Paying due diligence to new Eco rules

From next year, new legislation will require buildings to be energy efficient, in line with the European Directive on the Energy Performance of buildings of 16 December 2002. With a few exceptions, new/refurbished buildings of over 10,764 sq ft (1,000 m2) must meet new carbon emissions standards. These “green” buildings will have to make changes, which will be incorporated under parts L and F of the Building Regulations.

This will lead to extra costs. It is not only about the actual physical construction and installation of, say, an item of energy efficient plant or a passive system of lighting; it is also the extra design input, associated professional fees, increased development programme, not to mention the future extra due diligence on sales and acquisitions ensuring the implementation.

Building costs also depend on the type, specification, size, user requirement and so on. This in turn affects the level of energy efficiency. Even the complexity of meeting the future performance indicators will have an effect. The design will consider glazing area percentage, wall, floor and roof U values, glazing U values, shading, lighting levels and so on. In addition, there is the type of occupancy, equipment gains and fresh air, the M&E design as well as the many alternative solutions available and the future running costs to consider.

These aspects affect each member of the project team, whether QS, PM or architect. Who pays for these increases in work?

Building owners come in all forms, whether pension funds, unit trusts, property companies, individuals or end users.

The extra costs also depend on what someone is prepared to pay. Studies by QS firms have shown that compliance will not actually cost a great deal more – but to comply with a level that could be deemed an “excellent” building in performance terms may involve an extra 2% on cost. It could be higher depending on how environmentally friendly you want your building to be.

To simplify matters, the government is discussing whether to adopt a labelling system, similar to those seen on fridges. To promote green issues and push forward what should be seen as a good piece of legislation, to encourage a change in developer policy, and more importantly the future client, then some form of incentive would be seen as another good thing.

The more common incentives include grant funding for alternative energy sourcing, re-using waste electricity, solar power, residential insulation and so on. One incentive that promotes energy efficient equipment already has legislation: Enhanced Capital Allowances. This is a valuable tax break at 100% in the first year against taxable profits for commercial property.

Other possible incentives include reduced VAT on energy efficient products, stamp duty rebates for energy efficient measures and tax credits. The Energy Saving Trust is also considering further incentives.

Any decision on the construction of a green building will come down to the cost

However, tax breaks will not help non-taxpayers who require capital grant funding. They will only affect the companies who are in profit. Again, although a 100% tax break, the relative value is only as good as a firm’s tax rate, which for most companies is 30%. This means usually about a third of the costs can be recouped. Grants may only be available for part-funding any equipment and not the whole cost.

Even when considering a 2% cost increase, this could be partly for passive systems such as solar shading, which may not attract either grants or tax relief, against, say, efficient boilers, or alternative heating such as solar power which may qualify.

The costs above relate to the capital expenditure and do not take into account the future health of the building, its occupants and investment performance of the building. These costs are difficult to quantify, except perhaps when considering future rents, tenancy turnover, investment yields or productive companies.

Future due diligence on environmentally green property will become more complex and questions might be raised over what tax breaks are available in a property more than before. Detailed records might have to be kept by owners, increasing the costs of building ownership and development.

What is certain is that these incentives are important, although at the moment too complex to achieve. A more transparent and simpler system could perhaps be adopted.

Any decision on the construction of a green building will come down to the cost. This cost can only be determined when all factors are known, including taking into account the incentives available.

But will these incentives change behaviour? This will depend on the benefits attached to the incentives. There will certainly be more interest in these incentives with the introduction of the “green” building next year.

Clive Curd is a partner at Gleeds (Financial Services Division)