Freon Phaseout: Chilling News for Owners/Tenants

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On August 26, 1987, the United States signed the Montreal Protocol (on Substances that Deplete the Ozone Layer), an international treaty whose purpose was to protect the ozone layer by creating a timeline to “phaseout” the production of numerous substances responsible for ozone depletion. In response, the Clean Air Act of 1963 was amended in 1990; establishing new EPA regulations to phase out both the production and import of ozone-depleting substances (ODS) based on the schedule set forth by the Montreal Protocol. Ozone-depleting substances are divided into Class I and Class II categories with Class I substances, primarily comprised of chlorofluorocarbons (CFCs) which have higher ozone-depletion potential, already being 100% phased out in 2005. Class II substances, known as hydrochlorofluorocarbons (HCFCs) and originally used as transitional substitutes for Class I substances, are now being phased out.

Why it Matters

R22, otherwise known as Freon, is classified as a HCFC, HCFC-22 to be exact. For years this was the industry standard for air conditioning units; however, as of January 1, 2020 R22 will no longer be produced or imported in the United States. Therefore, starting in 2020 it will be increasingly difficult and expensive to obtain R22. Manufacturers have been switching over to the replacement coolant, R410a, for years; however, the older the unit the greater likelihood that it uses R22. Property owners and tenants responsible for HVAC maintenance, repair, and/or replacement as part of their lease should inspect their units to determine the type of coolant used. If it is determined that R22 is the coolant used, owners/tenants have 3 options:

Keep the Existing Unit/System

Depending on the age of the unit, owners/tenants may elect to keep the existing system. If well maintained it may continue to run for months or years. This does present a significant risk, as system failures during a heatwave coupled with the declining supply of R22 could result in extended downtime while units are being serviced or replaced. This is particularly relevant for commercial owners/tenants whose revenue is dependent on the habitability of their space and then again based on the property type, use, etc. Owners of multi-tenant office buildings must maintain comfortable temperature levels as part of their tenants’ right to quiet enjoyment. Failure to replace outdated HVAC units that results in untenantable conditions in the building could result in rent losses for the landlord. The impact of a system failure could be even more catastrophic for retailers, particularly restaurants, whose income is directly tied to being open for business and who have certain days/times in which the majority of their revenue is generated, i.e. weekends/evenings.

R22 can still be used to service existing HVAC units and technicians/contractors should recover and reclaim R22 from existing units to maintain adequate supply.

Retrofit the Existing Unit/System

Some units may be able to be converted to use approved refrigerants such as R410a; the operative word being “may.” Some units cannot be retrofitted, and in other cases, the process may be cost prohibitive. Additionally, depending on the condition of the unit, it may be difficult to find a technician that is willing and able to perform the work. Owners/tenants should confirm with their equipment supplier can be retrofitted to use an ozone-friendly, SNAP-approved (Significant New Alternatives Policy) refrigerant, that all system components are compatible with the new refrigerant, and that it will not void their warranty.

Replace the Existing Unit

While the cost of replacing an HVAC unit/system with a new one can be costly, there are tax credits for some residential HVAC systems and deductions for energy savings for commercial buildings. For principal residences and secondary homes, geothermal heat pumps are eligible for a 30% credit if placed in service by December 31, 2019 (26% if by December 31, 2020 and 22% by December 31, 2021). The Tax Cuts and Jobs Act of 2018 (26 U.S. Code § Section 179) provides a major tax break to commercial property owners/tenants that replace/invest in commercial HVAC equipment. Previously viewed as a capital improvement and therefore depreciable over 39 years, the new law allows owners/tenants to deduct up to $1,000,000 per year for purchases of new and used HVAC equipment. The Section 179 deduction is reduced, dollar for dollar, for investments exceeding $2,500,000. Owners/tenants should always consult a licensed tax accountant to ensure compliance with current tax laws.

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