Good to Great: Realigning Resources at Environmental Agencies

The following is our weekly excerpt from NAIOP’s report, Good to Great: Recommendations for the Baker Polito Administration. Comments are encouraged!

When considering a long-term vision for the Commonwealth’s environmental agencies, NAIOP encourages the Executive Office of Energy & Environmental Affairs (EEA) to start by realigning resources to ensure 1) environmental protection and 2) that resources are appropriately allocated to ensure timely and predictable permitting. In recent years, the regulated community has observed that a larger percentage of staff at the environmental agencies is focused on the development of new policies and regulations instead of the expedient implementation of existing regulations (i.e., permit approvals, compliance assistance, etc.). Prompt and predictable permitting is critical for economic development projects and ensures increased tax revenue for the Commonwealth. Compliance assistance programs provide a preventive and cost effective approach to ensuring environmental protection.

Therefore, NAIOP proposes the following recommendations:

  • Tie Permit Fees to Results: Permit streamlining was brought to MassDEP’s doorstep in the late 1980’s. Facing considerable time delays for the issuance of permits with no timetables, NAIOP was a founding member of the MassDEP Fees and Program Advisory Committee that established a fee program for all permits and a retained revenue account in return for the MassDEP’s agreement to set enforceable timetables for administrative review, technical review, and issuance of permits. General results were positive and fees have been adjusted gradually over the years to reflect cost of living increases. Permitting fees went into a dedicated revenue account, which was intended to supplement the MassDEP budget so that it could continue to provide its other non-permitting services. The original committee included NAIOP, AIM, Mass Municipal Association, MASSPIRG, Environmental League of Massachusetts, and other private and public sector representatives. The enacting statute establishing the agreement and authorizing MassDEP to establish the fee program is M.G.L., c. 21A, §18 and the regulations are at 310 CMR 4.00.As the architects of the Program left state government and Massachusetts faced revenue shortfalls, the original agreement was sacrificed for revenues. Gradually the Legislature began to apply permit monies to the MassDEP operating budget. Rather than decreasing the time for permit issuance based upon the lesser number of permits due to a slow economy, the General Fund percentage decreased for the MassDEP budget. As recently as 2013, the Fees Committee wrote to the Governor and to the Ways and Means Committees requesting that the agreement be honored. Business was hesitant to support the Department’s request for additional funding based upon the legislative track record applying fees for operations. NAIOP urges the Baker Polito Administration to reinstate the original agreement and ensure permitting fees are directed to the dedicated revenue account to ensure adequate resources for permit issuance.
  • Increase Use of General Permits: NAIOP encourages all environmental agencies to consider increasing the use of general permits. General permits are more cost effective and achieve the same goal as individualized permits, but do so faster and more cost-effectively and provide a higher level of certainty in outcome (including reducing the risk of permit appeals). In order for this to work, however, it is critical that agencies be committed to making these general permits effective and not so limited in scope or so overly burdened by contingent conditions that they are no longer useful. EEA should conduct an internal review of all programs to identify those that could move, in whole or in part, from individualized permits to general permits.
  • Move to Permit-by-Rule (aka self-certification): Self-certification needs limited staff resources to administer and oversee and uses enforceable third-party certifications to ensure that rules are met and standards are achieved. MassDEP is already using self-certification for some programs, but there are numerous opportunities for expanding the use of this cost-effective and proven regulatory approach.
  • Increase Permitting Staffing for Waterways Program: Waterways is responsible for issuing Chapter 91 licenses for docks, piers, and other water-dependent structures as well as non-water dependent uses and structures on tidelands and filled tidelands. It is involved in almost every major coastal project, including transportation, energy, infrastructure, commercial buildings and housing. Staff has recently been increased to five persons, still woefully inadequate to ensure timely processing of project permitting demands. The lack of staff is holding back the development of many major public and private projects. Additional resources must be committed and dedicated to new employees that focus solely on Waterways permitting and not policy development.
  • Continue Regulatory Reform Implementation: The Regulatory Reform initiative was originally motivated by a reduced budget affecting staff permitting and oversight, but the effort has also resulted in important regulatory and policy changes. Continually reviewing existing regulations to determine if they are needed or if changes are required, and closely examining the costs and benefits associated with new regulations before they are drafted, should be a top priority for the Baker Polito Administration (and is required under Chapter 238 of the Acts of 2012).
  • Provide MassDEP with Delegated Authority over National Pollutant Discharge Elimination System (NPDES) Programs and the Funding Needed to Adequately Administer the Program: As of June 2013, 46 states had been authorized to administer the federal NPDES permit program. Massachusetts is just one of four states in the nation where the federal government is in charge of the permit issuance, compliance and enforcement for the 2,990 NPDES permit holders in Massachusetts. MassDEP jointly issues NPDES permits with EPA. Having MassDEP as the sole permitting authority with EPA limited to an oversight role could result in a more efficient permitting process. In addition, as the NPDES program continues to evolve in response to increased concerns over issues like nutrient loading and stormwater impacts, MassDEP would have greater control over policy decisions. However, appropriate resources would be needed (estimated at approximately $9.5 million per year) to ensure a carefully coordinated approach to watershed management.
  • Concentrate on Implementing & Enforcing Existing Rules and Regulations: Agencies should concentrate on implementing and enforcing existing rules and regulations before expending resources on new program and policy development. This builds on the Regulatory Reform Initiative and is critical for the proper allocation of resources.

