July 24, 2012
On June 25, 2012 the Internal Revenue Service (IRS) released
Notice
2012-44 (2012-28 IRB 45) (the “Notice”) that provides interpretative
guidance on qualified energy conservation bonds (QECBs) under Section 54D of the
Internal Revenue Code of 1986, as amended (the “Code”). The Notice uses a
question and answer format to clarify, among other things, what types of
projects might qualify for two of the multiple eligible financing purposes (also
known as “qualified conservation purposes”) under the QECB statute: capital
expenditures incurred for purposes of (i) reducing energy consumption in
publicly-owned buildings by at least 20 percent and (ii) implementing a “green
community program.” Click
here to read background material on QECBs and click
here to see a list of all qualified conversation purposes under Section
54D(f). Below is a brief summary of certain portions of the Notice.
Reducing Energy Consumption in Publicly-Owned Buildings by at Least 20 Percent
With respect to this qualified conservation purpose, the guidance seeks to
clarify what constitutes a publicly-owned building, how an issuer measures the
reduction in energy consumption and the period of time over which one must
measure the reduction.
- A publicly-owned building is a building or buildings owned by a state or local
government or any instrumentality thereof. If the unit measuring the reduction
(called a “measurement unit,” as described below) is a unit other than a
building or buildings, the building or buildings encompassing the unit must be
publicly-owned.
- The following “measurement units” may be used by an issuer to measure the
reduction in energy consumption: (a) single publicly-owned building; (b)
multiple publicly-owned buildings; (c) one or more building system components
(i.e., a system that serves one of the following functions: heating, ventilation
and air conditioning, hot water system, lighting, building envelope or
electricity “plug load”) of one or more publicly-owned buildings; or (d) a
combination of (a) or (b) and (c). The measurement unit must include the
publicly-owned building or buildings, or building system component or
components, with respect to which the capital expenditures financed with QECBs
are incurred.
- A reasonable expectations standard applies for purposes of determining
whether the QECBs have reduced energy consumption by at least 20 percent. To
satisfy the 20 percent test, the issuer must reasonably expect that the capital
expenditures incurred for the project will result in a 20 percent or greater
reduction in energy consumption for the selected building, buildings or building
system during the selected measurement time period and using a common energy
unit.
- An issuer may rely on an independent expert to establish its reasonable
expectations with respect to the 20 percent test. Such expert must, no earlier
than 60 days prior to the issue date of the QECBs, certify under penalty of
perjury that the capital expenditures for the project are reasonably expected to
result in a 20 percent or greater reduction of energy consumption in the
measurement unit during the measurement period.
- A “measurement time period” is any reasonable and consistent time period of
not less than one year that may to be used by an issuer for purposes of the 20
percent test. The issuer must also use a consistent method of measuring energy
use. The first time period must begin immediately before, and the second time
period must begin immediately after, all capital expenditures are incurred for
the project. Energy use during such two periods will be compared to determine
compliance with the 20 percent test. Energy use during the construction period
is not considered.
Green Community Program
As described in the Notice, a green community program is a program that meets
the following two requirements: (a) the program’s purpose is to promote one or
more of the purposes of energy conservation, energy efficiency or environmental
conservation initiatives relating to energy consumption, including, but not
limited to, energy savings through retrofitting initiatives for heating,
cooling, lighting, water-saving, storm-water reducing or other efficiency
measures, distributed generation initiatives or transportation initiatives that
conserve energy and/or support alternative fuel infrastructure, and (b) the
program must (i) involve property that is available for general public use or
(ii) involve a loan (or other repayment mechanism) or grant program that is
broadly available to the member of the general public, including individuals and
businesses. It is not necessary for a green community program to affect the
entire geographical area or all residents and businesses within the geographic
jurisdiction of the governmental unit that implements the program so long as the
program broadly benefits the general public, residents or businesses in the
affected area. The Notice provides examples of “general public use,” “broadly
available” and of a “green community program.”
The foregoing information is intended to be a brief summary of certain
portions the Notice, and additional substantive rules under the Notice may apply
in certain cases. If you have any questions or would like additional information
with respect to the Notice or with respect to whether a proposed project may
qualify for QECB financing, please contact one of the authors of this alert.