Tax Policies that Encourage Tenant Medical Office Building Green Utility Retrofits

Abstract

This paper exams the financial impact of upgrading an existing medical office building with an energy efficient design or equipment from a tenant/lessee perspective.  The empirical study highlights the importance of utility cost, credit availability and producer price index for office construction on the amount of medical office building spending put in place.  The independent variables prime interest rate, cost of natural gas per therm and electricity cost per KWH are significant variables. A cost-benefit model is developed that inputs several personal income tax rates, incorporates a debt-service coverage ratio, analyzes investment tax credit and rebate scenarios and varies the level of energy savings. The cost-benefit case study results provide insight into which factors enable higher net construction spending when considering a green energy retrofit project. Both the regression model and the case study model focused on the tenant who rents medical office space using a triple net lease.  The tenant paradigm limits the analysis to energy savings, the tax implications of having these savings and benefits associated with borrowing when financing the green retrofit. The availability of low cost borrowing and increased investment tax credit (ITC) rates increases net retrofit construction spending.