State Adopts New Energy Code

On Tuesday, the Board of Building Regulations & Standards (BBRS) voted to adopt the latest version of the International Energy Conservation Code (IECC), making Massachusetts one of the first states in the nation to have it take effect statewide. This change represents a 20% increase in energy efficiency over the current statewide energy code. Under the Green Communities Act, the Massachusetts state energy code must be updated within one year of any revision to the IECC, so there was a statutory requirement to adopt this code.

The IECC is widely recognized as one of the most energy efficient codes. There is no question there are significant costs and design impacts associated with this code change. The IECC 2012 is approximately equal to the energy efficiency requirements of the stretch energy code, now in place in 131 communities in Massachusetts. Because of the Green Communities Act, Massachusetts will continually be updating its energy code to ensure it has the most energy efficient requirements in the nation.

Yesterday, the Legislature held a hearing on several bills addressing the concept of local option codes. NAIOP strongly opposes such codes, including the stretch energy code. Given that Massachusetts is required to have a very aggressive and energy efficient statewide code, NAIOP does not believe there is a need for a stretch energy code that would go beyond the latest version of the IECC. NAIOP testified in support of legislation that would ensure the IECC would be the energy code for all communities in Massachusetts. It would create one uniform, statewide energy code. By discontinuing the use of two or more energy codes for the state, it eliminates confusion for local building inspectors who are responsible for safely enforcing such codes. The legislation also clarifies that communities could be designated as Green Communities, and eligible for the grants associated with such a designation, by adopting this code. Most importantly, rather than having different requirements in different communities, it puts all communities on a level playing field – helping to ensure the Commonwealth’s competitiveness.

NAIOP will be hosting a special program on the energy code changes later this year and we will continue to push for one, statewide energy code.

NAIOP Testifies on Energy Disclosure Ordinance

On March 28th, I testified on Mayor Menino’s proposed Energy Disclosure Ordinance before Boston City Council’s Committee on Government Operations.  Neither of the two major real estate trade associations were asked to be involved in the development of this ordinance.  After it had been developed, NAIOP submitted detailed comments in October on a draft summary of the ordinance.  Unfortunately, none of our recommendations were incorporated in the final version that went out for public comment in February.

Brian Swett, Boston’s Chief of Environment & Energy, testified at the hearing in support of the ordinance along with representatives from other cities that have energy disclosure programs in place.  They agreed that because of these programs owners were better able to make investment decisions for their properties once they had information about their tenants’ energy use.  Interestingly, no one explained the value (if any) of publicly disclosing this information (as is required under the current draft ordinance).  While some property owners did testify in support of the program, many others expressed serious concerns with what was proposed.

