The Inflation Reduction Act (IRA), passed in 2022, presents a monumental opportunity for commercial real estate (CRE) owners, developers, and investors. Among its many provisions, the IRA offers tax incentives aimed at reducing carbon emissions, increasing energy efficiency, and promoting sustainability in building practices. The complexity and breadth of these incentives mean that CRE owners need to be strategic in their approach to maximize the benefits. To help navigate the array of IRA incentives, the Urban Land Institute (ULI) Northwest hosted a webinar series. The first session, “Introduction to IRA Tax Incentives,” brought together experts to provide an overview of the key tax credits and deductions available under the IRA, as well as guidance on how to leverage these opportunities.
Drivers for Sustainability in CRE
Before diving into the specifics of the IRA, it’s important to understand why sustainability and energy efficiency have become such pivotal concerns in the CRE industry. As Ben Evans from the U.S. Green Building Council outlined during the webinar, several factors are driving the push toward greener, more resilient buildings. These include:
Investor and Tenant Demand: In today’s market, both investors and tenants are increasingly prioritizing environmental, social, and governance (ESG) considerations. Green buildings, which offer lower energy costs and a smaller carbon footprint, are in high demand. Many institutional investors are now factoring ESG criteria into their investment decisions, while tenants, particularly large corporations, seek out office spaces that align with their own sustainability goals.
Regulatory Pressure: Building performance standards (BPS) are becoming more stringent, with many cities and states adopting regulations that require building owners to reduce energy use and greenhouse gas emissions. Failure to comply with these regulations can result in hefty fines, making energy efficiency upgrades not only beneficial but necessary.
Skyrocketing Insurance Premiums: Climate change has led to an increase in extreme weather events, such as floods, wildfires, and hurricanes. Properties in high-risk areas are facing rising insurance costs, incentivizing owners to invest in resilience measures that can mitigate climate-related risks.
In this context, the IRA’s tax incentives provide a critical financial tool for CRE owners looking to enhance their buildings’ sustainability and energy efficiency. However, as with any tax-related issue, the details matter. Jacob Goldman of Energy Tax Savers took a deep dive into the specifics of these incentives, explaining the requirements, benefits, and timelines for each one.
A Breakdown of the IRA’s Key Tax Incentives
The IRA contains numerous provisions aimed at encouraging energy efficiency in real estate. Here, we’ll unpack four main tax incentives that apply directly to CRE owners and developers.
1. Section 45L - Homebuilder Tax Credit
Section 45L provides a tax credit for homebuilders who meet specific energy efficiency standards. The credit is structured as follows:
● $2,500 per unit for residential units that meet ENERGY STAR requirements.
● $5,000 per unit for units that meet the more stringent Department of Energy (DOE) Zero Energy Ready Homes requirements.
This credit applies to both single-family and multifamily homes, with the prevailing wage requirement applying only to multifamily projects. The benefit for developers is clear: by meeting ENERGY STAR or DOE standards, they can significantly reduce the overall cost of construction while delivering energy-efficient homes that are attractive to both buyers and renters.
2. Section 179D - Energy Efficient Commercial Buildings Deduction
Section 179D offers a tax deduction for energy-efficient commercial buildings. The amount of the deduction is determined on a sliding scale based on the percentage reduction in a property’s energy use intensity (EUI). The deduction is structured as follows:
● A reduction of 25% in EUI qualifies for a deduction of $2.50 per square foot.
● A reduction of 50% in EUI qualifies for a deduction of $5.00 per square foot.
The deduction is also adjusted annually for inflation, meaning that the dollar amount will increase over time. Importantly, the Section 179D deduction applies not only to new construction but also to retrofits of existing buildings. This makes it a particularly valuable tool for CRE owners looking to upgrade their portfolios to meet both regulatory requirements and market demand for green buildings.
3. Section 48 ITC - Alternative Energy Credits
The Investment Tax Credit (ITC), outlined in Section 48, applies to a broad range of alternative energy technologies, including:
● Solar energy systems
● Wind turbines
● Heat pumps
● Geothermal systems
● Energy storage solutions
Under the current framework, most of these technologies are eligible for a tax credit through 2024. Afterward, the existing Section 48 will transition to Section 48E, which covers many of the same technologies but adds a new requirement: projects must have zero lifecycle greenhouse gas emissions to qualify.
The shift from Section 48 to 48E means that CRE owners interested in installing alternative energy systems should act soon to take full advantage of the current tax credits. This credit can significantly reduce the upfront capital costs of installation for buildings aiming to incorporate renewable energy solutions like solar panels.
4. Section 30C - EV Charging Tax Credit
With electric vehicles (EVs) becoming more common, the demand for EV charging infrastructure is growing. Section 30C provides a tax credit of up to $1,000 per charger for installing EV charging stations, with specific location requirements to qualify. This credit is especially beneficial for retail, office, and multifamily properties, where providing EV charging can be a valuable amenity that attracts tenants and customers.
Maximizing Benefits Through Additional Requirements and Bonuses
The amount of tax credits available under the IRA often depends on whether a project meets certain additional requirements. Here are some of the key factors that can increase the value of a tax credit:
●Prevailing Wage Requirements: To receive the maximum credit, developers must ensure that their project meets the prevailing wage standards as posted on sam.gov. This involves paying construction workers the locally determined wage rate for their job classification and keeping accurate records to demonstrate compliance.
●Apprenticeship Requirements: At least 15% of total labor hours on a project must be performed by apprentices. For contractors and subcontractors with four or more workers, at least one must be an apprentice. These apprentices must be part of a federally registered apprenticeship program, ensuring that the workforce is trained in accordance with national standards.
●Domestic Content Bonus: To qualify for the domestic content bonus, 100% of structural steel and iron used in a project must be sourced from the United States. Additionally, 40-55% of all other manufactured products must be domestically produced, with the percentage requirement increasing over time.
●Energy Community Bonus: Projects located in designated energy communities—such as brownfield sites, areas with recently closed coal mines or coal-fired power plants, or regions with a high dependency on fossil fuel industries—can qualify for an additional bonus credit.
●Low-Income Community Bonus: Available to a limited number of properties, this bonus applies to projects located in low-income communities and offers extra incentives for developers focused on affordable housing.
Selling and Transferring Tax Credits
One of the more innovative provisions in the IRA is Section 6418, which allows CRE owners to sell their tax credits to other entities. This is especially useful for tax-exempt organizations like nonprofits and government agencies, which don’t have tax liabilities of their own but can still benefit from the credits by transferring them to a partner, such as a designer or architect.
This provision offers a unique opportunity to monetize tax credits for commercial property owners, particularly Real Estate Investment Trusts (REITs). Instead of applying the credits to their own tax bills, REITs can sell them to other commercial entities, generating cash that can be reinvested in future projects.
Pulling it All Together
The IRA’s tax incentives represent a comprehensive suite of resources designed to encourage sustainability in the CRE sector. For developers and building owners, the challenge lies in navigating the various requirements, timelines, and benefits to maximize savings. By understanding the specific provisions, such as Section 45L for residential properties, Section 179D for energy efficiency upgrades, and Section 48 for alternative energy systems, CRE professionals can strategically plan their projects to unlock significant financial benefits.
In a rapidly evolving real estate landscape where sustainability and resilience are increasingly critical, the IRA offers a powerful toolkit for those looking to future-proof their portfolios. Whether it’s through tax credits, rebates, or low-interest financing, CRE owners have a range of options to reduce their energy costs, enhance the value of their properties, and contribute to a more sustainable built environment.
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