'Huge Potential': Inflation Reduction Act's Green Building Incentives In Limbo One Year Later
One year after the law’s passing, the provisions of the Inflation Reduction Act that multiplied benefits for developers and property owners incorporating sustainable elements into their buildings remain largely gummed up in the gears of the federal government.
With rule-making processes still underway one year on, those in real estate who would have otherwise made use of these provisions are instead waiting in the wings, holding up the energy-efficient benefits intended in the law and postponing projects. A dragging real estate economy has further slowed the process.
“Is the real estate industry really using all these incentives yet?” said Boundary Stone Partners Vice President Rachael Grace, who is in the climate change policy firm's buildings and industrial decarbonization practice.
“My sense is that no, not yet. That's partially because all the rules haven't been released yet. But there's huge potential here for the real estate industry to really unlock all these incentives and put them to work.”
The sprawling law, passed Aug. 16, 2022, authorized about $369B of clean energy and climate change investment, with a stated goal of reducing carbon emissions by 40% by 2030 and spurring sustainable energy production and manufacturing.
For real estate, one key provision increased a tax deduction for the construction of energy-efficient commercial and multifamily buildings to as much as $5.36 per SF. The increase to a deduction originally codified in 2006 was seen as an opportunity for developers to offset the growing costs of building, especially with green elements.
Besides the slow pace of making rules that actually allow the law to be implemented, the deployment of some of the sustainable energy systems that qualify for subsidies can also be arduous for financial or technical reasons, RET Ventures Vice President Jameson Hartman said.
Hartman cites one company in the RET portfolio, Juno, as an example. Juno is a multifamily design and development platform with the goal of building sustainable apartments in a repeatable manner.
“Juno is a combination between prefab modular and off-site construction, and has a lot of building envelope efficiencies that can be tied to it, but the financing and development market is kind of low right now,” Hartman said. “So while there's interest, there's less capital to put to work today. Hopefully there will be more next year, or the year after.”
Then there’s the labor shortage.
“For example, there might be a high interest in deploying EV charging at properties, but there's a shortage of electricians to actually do the installation, so that presents a complication,” Hartman said.
Despite the sluggish rollout of clarification and the state of the economy, there is still considerable enthusiasm about the act and the incentives that real estate will be able to take advantage of eventually.
“It's a tremendous time in the renewable energy and battery storage industry,” Ameresco Vice President-Construction Services Jason Scott said.
Ameresco specializes in energy-efficiency and renewable energy.
“We're seeing the world transform to electrification and a focus on decarbonization, and a greater need for energy infrastructure resiliency,” Scott said.
For some property managers, especially for those that weren't able to take advantage of the previous version of the investment tax credit, the act will be a game-changer, Scott said.
“The challenge with the deployment of the credit is getting certainty,” Scott said. “Guidance from Treasury has been slow to come out. We've been waiting patiently as an industry to get clarity on the rules and provisions to meet the intent of the law.”
Ameresco's clientele includes major financial institutions, for which it is working on energy-efficiency projects on their campuses and retail branches.
“JPMorgan Chase is one of our clients, and we're supplying renewable energy projects at its largest campus in Ohio and one in Delaware, and now we're looking at a project that will go across every one of their branches in the U.S. to add battery storage and solar,” Scott said.
The company is also working with large healthcare providers nationwide.
“They want to do a mass deployment of renewable energy and battery storage on all of their campuses,” Scott said.
With these aspirations growing in frequency among property users, developers are thinking about how they can incorporate features like solar panel systems, EV charging stations and more, bringing incentives into the project early on, when it is easier and cheaper to design for energy-efficiency, CohnReznick ESG Advisory Practice Leader Jenny Brusgul said.
Another provision of the law, known as 45Q, lowered the threshold for carbon capture tax credits, offering another opportunity for the property industry to save on green advancements.
CarbonQuest Vice President of Strategy and Market Development Anna Pavlova, whose company specializes in carbon capture technology for buildings, said the changes to carbon capture policy will benefit the industry — at least, once the rules are finalized.
"The threshold for how much carbon you have to capture to get the 45Q credit has been lowered to 12,500 tons a year,” Pavlova said. “And they do allow aggregation that we believe is fairly flexible, judging by the clarifications that the IRS released back in 2020, before the IRA passed, and we're hoping the same clarifications will apply here.”
However, it will be some time before there is certainty on the rules, Pavlova said.
“Probably by the end of 2025, at that point, we can start capturing the 45Q credit as well,” she said. “45Q is fantastic. It represents a good start, but it's probably not enough. What should be happening in addition to all these great tax incentives is also more priority on carbon sequestration."
Some guidance has come out already. One example is a set of two rebate programs, together called home energy rebates, Grace said.
“The Department of Energy released guidance on those programs in late July, and now that guidance goes to the states to put together their programs, so the rebates mainly won't come online until next year. Almost $9B of rebates that multifamily building owners and aggregators can tap into, for both single-family and multifamily new construction and retrofits,” Grace said.
One of the advantages of the law, Grace said, is that the incentives in many cases can be combined, forming an ensemble that will make upgrades and sustainable elements of a deal easier to pencil.
“The opportunity will really be in stacking different incentives that are right for any given property,” Grace said. “That's kind of the beauty of the Inflation Reduction Act.”