During my testimony, I offered the following four critical changes to the ordinance:

 1.      Utility companies should be required to obtain tenant energy data and the reporting requirements should be delayed until such a system is in place.
In many buildings, owners do not have access to the energy data for separately metered tenants.  NAIOP believes that the utility companies should be responsible for submitting this data to building owners, and the reporting requirements should be postponed until such a system is in place.  Furthermore, utilities should provide such information to building owners no later than 4 months prior to the first reporting deadline to ensure adequate time for compliance.

 2.      Multifamily properties should not be included in the ordinance.
As currently drafted, this program would be very difficult to implement for multifamily property owners, due partly to the fact that the Energy Star Portfolio Manager tool is not designed to adequately measure multifamily properties.  Like many of the other cities that have adopted similar energy disclosure requirements, we believe that Boston should not include multifamily properties in the ordinance.  However, if the City chooses to require them to comply, the reporting dates should be delayed by two years.  Furthermore, owners should not be required to comply until a tested and proven tool for this product type is developed with input from an industry advisory committee.

 3.      Involve landlords & owners in determining the disclosure strategy and allow for changes to the program before publicizing data.
Given the significant impact such a rating could have on individual buildings, property managers and landlords must be involved in determining how such information would be made public.  Several other cities that have required energy disclosure allowed for a one year trial where the energy data was reported, but was not available to the public.

 4.     Involve NAIOP, other industry groups, and property managers & building owners in developing regulations and overseeing the program’s implementation.
Much of this program will be left to interpretation by those developing the regulations.  We urged the City to formally include representatives from multiple industry groups representing retail, residential, lab, and office space, as well as individual property managers and building owners on the regulatory task force.

A vote on the ordinance is required by April 25.  The Chair of the Committee, Councilor Matt O’Malley, has indicated that he will be scheduling a working session in the near future to discuss potential modifications to the ordinance.  NAIOP looks forward to participating in the working session. If the City Council votes favorably on this ordinance, we are hopeful that our comments and those of the vast majority that testified will be included in the final language.

Grim Optimism for Real Estate and the Economy

Goodwin Procter’s Real Estate Capital Markets Conference was recently held in New York City in partnership with Columbia Business School.  GP-REConferenceAn exceptional group of speakers discussed the real estate markets, investments, and the economy.

The keynote presentation was delivered by Austan Goolsbee, former chairman of President Obama’s Council of Economic Advisers, and now a Professor of Economics at the University of Chicago’s Booth School of Business. Goolsbee spoke with “grim optimism” about the US economy.  The US has the most productive work force in the world and low energy and new-energy sources will benefit our growth.  Relative to the rest of the world, our fiscal imbalance is manageable. All in all, he believes that the next six to twelve months will be a bumpy ride, but prospects in the long-run look good.

The following are a few interesting observations made during the panel discussions:

  • Demographics are playing a key role internationally, especially in the US. Effects of this will be seen in an increased demand for apartments, senior housing, and retail.
  • With accounting standards likely to change in the future, as relating to corporate leasing and ownership, more businesses will likely choose owning large amounts of their space.
  • Retail sales continue to be impacted by online competition, but retail is still a growing market. The future may move towards more hybrids that have both online and storefront locations.
  • Office space needs are dropping in terms of space requirements per new job. However, there is a sense that over time businesses will start to swing back towards a need for greater space.
  • Multifamily housing rents are back to pre-recession highs and it is likely that rents will experience slower growth going forward.
  • Record amounts of capital were raised both in the public and private markets last year. With less growth worldwide, real estate is very attractive to investors.  Investor interest is focused on yields and risk management. Where in the past, “cash is king”, now, “cash flow is king”.
  • Rates should not be rising in the short term, but that is a big risk for all asset classes. The markets could wake up to a starting spike in rates that, in hindsight, will have seemed inevitable.

