Laura Bowler
March 28, 2023
The Inflation Reduction Act (IRA) and real estate: Designing to maximize your IRA benefits
Many of the incentives from the IRA came into effect in 2023. So how can real estate developers and operators maximize the benefits from the new bill? In this piece, our experts will showcase how you pave the way for multiple benefits by taking the IRA into consideration as part of the design process
It’s been several months since the Inflation Reduction Act (IRA) was signed into law creating a strong platform for the United States’ commitment to increase climate-related investments.
The bill focused on key themes such as affordable and accessible energy, decarbonization, and environmental justice and will have widespread impacts across several industries. For real estate, the legislation included several provisions that directly impacted commercial building developers and operators.
With many of the incentives already in effect from the beginning of 2023, it is a good time to revisit the bill and understand how real estate developers and operators can maximize the benefits from the IRA.
For many real estate players who already focus on efficiency and sustainability, the IRA will not dramatically change the way they operate – it will simply improve the business case of the actions they are already taking. But for others, who may not have been able to prioritize efficiency in previous projects, these incentives may be the difference between whether a project pencils out or not.
To take advantage of these benefits, real estate developers and operators should consider three key questions during the design process:
- What opportunities exist to design my building more efficiently?
- Would renewable energy make sense for my project?
- Will future tenants/buyers want electric vehicle charging stations?
We dive into each question in more detail to understand why these questions are critical, and how they relate to the IRA.
Designing a new building to be more efficient can provide real estate developers and operators with three main benefits:
- It can bring in more revenue (either through increased building value or higher rents)
- It can save money in the long run (thanks to cheaper utility bills and in some cases, less maintenance)
- It is easier and cheaper to design for efficiency from the start (rather than retrofitting later)
However, there is a point where increasing the efficiency of the building stops providing a good return on investment. At this point, upgrades without a strong business case or strategic alignment for a specific building are typically rejected.
Over time, to streamline the design process, these rejected solutions may no longer be evaluated at all – developers may simply default to the solutions they always use.
But, with the IRA, these solutions may need to be reconsidered - the bill changes the business case around building efficiency through two key provisions:
A) Energy Efficient Commercial Buildings Deduction (IRC 179D)
- Overview: This provision expanded the existing tax deductions for developers constructing efficient buildings (including commercial and larger multi-family buildings)
- The benefits: For buildings that meet the minimum 25% energy reduction, developers can deduct up to $2.50 per square foot built. Further efficiency improvements increase the deduction by $0.10 per square foot (per additional percent energy reduction)
B) Energy Efficiency Home Credit (IRC 45L)
- Overview: This provision expanded the existing tax credits for developers constructing efficient housing and multi-family buildings
- The benefits: Developers can claim up to $2,500 per home/unit for Energy Star Certified properties, or up to $5000 for Zero Energy Ready properties
Quick note: For both provisions, benefits are significantly lower if additional wage/apprenticeship requirements are not met. In addition, all energy reductions must be modeled for the entire building and verified by a qualified third party.
These provisions can help improve the business case of more costly or difficult upgrades. For example, upgrades such as high efficiency HVAC systems, advanced ventilation systems, or high efficiency windows with dynamic tinting may not have made financial sense in the past.
However, considering these incentives together may help the building meet minimum energy efficiency thresholds and qualify for IRA incentives, the upgrades are worth it for the developer to implement.
Unfortunately, if developers are relying on older business case analyses to make design decisions, they may miss out on profitable options for their building. To maximize the benefits of the IRA (as well as the long-term benefits of building efficiency), developers will need to ensure that they are considering ALL opportunities to improve efficiency EACH time they design a building.
Renewable energy projects are becoming more popular, thanks to a few key benefits:
- Lower energy costs, thanks to higher efficiencies or direct energy production on-site
- Increased resilience to changing fuel prices and grid outages
- Lower (or zero) emissions, which can help sustainability-oriented companies achieve climate goals and reduce air pollution
However, one of the biggest barriers to implementing a renewable energy project is the upfront cost/long payback period. Although prices of renewables have been falling steadily over the past decade1, developers and operators continue to pay higher startup costs to include these technologies in buildings, and many can’t afford or justify the initial investment.
Good news - the IRA also included a provision to help out with this situation:
C) Investment Tax Credit (IRC 48)
- Overview: This provision expanded and extended the existing tax credit for developers and operators that install qualifying renewable energy projects (including solar, geothermal, fuel cells, wind, energy storage, etc.)
- The benefits: Projects over the next ten years can qualify for up to a tax credit equal to 30% of the total project cost. Projects installed in low-income areas or energy communities, or ones that use equipment manufactured in the US, can qualify for an additional 10%.
Quick note: Like the 179D and 45L provisions, the benefits from ITC 48 are significantly lower if additional wage/apprenticeship requirements are not met.
For many developers and operators, this additional credit can help remove upfront investment barriers and shorten the payback period for renewable energy projects. To take advantage of these benefits, developers and operators should make sure to assess EACH building for opportunities for renewable energy opportunities. These assessments should be refreshed on a regular basis, as renewable energy becomes cheaper and more widespread to ensure design decisions are made with the latest information.
3) Will my future tenants/buyers want electric vehicle charging stations?
Although electric vehicles (EVs) are not the dominant mode of transportation (especially in the US), they have been gaining popularity2 over the last decade. As a result, building developers and operators are beginning to consider whether the charging infrastructure for these vehicles should be incorporated into future designs to increase tenant desirability.
Installing EV charging stations can provide a few benefits to developers/operators:
- Higher property values or higher rent (from perceived value of having charging stations on site)
- Additional revenue from charging activities (direct sales to customers or a leasing arrangement through the charging companies)
- Available infrastructure for charging developer/operator electric fleets (e.g. maintenance or landscaping fleets)
However, like efficiency upgrades and renewable energy installations, one of the biggest barriers to installing electric vehicle charging infrastructure can be upfront investment. Luckily, the IRA specifically addresses this:
D) Alternative Fuel Refueling Property Tax Credit (IRC 30C)
- Overview: This provision expanded and extended the existing tax credit for developers and operators that install qualifying EV chargers and equipment
- The benefits: Projects in low-income or rural areas3 can recover up to 30% of the upfront cost of equipment, up to a maximum of $100,000
Quick note: Like the other provisions mentioned, the benefits from IRC 30C are significantly lower if additional wage/apprenticeship requirements are not met. Unlike other provisions, this credit is a bit more limited in application, since it only applies to low-income or rural areas and may not be applicable for all developers/operators.
Although EV charging stations are most associated with multi-family housing (where tenants might charge overnight), this infrastructure can be relevant for any type of building where people park for more than 30 minutes, such as office, retail centers, etc. Developers and operators with assets in low-income or rural areas should incorporate analyses around installation of EV charging equipment into each new project to determine if the business case makes sense with the new incentives.
The IRA is expected to accelerate green building development over the next decade
The IRA included several provisions that can help real estate developers and owners create more sustainable buildings for less investment. Although we have focused on questions to ask during the design process, these provisions also apply to significant renovations. Building operators should consider these questions when planning upgrades and consider expanding their renovation to include additional upgrades, if the business case makes sense.
With many of the benefits already in effect, real estate developers and owners are beginning to execute plans to take advantage of the IRA provisions. Expect to see an increase in sustainable buildings over the next few years, which will be a critical step in decarbonizing the building sector as a whole!
Want to know more?
Laura Bowler
Manager
+1 734-890-6226