While you’ve no doubt heard of the Inflation Reduction Act (IRA), it may have escaped your area of concern as something only relevant to those focused on fighting. against economic inflation or the fight against climate change. You may want to take a look, as the bill has major considerations for the commercial real estate (CRE) sector. Because the bill is broad and its implications far-reaching, we will focus only on the impacts of the bill on CRE and exclude consequences related to home manufacturing, single-family residences, medical costs, etc. If you are a commercial or multi-family owner, trustee, promoter or CRE investor, this article will be of particular interest to you.
The IRA (HR 5376) was signed into law by President Biden last August, allocating $369 billion to a myriad of carbon reduction strategies, with a particular focus on helping the poorest communities.
It’s hard not to notice the steady rise in electricity prices, which hit an all-time high in the first half of 2022 due to record fossil fuel costs as well as inflation. CRE industry players know that operational expenses can make or break a bottom line. The IRA aims to reduce this expenditure by subsidizing both energy efficiency retrofits (to reduce total consumption) and renewable energy installations (to offset the cost of consumption). The bill does this primarily through deductions and tax credits.
Tax deduction 179D
IRC Section 179D is an existing incentive that allows property owners and developers to claim a tax deduction on energy efficient buildings and facilities. The IRA has enhanced this tax deduction by:
- Significant increase in the deduction from $1.88/sq.ft up to a maximum deduction of $5.00/sq.ft.
- Significant reduction of the minimum efficiency requirement to benefit from the tax deduction from 50% to 25%.
This deduction applies to all commercial buildings as well as multi-family buildings of 4 stories or more. Existing buildings under renovation and new constructions are eligible. Further updates to 179D allow REITs and tax-exempt property owners (eg, nonprofits) to take advantage of these tax deductions, albeit in a limited capacity.
179D also allows real estate investors to deduct a significant portion of the cost of a new energy-efficient building, or renovation of an existing building, in the first year, instead of having to wait many years to realize these deductions as depreciation. Calculating the total first year tax deduction amount can be complicated and requires an independent engineer to certify the energy savings target. An engineering consulting firm can design the energy efficiency upgrades for the maximum tax deduction and ensure compliance with Section 179D and ASHRAE standards. Without going into the “exciting” details of the tax legislation, we can say with certainty that many energy efficiency projects that historically have not been “finished” will now be economically profitable.
45L tax credit
IRC Section 45L is a federal tax credit that incentivized developers of multi-family properties to meet energy-efficient design criteria until it expires in 2021. Developers received a $2,000 tax credit for each energy-efficient dwelling in their buildings. The IRA has improved the tax credit by:
- Extension of the 45L credit until 2032.
- Starting in 2023, the IRA will increase the maximum tax credit value from $2,000 to $5,000 per property for single and multi-family homes.
Additionally, energy efficiency criteria will change to match Department of Energy (DOE) programs that apply to all residential developments (as opposed to just low-rise developments). Multi-family properties of 4 stories and above may be eligible for 45L credits in addition to 179D deductions.
Renewable energy generators
The ERI is more than just an incentive tool for reducing energy consumption; it also promotes the implementation of renewable energy generators like solar and the technologies that support it like batteries and electric vehicles.
One of the biggest inclusions of the IRA is the extension of the Solar Investment Tax Credit (ITC) to 2034. This credit allows owners and investors of solar panels to benefit from a tax saving of 30% on the operating budget of their project.
Simply put, the government reimburses you for 30% of the cost of your solar project as a tax credit. Without going into the details of the tax advantages of the legislation, note that the energy code also allows the solar asset to be depreciated (under MACRS) using a recovery period of 5 years and for the owner to go into charge the depreciable base of the system using bonus depreciation rules.
While a 30% tax credit already gives most CRE professionals the boost needed to get their solar project over the hump, the IRA also includes provisions to increase the credit even further. of tax. A 10% increase will be applied to the tax credit for projects located in low-income communities (20% for eligible HLM residential buildings). Additional adders are available for projects using US-made equipment and for projects located in an “energy community” (areas with significant coal and natural gas jobs).
Similar to energy efficiency upgrades, starting in 2023, property owners and tax-exempt investors (e.g., nonprofits and state/local governments) will be allowed to transfer their energy credit tax for renewable energies to a third. This change effectively allows these entities to sell their tax credits for cash.
If you have rooftop space with a useful life of 15 years or more and high electricity rates, a solar photovoltaic system could be a reliable investment with significant tax incentives. Experienced consultants can help you maximize all available rebates and incentives and ensure the project is solid from feasibility to implementation.
The IRA now views energy storage or battery energy storage systems (BESS) as a stand-alone project instead of needing to be linked to a renewable energy project. This means that energy storage systems will be eligible for the same benefits and tax credit extensions as mentioned in the solar section above. This is great news for all property owners who currently own or are planning to install an energy storage system, especially properties with limited rooftop space. Prior to the IRA, energy storage systems had to be at least 75% charged for the first five years by renewable resources, which limited the possible services an energy storage system could provide and deterred property owners who could not install solar power to install energy storage. system. With the IRA, energy storage systems are now able to offer a wider range of revenue streams than ever before. If a CRE property is located in one of the states below, an energy storage system will likely be a reliable investment with great tax incentives. Working with renewable energy consultants can allow you to quickly analyze these projects and provide detailed economic metrics to CRE customers who may be interested in an energy storage project.
Figure 1: Large markets for solar storage plus (S+S) or stand-alone energy storage projects
Electric vehicle chargers
Homeowners and investors interested in installing electric vehicle charging stations in their parking lots (or garages) in low-income or rural areas can now take advantage of the extended and modified home loan for refueling fuel vehicles alternative. From 2023 to 2032, a 30% tax credit will be applied to this charging infrastructure up to $100,000 per property.
All types of projects mentioned above that start in 2023 and exceed 1 MWTHAT, however, must meet current IRA salary and apprenticeship requirements; otherwise, the tax credits are reduced to 6%.
The direct financial benefits of the ERI discussed above are significant and will go a long way in incentivizing CRE industry players to integrate renewables and energy efficiency systems into their business models. However, there are a variety of indirect and/or operational aspects of the IRA, which are beneficial to anyone whose business model requires attracting and retaining tenants. Lower electricity costs despite market volatility, power supplied by on-site solar panels, protection against grid outages and the ability to charge electric vehicles are all major selling points for those whose activity is based on the occupation of their buildings.
And since the government heavily subsidizes the cost of these improvements, now is the time to act.