August Brings Opportunities for Asset Owners
In consecutive weeks, big changes have been announced that can positively impact the built environment, from the Inflation Reduction Act to important announcements by the insurance industry.
Thus far, August has proven to be a month with lots of potential ESG activity. It was hard not to turn on the news without seeing stories about the Inflation Reduction Act, which was signed into law on August 16th. Since the signing, the expected party lines were drawn, with one side claiming the opposite of the other side. There have been plenty of slanted opinions on what the Act means, but what does it really mean, especially for those of us in real estate?
Under the Act, existing and expired energy efficiency tax incentives for commercial and multifamily building owners, investors, developers, and homebuilders have been significantly expanded.
An example of this is the 179D tax deduction which was previously $1.88 per square foot will be increased to $5.00 per square foot to encourage energy efficiency in buildings that are four stories or higher. It also appears that Real Estate Investment Trusts (REITs) will have the ability to utilize 179D tax deductions when computing the REIT’s earnings and profits. Additionally, tax-exempt building owners (such as non-profits) will now be able to allocate 179D tax deductions to architects, engineers, and designers involved with implementing energy-efficient systems for the building.
In addition, the 45L Tax Credit, which had expired at the end of 2021, has been retroactively extended through 2032 under the previous criteria and provides a $2,000 tax credit per dwelling unit, which will increase to $5,000 in 2023. Note that the 45L tax credit does not apply only to buildings four stories or higher.
The expansion of the tax credits, both in terms of to whom they can be used by as well as the amount, will help encourage the development of energy-efficient properties.
The Act will also extend and expand tax credits for non-business homeowners when they make energy-efficient upgrades. This will likely increase the demand for energy-efficient equipment, resulting in manufacturers expanding the availability and model features. While this portion of the Act will not directly impact businesses, with market demands and supply increasing to meet those demands, we should see additional competition and more competitive pricing, which should positively impact business purchasers.
The Inflation Reduction Act also aims at reducing the emissions of our energy through additional tax credit extensions such as:
The Renewable Electricity Production Tax Credit (PTC) is also extended through the end of 2024 and extends to the end of 2024 the election to treat certain facilities that otherwise qualify for the Code Section 45 PTC (for “qualified investment credit facilities”) - as energy property qualified for the Code SectionSection 48 ITC instead. The credit can be increased if the wages of those installing the electrical production equipment meet the prevailing wage and an apprenticeship program is associated with the project. After all, the Act is intended to increase worker wages and help train workers to transition to clean energy jobs.
The Energy Investment Tax Credit (ITC) which also extended some energy investments through 2024; here, geothermal equipment was extended through the end of 2034. The Act allows the credit for new types of energy installations, including energy storage technology, qualified biogas, and microgrid controller property, and quintuples the credit amount if the same prevailing wage and apprenticeship requirements are met as PTC. In addition, to encourage the establishment of domestic energy equipment production, a 10% bonus credit can be applied if domestically produced equipment is used.
An increase in the Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities is also included through an expansion of Code Section 48 Energy Investment Tax Credit. To qualify, a facility must have a maximum net output of less than 5 megawatts and must be in a low-income community, or on American Indian land, or part of a low-income residential building project or a low-income economic benefit project. This provision is effective beginning in 2023.
The Zero-Emission Nuclear Power Production Credit provides a new business credit for electricity produced at qualified nuclear power facilities that are placed in service before the date of enactment and sold to an unrelated person. The credit amount is quintupled if wage requirements are met. This provision applies to electricity produced by a qualified nuclear power facility and sold after 2023, in taxable years beginning after 2023 but before 2033.
The net effect of these modifications, extensions, and expansions should provide some needed certainty for renewable energy developers. The past decade has featured a nearly annual uncertainty that renewable tax credits would be extended, and this uncertainty had the effect of cooling some investment in renewable energy infrastructure. It should be noted that while we have continued to see investment due to the market demand and technological advancements, the added certainty around these programs provided by the Act should increase investment and development of solar, wind, geothermal, biofuel, and nuclear energy generation.
In addition to the built environment, the Inflation Reduction Act also looks to impact the transportation industry. For business owners, the Qualified Commerical Clean Vehicle Act will lift the previous cap of 200,000-unit-per-manufacturer tax credit starting in 2023 and provide a tax credit for qualified clean vehicles with a cap of $7,500 per vehicle and $40,000 for a vehicle with a gross weight rating of at least 14,000 pounds. There is also a new $4,000 credit for used EVs, and this new credit terminates in 2032 and applies to vehicles acquired after 2022. Similar to the energy generation aspects of the bill, the Act aims at increasing North American production and requires that by 2024 at least 50% of the materials used in batteries originate from the US, Canada, or Mexico. This number will increase to 100% by 2028.
This component will be challenging as most materials and assembly of both vehicles and batteries is outside of the United States. While the intent is to foster manufacturing here, this restriction potentially could lead to this portion of the bill not being as consequential as the building and energy infrastructure portions. However, the lifting of the 200,000 cap for tax credits is helpful.
What also appears to be lacking is a mechanism for REITs and other non-taxed entities to take advantage of the transportation elements. In order to impact the charging infrastructure across the United States, we will need these entities incentivized and engaged.
Nearly lost in the talk about the infrastructure bill was the August 8th announcement by FM Global of allocating $300 Million in premium offsets for FM Global policies with renewals between October 1st, 2022, and September 30th, 2023. This 5% premium offset is being called a “resilience credit” and is intended to incentivize policyholders to reduce the risk of flood, wind, and wildfire exposure to insured assets. In addition to the credit, FM Global will introduce a suite of climate solutions to help clients assess climate risk exposure and prioritize risk improvement strategies.
I have long advocated that it will be a game changer when insurance companies begin to reward asset owners for assessing and mitigating climate risk the same way automobile insurance companies reward drivers for safe driving. The insurance industry is based on analyzing the financial cost of risk and uncertainty. With increasing evidence of the impact of our changing climate, it only makes sense that they would develop policies that minimize the cost of that risk and incentivize asset owners to mitigate it where they can.
Both of these August actions hold the potential to help reduce costs for those owners who proactively address climate change in their portfolios. Both in terms of energy efficiency as well as insurance rate savings. Knowing where to be proactive is the next step, which requires understanding where you are and what your opportunities are.
You can help reduce the impact of the built environment by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience, we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. At Conservice, we have developed a true bill-to-boardroom solution to help truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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