In early August 2022, the Inflation Reduction Act (IRA) passed the Senate and House and became law. With its investment in environmental justice, it’s one of the most significant pieces of climate legislation passed in the U.S. In addition to revitalizing underserved and marginalized communities struggling with pollution, the law is intended to help:
- Reduce energy costs
- Build a cleaner future
- Improve public health
- Shrink pollution
- Increase access to affordable clean energy
With billions of dollars earmarked for home energy rebate programs, consumers will see increased energy efficiency and decreased energy costs and expanded opportunities to electrify their homes. Tax credits for clean energy technologies including electric vehicles, renewable energy, and rooftop solar have been extended and expanded as well. And the act also includes a $1B grant program designed to increase the energy efficiency of affordable housing.
What does all this mean for the state’s CRE landscape? Some significant benefits and cost savings.
Energy Tax Incentives
The IRA’s maximum allowable benefit for the 179D Energy Efficient Buildings Tax Deduction expands in 2023 to $5.00 per square foot (up from $1.88 per SF). This provision is designed to encourage building owners to make energy-efficient retrofits previously deemed too expensive.
Eligible 250,000 square foot buildings will see their current $470K deductions increase potentially to $1.25M, for example. Renovated buildings and new construction projects must comply with energy reduction requirements to qualify.
For full compliance, buildings must provide certification from a qualified individual verifying that a building’s interior lighting, HVAC, and hot water systems energy and power consumption has decreased 50% or more compared to minimum industry standard determined by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE).
However, the 179D deduction includes a tier system allowing for fractional deductions for buildings in partial compliance. The laddered benefit begins with a $2.50 per square foot deduction for buildings with a 25% energy usage reduction. For each percentage point, $0.10 is added until the building hits $5.00 for 50% efficiency or greater.
One caveat for the 179D incentive? Whether building owners pay their workers prevailing wage. If they pay below industry minimum, owners qualify for a maximum $1 per square foot.
What’s more, the 179D deduction has expanded to include many more entities including design-build contractors, engineers, and architects of tax-exempt buildings owned by:
- Charitable organizations
- Native American tribal governments
- Political organizations
- Private foundations
- Private schools and universities
- Religious organizations
The IRA also increased tax credits for carbon capture and sequestration projects’ value to 45Q. The credit covers any carbon capture, carbon utilization, or direct air capture project beginning construction before January 1, 2033.
Industry experts predict accelerated technology and platform growth in the energy efficiency sector and greater investments in solutions designed to improve HVAC and interior lighting systems. The materials used for building envelope solutions, including floors, roofs, and walls, may see manufacturers experimenting with new materials that — without the tax credits — would be too costly to explore. Other possible solutions include new insulation technology and energy-efficient glass.
45L Tax Credit
Multifamily landlords will benefit from the 45L tax credit, earning up to $5K per single-family home or apartment if they meet the criteria. Originally, landlords meeting the Energy Star benchmark could take advantage of the $2K/unit maximum credit, which expired in 2021.
Beginning in 2023, rentals meeting the Energy Star standard will earn $500 extra per unit. Those homes meeting the zero-energy ready (ZER) standard qualify for $5K per unit. New multifamily units must be built with prevailing wage to qualify — otherwise the credit caps at $1K.
The Federal Building Fund Gets a Boost
The IRA has earmarked $2.15B for the Federal Building Fund enabling the General Services Administration (GSA) to access more capital for acquiring and installing low-carbon products and materials. The nation’s largest landlord already owns hundreds of millions of square feet of property and complies with strict energy-efficiency requirements.
The GSA’s transition to low-carbon materials at such a large scale will reverberate throughout the industry. States typically emulate the federal government’s moves (from a building standpoint), for example. And because the federal government is one of the country’s biggest tenants, its standards impact landlords and developers seeking federal tenants.
Environmental Product Declarations Standardization
The IRA has set aside $350M to standardize metrics used for determining whether a building material or product meets environmentally friendly standards. Part of these funds will help standardize the Environmental Product Declaration (EPD) rating system used by companies to compare the carbon reduction of different materials. (It’s a process similar to the FDA’s calorie labeling metrics required for all food products.)
The motivation for this directive is to help propel innovation within the building industry which has seen some progress in the design of lower-carbon building materials but where adoption continues to lag. It’s hoped that wider implementation will make sustainable materials a cost-affordable option for more projects.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.