More Money In Your Pocket: How Tax Tools Can Make Energy-Efficient Construction More Affordable

With the arrival of spring, a commercial real estate owner, developer or investor’s fancy naturally turns to thoughts of taxes — or, more specifically, how to reduce their company’s tax burden.

And yet they might be overlooking opportunities to benefit from tax incentives for businesses that could save them millions of dollars. Across all business types, an estimated 60% to 80% of U.S. companies do not take advantage of these tools to the fullest extent.

In the CRE world, these include the 179D Energy-Efficient Commercial Buildings Deduction and the 45L Energy-Efficient Home Credit. Sometimes used in tandem with cost segregation studies to accelerate depreciation, these tax incentives can help a business free up capital, enhance cash flow and maintain long-term financial stability, according to ABGi, a global tax consultant specializing in tax incentives for businesses.

“Many CRE companies fail to take full advantage of these important tools due to a lack of awareness or capacity, or because they fear the complexity of the process or the risk of audits,” said Matt Foley, an engineering manager and specialist in real estate tax incentives with ABGi USA. “These concerns are overblown if the company works with a knowledgeable tax advisor, and with shifting tax laws it’s more important than ever to maximize their use of available incentives.”

Bisnow spoke with three ABGi tax experts about how these tools work and how they can benefit CRE firms as well as the firm’s approach to performing tax planning for developers.

45L Credit: ‘Money In Your Pocket’

The 45L Credit applies to residential construction and is of particular interest to multifamily projects as the amount of credit available is on a per-unit basis. But its use is not limited to ground-up projects.

An owner of an existing building can use the credit when the property is being thoroughly renovated from non-residential to residential use, Foley said. At a time when many office buildings remain underoccupied, the multifamily tax credit could benefit an owner trying to make a conversion pencil.

Whether the project is new construction or a conversion, Foley said 45L offers the potential of “more money in your pocket.” The tax credit, perhaps combined with other factors, could be enough to make a deal pencil, he said. 

To fully benefit from 45L, ABGi advises CRE owners to work with a qualified tax adviser early in the process before the structure is constructed or converted. That way, ABGi can make a more confident judgment as to whether a building qualifies for the credit.

“We like to get our foot in the door at the design phase,” Foley said. “That allows us to determine, for example, that if you add an extra inch of insulation it will make the difference in qualifying for a half-million dollar credit.”

179D Deduction: ‘Extremely Lucrative’ Benefits

As another important tool for tax savings, 179D is not solely a tax deduction for building owners and developers — it can also benefit design consultants, but only when the building is owned by a government, nonprofit or tribal entity.

ABGi's recent projects include a 2M SF commercial building that it helped obtain the highest deduction rate possible. On another project, ABGi's experts worked with the building’s mechanical and electrical engineers to deliver $12M in deductions in tax years 2022-2024.

“179D is an extremely lucrative benefit for a lot of folks,” said Kris Huffman, an ABGi senior project manager and associate director.

In total last year, he said ABGi reduced clients’ taxable income by approximately $60M through 179D, which can apply to multifamily buildings of four or more stories. Owners are eligible for the deduction, but 179D can also benefit design teams working on government-owned buildings since they are the ones who create energy-efficiency specifications for a project.

Under 179D, ABGi performs two energy models of a building, including a site visit so that it can verify to the IRS that the energy efficiency measures were applied to the building’s construction. It then compares the two models, and if the difference reaches a certain threshold of energy cost savings, the building is eligible for a deduction of a certain dollar amount per square foot.

Although 179D can trace its roots back to the Energy Policy Act of 2005, Huffman said not enough commercial building owners benefit from it.

“They may have never heard of 179D or understand how they can take advantage of it,” he said. “But if I owned a building, I would 100% go after it to reclaim some of my investment in tax savings.”

Huffman added that the 179D process should not take up a lot of a client’s time if they work with an experienced tax professional. ABGi typically requires no more than a couple of hours of their time if they provide all the necessary documentation.

“We want it to take as little of their time as possible because they're paying us to do this work while they concentrate on their business,” he said. “I tell them that they will hear from me periodically but I will not overload their inboxes with unnecessary correspondence.” 

Cost Segregation: Why Experience Matters

To fully benefit from a tax reduction tool, commercial building owners should seek the help of an adviser early in a project’s life cycle.

“They need to work with a firm whose people are experienced and know what they’re doing,” said Damien Gallow, ABGi director of cost segregation. “That's important in doing cost segregation because you need to understand the tax law as well as accounting, engineering and real estate.”

Cost segregation allows a building owner to accelerate the depreciation of building components, he said. Rather than waiting 39 years for the depreciation, an experienced adviser can help reduce the depreciation on components to only five, seven or 15 years.

One ABGi client realized more than $1M in savings in a single year through depreciation. It then applied that money to expand its real estate portfolio and increase its headcount.

None of that could have been achieved without the assistance of an experienced partner.

“They need to work with someone with an engineering background, which is an IRS stipulation,” Gallow said. “A lot of accounting firms don't have cost segregation or other special expertise in-house. They'll refer their clients to a tax specialty services firm like ours.”

This article was produced in collaboration between ABGi and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.