Hurricane Sandy’s Message for Boston

A recent Boston Globe Editorial, “After a near-miss with Sandy, more preparations are needed,” advocated for policy makers to focus on climate adaptation measures to protect Boston from future storms and flooding.  NAIOP wholeheartedly supports convening public and private interests to discuss short-term and long-term solutions that are practical and feasible.

An important first step would be to create incentives for building owners and developers that would make climate change planning part of their design process.  Focusing on carrots instead of sticks will be an important first step in changing the way some in the industry view this issue.  As an example, we should be encouraging, not penalizing, the relocation of utility spaces to upper floors.  This relatively simple step would have preserved many of the systems that were destroyed in New York and New Jersey.  However, current codes do not exempt these areas from the allowable building envelope, causing landlords to worry about losing rentable space to mechanical equipment.  A change should be made that would provide additional square footage for those developers that commit to doing this.

The Globe editorial suggested that restrictions be put on ground-floor uses in areas that will be prone to flooding.  However, as with the scenario above, it is critical that the impact of decreased rental income and increased construction costs be mitigated.   Furthermore, some of our current laws would prevent such a policy.  As an example, our Chapter 91 statute mandates the use of the first floor space for public access.

Yes, we need to find ways to efficiently prepare our coastal cities for the increased frequency of powerful storms, but we should also be ready to adjust our policies to incentivize the public and private sectors to make appropriate infrastructure and building redesigns, not penalize them with red tape and unnecessary costs.

Mandates Not the Tool to Increase Energy Efficiency in Commercial Buildings

In a recent blog, How Many Miles Per Gallon Does Your Building Get? The Ratings Game Comes to Buildings, NAIOP member Seth Jaffe of Foley Hoag makes some observations about the recent report issued by the Institute for Market Transformation.  The report describes the existing efforts to rate the energy efficiency of commercial buildings in the country.

Although I appreciate the reasonable dose of skepticism that he expresses, I am a bit more doubtful of the intent of the pilot program originally drafted by our state Department of Energy Resources.  The DOER report, issued in December 2010, states that the intent of an energy rating program is to devalue properties that are less energy efficient (e.g. older building in Gateway Cities) so that there would be an “incentive” for owners to upgrade their buildings prior to financing or sale. This is not the same goal as providing information so that a building owner can make the best economic analysis to determine which energy efficiencies make financial sense.

The decision to invest in building upgrades is dependent on a number of factors including market rents, educated tenants, costs and benefits of efficiency measures, availability of capital, competition, etc.

New buildings are now much more energy efficient than their predecessors.  Developers over the past five years have produced many buildings with LEED certifications.  That said, we all know that the big challenge is with less efficient existing buildings.

However, the best incentive for upgrading that building stock will be an improving economy.  As demand for space increases, rents move up, energy costs continue to rise, and the price of efficiency technologies drop, we will see a major investment in building upgrades.

As we have said before, mandates are not the answer.  The market will lead the way and there is no doubt that, on this particular issue, regulators will do more damage trying to push businesses into expenditures ahead of their economic feasibility.

It’s a bright time for solar

If there ever was a time to consider investing in solar photovoltaic (PV) projects in Massachusetts, it is now. There are a number of federal and state financial incentives that may not be around for long. 

  1. First, the developer can take advantage of a Federal U.S. Treasury “Cash Grant” based on 30% of the total value within 60 days of the project becoming operational.  This benefit expires on the end of this year. Or, as an alternative, the owner can take a Federal Investment Tax Credit of 30% of the project value. Tax credit can be carried back 1 year and carried forward 20 years.  This incentive expires December 31, 2016.
  2.  Second, the owner can benefit from a 100% bonus depreciation. This is based on the total value in the year that the project is placed into service. This will also expire the end of this year, but will continue for another year with a 50% bonus depreciation.
  3.  Lastly, project developers can benefit from the Massachusetts solar renewable energy certificates (SRECs.)  The market for SRECs is currently trading at more than $500/MWH (there is a $300 floor.) This is value priced annually.

Maybe this is the right thing to do for the environment; but it looks like, for now, it is the smart thing to do for your bottom line.