thing too is that what I hear from, you know, these these these building owners. Well, you know, like, well, how much I'm gonna pay you?
Steve:You know? I'm gonna get this $500,000 deduction. Am I gonna have to give you a 100 of it? And the answer to that is absolutely no. It's probably a fraction of that.
Steve:We've tried tried to look at it like a 10 to 1 payback. For every $10 we get you, you pay us 1, but it's sometimes a lot higher than that. That's just our recommendation for whether it's a good pursuit or not.
Jeff:Yeah. It's interesting. You know, when with the Inflation Reduction Act, when $400,000,000,000 floods into a market, you see, you know, somebody's gonna get that money. Right? And, and you get a lot of people that that maybe aren't super experienced or willing to cut corners.
Steve:Vendors out there too. You know, there's there is, you know, a flood of solar vendors, and and now these mechanical vendors are trying to and that's where I caution too is if you're trying to explore these type of systems, try to find a vendor that just didn't sprout up in the last 6 months to a year. Because because we've seen where solar these Sunday solar projects yeah. I found this really cheap guy that's, you know, $500 a panel. We've covered our entire manufacturing, and then the system doesn't generate any energy.
Steve:You know, it's it's a faulty system, and they're having all sorts of issues. And ironically, you can't get the credit or direct payment back until the system is generating energy. So they're kinda in a really tough spot. But, yeah, you used a vendor that just came up because, you know, they saw there's a bunch of money out there, and they're trying to capitalize on that. You know, trying to find somebody that's been out there.
Steve:And same thing with geothermal systems. Yeah. We're seeing a rise in that, particularly that with schools and, government buildings are implementing these geothermal systems and trying to find a good mechanical contractor that understands that system, is hard. There there isn't many out there.
Jeff:What would be your single best piece of counsel for, you know, a not for profit or public sector building owner?
Steve:If you're thinking about if even if if it's just an idea, like, hey. We're gonna expand or, hey. We you know, we'd love to renovate all of our all of our schools or district buildings or court houses or or, you know, if it's boys and girls, we wanna we wanna renovate all these these to be more energy efficient. If even if it's just an idea, you gotta get in front of a consultant in space to talk about what that looks like because, again, there's so many things you have to check check boxes on to make sure that you're meeting them all. And, again, that's that PWA is is probably the the hardest one.
Steve:You know, if, again, if you're in a state that requires it, maybe not such a hurdle, but, you know, Wisconsin doesn't. You know, there's so many states out there that don't that don't, you know, and what does that look like? What's that if I have to pay that, how much does that increase my cost to my project? So sometimes it it it doesn't make sense. Same thing with solar.
Steve:You know, if you're, you know again, it's just that consulting upfront. Like, hey. I wanna pull energy from solar. That's great. But maybe there's other things you should do before that.
Steve:You know, if if you're building a new building, your new building might if you create you know, just spend a little extra more money on insulation and windows and roof, now you're getting this really energy efficient building already. So by installing solar, yeah, you're pulling the the this energy from the sun, but you don't need a lot of it already. So your return of your investment isn't 5 or 7 years. It's 12 or 15 years, and that's not a bad thing because your building doesn't need as much energy as it would as if it was an older 19 seventies building. So there's a lot of facts that just just having a a a me to learn with, you know I I don't wanna be biased, but, like, miffly, where we we sit an hour and talk about all these things.
Steve:Give them something to digest, and then we huddle back up. And then it's okay. Here's the things we wanna do and what makes sense. And then we connect them to various different vendors that we work with and partner with and say, hey. Okay.
Steve:You you're in solar bank sense for your project. We have an individual that we work with over the years that's been in this industry for 20 years. Here's who you should design your because we're not gonna design it. Right? You know, here's design it.
Steve:Now come back to us once you guys get everything on a paper and it's gonna becomes more real. So again, that'd be a proactive. Now if we come in on the back end, we can help, but there there is limited things we can do. And it becomes really frustrating for everybody because we can't you know, especially with PWA, if they're not meeting that prevailing wage and apprenticeship requirements, to correct it, it is it is awful and, usually, almost impossible. So it get it frustrates the client saying, hey.
Steve:Quickly, can you come in and help? We find out, oh, the project's wrapping up, you know, and we don't we don't meet all these safe harbor exceptions where we we don't have to meet this requirement. We have to meet it, but we don't. How do we correct it? We give them that advice, guys, and say, hey.
