A Sign of the Times: Harris County Tax Abatement Promotes Green Building

Harris County is showing some “LEED-ership” by creating tax incentives for “green” development. In May of 2008, Harris County Commissioner’s Court passed the Leadership in Energy and Environmental Design Tax Abatement (“LEED Tax Abatement”), which provides for a 10-year tax abatement program applicable to qualifying commercial building projects within certain areas of Harris County. The abatement is intended to offset the additional tax liability that sometimes results from the increased appraised values often assigned to LEED Certified buildings. Although the scope of the abatement program is somewhat limited (i.e. applying only to Harris County taxes assessed on eligible projects in unincorporated areas) and despite the fact that the economic incentive is relatively small, this program is important in that it points to a growing trend of local governments looking for ways to promote sustainable, also known as “green” building.

Eligibility
A developer may apply for the LEED Tax Abatement separately or as part of its application for other Harris County Reinvestment Zone Tax Abatement programs. However, as required under any Harris County Reinvestment Zone Abatement program, a developer must expend at least $1,000,000 in project improvements. The LEED Tax Abatement adds the additional requirement that a developer expend at least $100,000 (which is applied toward the total expenditure requirement) on costs related to LEED Certification and only new commercial projects, including manufacturing, research, warehouse and entertainment facilities, are eligible for the program.

Application
Prior to submitting an application, a developer must register the project with the United States Green Building Council, stating that the project will seek LEED Certification. A developer can then submit the application to Community Services Department (“CSD”) of Harris County at any time prior to commencing construction, along with a $1,000 non-refundable application fee. In addition to completing a simple two-page form, the applicant must also provide the following: (i) a narrative describing the project; (ii) the anticipated level of LEED certification; (iii) a projected timeline for completing the project; (iv) the estimated project budget; and (v) developer/owner financial information.

The application process is intended to allow the developer and CSD to jointly develop a project-specific agreement, to be approved by Harris County Commissioner’s Court, which outlines the tax abatement structure if the project achieves the agreed LEED Certification and any other specifications agreed upon by the parties. If a developer meets the qualifying criteria and the application is approved, an agreement is typically finalized within sixty days of the approval date. A LEED Tax Abatement agreement remains effective for ten years, beginning on the date of its approval by Commissioner’s Court.

Tax Benefit
The tax abatement is effective once the developer completes the project in compliance with the agreed specifications outlined in the agreement, including obtaining the agreed level of LEED Certification. The amount of the tax abatement (i.e. the portion of the appraised value exempt from property taxes) is tied to the level of LEED Certification awarded to the project. The higher the level of LEED Certification, the greater the percentage of tax abatement awarded, as shown on the following chart:

The following is an example of a LEED Tax Abatement calculation using the information from the foregoing chart:

• A completed project is appraised with a total value of $1,500,000, with land valued at $250,000 and improvements valued at $1,250,000;
• The cost of development was $1,000,000, which included $100,000 expended to achieve Platinum LEED Certification;
• The tax abatement is calculated as follows:
• $1,000,000 (cost of improvements) x .10 (abatement percentage allowed for LEED Platinum Certification) = $100,000 (tax abatement); and
• $1,250,000 (appraised value of improvements) - $100,000 (value of tax abatement) = $1,150,000 (appraised value for purposes of calculating Harris County taxes on improvements).
• Applying the Harris County 2008 tax rate of 0.0062998, tax savings equals $629.98 for one year (i.e. the savings realized from reducing the appraised value by $100,000).

The developer may use the abatement each year while the LEED Tax Abatement agreement is in place for a total term of up to ten years. The maximum amount of tax abatement is always based on the percentage associated with the LEED Certification level awarded to that property (in the above example, if $200,000 had been expended for LEED related expenses, the tax abatement is still $629.98 each year due to the cap of 10%). To emphasize the possible “worth” of the abatement on the upper end of the scale, consider if in the above example total new project development costs were $100 million (cost to complete platinum certification would be higher, but assume more than $100,000) – in that case the tax abatement value is 100 times higher, or $62,998 per year for 10 years.

According to the Harris County Economic Development Office, a LEED Tax Abatement agreement does not automatically transfer to a new owner upon sale of a project.; Prior to the sale, the seller and buyer must seek approval from CSD to assign the agreement to the new owner.

More Green Carrots to Come
In light of the narrow eligibility criteria and the increased costs associated with obtaining higher levels of LEED Certification, the LEED Tax Abatement is unlikely to generate a lot of new interest in green development in the short term. As of December 17, 2008, only one LEED Tax Abatement agreement has been approved and only one other application is pending. Nonetheless, commercial developers already planning LEED Certified projects in unincorporated areas of Harris County would be wise to consider applying for a LEED Tax Abatement, as at least some of the costs of LEED Certification can be offset. Additionally, a LEED Tax Abatement agreement can be a significant benefit to developers and builders who wish to market themselves as “green” builders.

More importantly in the long term, however, is the realization that Harris County is taking even a baby step towards promoting and encouraging sustainable development. In the recent past, interest in green building has been largely limited to certain regions of the country, particularly the West Coast. That Harris County would create an incentive program suggests sustainable building initiatives are becoming mainstream and that elected officials are likely to continue promoting this trend, which may spread to the City of Houston and other local jurisdictions (as it has already in some small isolated communities around Texas). The LEED Tax Abatement, while a relatively small program, is undoubtedly not the last time Harris County and other local governments will use tax policy to encourage green development.