Decarbonizing real estate is critical to combating the climate crisis, and there are many details for the industry to consider as the federal government encourages building owners to do their part through anti-inflation legislation. . In August 2022, the government passed legislation that includes $370 billion over 10 years in an ambitious and historic initiative to support clean energy production and investment by the real estate sector. A growing number of legislators and building owners are recognizing that significant amounts of carbon emissions come from real estate.
While IRAs include some direct funding opportunities, such as rebates and grant programs, there’s another untapped well here in the form of large tax credits and deductions. The greatest incentive opportunities are available for projects such as energy efficiency, electrification, EV charging, and renewable energy (including storage), and stacking these incentives can significantly reduce overall project costs. Detailed guidance will continue to be provided by the U.S. Treasury and the IRS, but several financing opportunities currently exist that can significantly increase the ROI of your project and reduce greenhouse gas emissions at the same time. .
increasing demand
Electricity demand will continue to increase. Ben Evans, federal legislative director for the U.S. Green Building Council, says the real estate industry needs to think about how to efficiently meet this demand.
Although there are some similarities, IRA funding is different from federal funding programs of the past. Of current building incentives and programs, most of the funding available in 2023 will include subsidies for everything from on-site renewable energy and electric vehicle charging stations to energy storage and microgrid incentives. The focus is on tax cuts, not money.
Evans also refers to IRA funding as an “all you can eat buffet.” “You don’t have to choose one or the other. There are many subsidies and tax benefits that can be combined.”
The IRA also focuses on public-private partnerships and leveraging private capital. A guide for local government leaders published by C40, a global network of about 100 mayors fighting climate change, also includes a huge amount of federal funding aimed at reducing emissions by 32 to 40 percent by 2030. Injection is mentioned. .
New real estate decarbonization opportunities
Recognizing the critical role that real estate plays in decarbonizing cities, several C40 cities are partnering with the real estate industry to develop collaborative He said he is leading efforts to promote carbonization strategies. City of York Building Energy Exchange. Building Innovation Hub in Washington, DC. and the newly launched Chicago Building Energy Resource Hub.
“In many U.S. cities, the energy used in buildings is the largest source of climate pollution,” Johnson said. Real estate and city leaders can collaborate on strategies that promote carbon-free buildings that not only pollute less, but are also healthier, more affordable, and more resilient to the effects of climate change.
With so much new information coming out at a steady rate, it can be difficult to identify and keep track of the most relevant opportunities. The top four IRA funding opportunities currently available are:
energy efficiency
Section 179D is a tax credit expansion that makes major changes in that it no longer benefits only new construction and major renovation projects. The objective is to improve the construction efficiency of commercial facilities and high-rise residential buildings, including apartment buildings with at least four stories or more. There is now a growing awareness of how important it is to accelerate the improvement of existing buildings and how they are retrofitted. “Old buildings consume a lot of energy. We need to invest in them and make them more energy efficient,” Evans says.
Kent Peterson, chair of ASHRAE’s Task Force on Building Decarbonization, points out that buildings such as typical commercial buildings and churches can benefit, as well as a variety of nonprofit organizations. doing. “This deduction has nearly tripled from $1.80 per square foot. [0.09 sq m] up to $5.00 per square foot,” he says, adding that many of the updates are designed to encourage a broader range of building owners and stakeholders to invest in energy efficiency and decarbonization projects. Ta.
Section 179D aims to reduce energy consumption by 25 percent to 50 percent compared to baseline energy use. Any combination of interior lighting. HVAC and hot water systems. Roofs, windows, and insulation incurred after December 31, 2022 are eligible for the deduction.
According to the Real Estate Roundtable, this tax credit for energy efficient buildings is a sliding scale credit. The organization explains that the minimum efficiency gain eligible for the deduction is 25 percent, with the amount increasing as the level of building efficiency increases. This formula translates into each percentage point being correlated to a 2 cent increase in the deductible.
Certain guidelines apply to new construction and renovations. For example, new buildings must be at least 25% more efficient than the ASHRAE 90.1 baseline, and the quality of the building must be at least 5 years old to qualify for the retrofit deduction.
Section 45L applies to new or rebuilt energy-efficient single-family homes that meet Energy Star or the Department of Energy’s Zero Energy Ready Home (ZERH) program requirements. Evans explains:[45L] It has been significantly expanded in several ways under the ‘IRA’ and now applies to all apartment buildings of all sizes, rather than being restricted to three-story buildings. For single-family homes, you can receive $2,500 for Energy Star and $5,000 for ZERH. For multifamily properties, you can receive a tax credit of between $500 and $5,000 per unit, with the ZERH and prevailing wage requirements being the maximum credits. Completed homes will also receive a $1,000 credit per home.
“So those two are pretty lucrative,” Evans said. “If you own a building with 25 units, you’re going to get a hefty tax credit. That’s real money.”
The difference between the two programs is that under Energy Star, homes must be a certain percentage more energy efficient than the average home. The Department of Energy explains that under its new ZERH program, homes must operate at such high performance that renewable energy systems can offset most or all of a home’s annual energy use.
renewable energy and storage
Section 48 has been updated and expanded to make the installation and operation of renewable energy projects more affordable. This applies specifically to clean electricity, giving tax credits to buildings that generate electricity from renewable sources. The Real Estate Roundtable points out that section 48 now covers energy assets covered by previous legislation, such as solar panels, microturbines and geothermal heat pumps. The most common common method to qualify is solar, but other types of energy equipment are also included.
Prior to the IRA, stand-alone energy storage projects such as thermal energy storage, dynamic glass, microgrid controllers, biogas facilities, linear generators, and grid-linked “interconnection facilities” were considered to be separate from solar PV system installations. They were not eligible for credit unless done together. It utilizes power generation facilities and circumvents several other limitations.
In 2023, the base credit is 6%, with a partial credit depending on factors such as the type of energy asset, whether the new prevailing wage and apprenticeship requirements are met, and whether the project is in a low-income bracket. projects can reach 30%. , tribal lands, or energy communities.
Alternative fuels and electric vehicle infrastructure
Section 30C is a revised alternative fuel real estate credit for buildings that install electric vehicle charging or other types of alternative fuel stations for the period January 1, 2023, through December 31, 2032. The goal here is to help more people use electric vehicles to improve energy efficiency. of the community. The original program expired in 2021, but with IRA funding, it was renewed for another 10 years with some conditions.
The amount of the credit is 6% of the value of the eligible property, up to a maximum of $100,000 per property item. This credit has geographic requirements, and the property must be within an eligible census tract that includes low-income communities based on density. The IRS expects to release more guidance and maps soon.
These strong IRA incentives for decarbonization are great even in base amounts, but if a project can meet prevailing wage and other provisions, the incentives double to It can be a source of income. Note that the amount of certain incentives in Section 30C, Section 48 and Section 179 increases by five times if the project also meets certain wage and apprenticeship requirements.
Maximize profits
For best-value decarbonization projects, Peterson said, these tax credits and credits can be layered with modified accelerated cost recovery systems (MACRS) and bonus depreciation to reduce project costs. It states that it can simply shorten the payback period of decarbonization technology.
While a tax professional is ultimately the best resource for applying these tax credits and deductions to a specific project, ULI is committed to helping you identify relevant federal funding opportunities for decarbonizing real estate. We will continue to provide resources to guide you.