Steve:This is what you have to do, but, you know, you have to go back and pay these trades these dollars. And if the project's done with, it's really hard to go back and pay those extra dollars. And we've had projects like that. We we try to we try to avoid engaging in mid, you know, mid project at this point because it because it just creates those frustrations.
Jeff:What what about timing? I mean, is urgency important? Is this something you can kinda just at your leisure take advantage of, or, like, how important is it to move quickly?
Steve:Yeah. I mean, so timing with these incentives, you know, it's some of them are a little bit more urgent with the not for profits depending on where their fiscal years end, you know, when they need the money, how they need the money, the timing of the project. I know some of the schools are like, hey. I need to get this stuff done now sooner rather later because our our fiscal is in January, for example. It's like, okay.
Steve:So we wanna try to get that buttoned up so they can take get those direct payments or some type of donation or whatever it may be or whatever form that they're getting it from these incentives. For for profits, it's all tax related. So a lot of this stuff trickles at the very end, which is the the problem that's where it's thought about. They're like, they don't they build this building, and here it is, and boom. Now they're gonna capture this incentive.
Steve:So, you know, that's, you know, that's the two differences, but, usually, a lot of stuff all those benefits come at that end, and they capture it through their tax returns. And a lot of the fees and the work that's being done is majority of it's done at the end too. But that that, again, that's where we're trying to advocate. Have that initial proactive conversation. Get us set up.
Steve:Get a road map put in place. Get who's you know, get delegate who's responsible for what, and then it should be a smooth road. And it usually is once you you kinda hash that initial piece out with all these incentives. Now looking in the future, and maybe that's gonna be your next question.
Jeff:Well, what I what I wanna say is, yeah, if you're waiting until 2 weeks before the filing deadline, that's maybe a little too late, especially since, you know, in some of these cases, you gotta have an on-site visit and energy model and all that kind of good stuff. So, you do like you said, the early bird gets the worm on this one. So if you do your due diligence and really plot out that strategy and engage proactively, you know, you're really you're gonna be happy with the net results versus if you're coming at the 11th hour. Maybe maybe there's something that could be done, but it's not gonna be nearly as significant as if you really proactively engage.
Steve:That's a great way to put it. And I I wouldn't discourage somebody from exploring it regardless. For whatever stage your billing is, it's it is definitely worth exploring and see what your options are. Get educated around it.
Jeff:Totally.
Steve:You know, and it it's usually not an over over time consuming thing to to explore. You know, a half an hour call, a little bit of information back and forth, and there it is. We usually have what your options are and what needs to be done.
Jeff:Yep. Well, I love your quote, Steve, of build green to get green. And I think today's episode was a phenomenal primer, whether you're in the the not for profit world or the commercial world. Appreciate you coming on the show and thanks for the time.
Steve:Absolutely. I appreciate it. Thanks, Jeff.
Jeff:Well, what a fun conversation with Steve Barnes. Every time I talk to Steve, I learn something new. Here are just a couple of the takeaways I think are helpful for building owners. The first takeaway is that these energy incentive programs are significant and material. In many cases, energy efficiency projects can get almost the entire project cost back by leveraging these energy tax incentives.
Jeff:For private or commercial buildings, these energy incentive programs operate the exact same way as programs they already know, like cost segregation. So these energy tax incentive programs don't need to be intimidating because they operate just like things that you know such as cost seg. For public buildings, there is ghost money to be had. And what Steve meant by that is that for savvy public or not for profit entities, they can negotiate future benefits like discounted maintenance of these systems. So they can allocate the tax benefit to their designer and then in return, receive benefit from that designer.
Jeff:And that is just found money, right, that can help balance the budget or books. And finally, for designers of these energy efficiency improvements for public or not for profit clients, there is the potential to double dip. Designers can get the allocated depreciation benefit, and they can make a donation to get an additional tax benefit. Steve also said something that stood out. He said that you need to build green to get green, and I think that's the reframe.
Jeff:What he means is that these programs are not just about sustainability, they also benefit the bottom line. In our next episode, we'll impact the changing landscape for building owners in this turbulent market. I hope you'll join me as we discuss the new playbook for growth and the role and strategic impact of energy incentives. Till next time.
Announcer:You've been listening to Reframe, the show about building sustainability, presented by Pilot Light. Opinions shared by the Reframe guests aren't necessarily the views of their companies. If you'd like to learn more about the podcast, the show's host, guest, or topics, check out this episode's show notes or visit pilotlight.ai/podcast. Got a question for the Reframe team? Drop us a note at reframe@pilotlight dotai.
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