A Real Estate Developer’s Inflation Reduction Act Guidebook

The Biden Administration signed the Inflation Reduction Act into law in August of 2023, and the legislation is intended to strengthen the economy, invest in energy security, promote climate resilience, and lower healthcare costs for consumers. The United States Department of Treasury will be responsible for implementing major components of the law, such as tax incentives to spur clean investment, corporate tax code reforms, and improvements to the Internal Revenue Service’s customer service and general operations. Economists believe the legislation will modestly slow rising costs over the next couple of years, but could also impact the economy in other significant ways. 

Even though the Inflation Reduction Act does not include direct language about the commercial real estate industry, provisions in the legislation and its broader economic impact could have implications for your firm. The legislation’s clean energy investments provide game-changing opportunities for your development team to take advantage of incentives and tax credits, helping you upgrade buildings to meet ESG goals or pursue sustainable projects in the future. You can also expect the bill to impact the market in less direct ways; the legislation could have an impact on interest rates and the broader investment environment 

Here’s your guidebook for the Inflation Reduction Act, including the opportunities and challenges the legislation presents for your development firm: 

Understanding the Inflation Reduction Act 

The Inflation Reduction Act is a slimmed-down version of the Build Back Better bill and aims to increase the nation’s social safety net. The legislation largely includes investments in healthcare and prescription drug affordability, fighting climate change, and taxing corporations. Even though the bill isn’t primarily focused on housing production or development, the legislation will have a larger impact on the economy and includes climate policy relevant to the industry. Understanding the largest provisions of the law will be valuable for your team as you plan for potential impacts on the market or your operations. 

Here are a few of the major components of the bill expected to have an impact on the economy: 

• 15% Minimum Corporate Tax Rate - Corporations with $1 billion or more of income will be taxed 15%. Corporations will also face a 1% buyback tax on stock buybacks. Individuals and households won’t be taxed more. 

• IRS Tax Enforcement. The IRS will get a boost in funding to increase customer service and tax enforcement. The bill invests about $80 billion into the tax agency over the next 10 years to improve customer service and ensure corporations are compliant with taxes owed. 

• Prescription Drug and Healthcare Reform - The bill puts a $2,000 annual cap on out-of-pocket prescription drugs for people insured by Medicare, most impactful for senior citizens. In addition, the bill will extend and renew subsidy extensions under the Affordable Care Act. The ACA currently subsidizes medical premiums to lower costs but the program was set to expire. 3 million Americans would be at risk of losing health insurance if the program wasn’t extended. 
• Sustainability and climate investments - The bill includes numerous tax credits for people and businesses switching to cleaner energy sources, including electric vehicles and solar panels to the tune of $369 billion. These provisions will provide the most direct impact on real estate developers, who can take advantage of incentives to help fund sustainable projects or update old buildings. 

The provisions in the Inflation Reduction Act are intended to bring down inflation in three ways. First, it aims to reduce the federal deficit, or the amount the government spends in comparison to how much it makes in taxes and revenue. The idea is when there is less money floating in the economy there is less demand and fewer price hikes. The second approach is to promote the production of certain goods, mainly renewable energy, with the idea that having more supply than demand will lower costs over time. The bill is also expected to limit the cost of prescription drugs by allowing Medicare to negotiate costs with suppliers. If the bill is successful, the Federal Reserve would be more likely to lower interest rates and investor sentiment could improve. However, economists are skeptical the bill would have that effect on the market and is instead expected to have a less direct impact on the economy. 

The bill doesn’t include language around commercial real estate development, but the legislation could have implications for the industry. The legislation is likely to present opportunities - such as tax incentives on buildings that use sustainable construction materials - as well as challenges, such as ongoing uncertainty in the market and a slow investment environment. Your team should be prepared to take advantage of the act’s hidden benefits and be prepared for the legislation's potential impacts on the investment environment and economy at large. 

The Inflation Reduction Act Guidebook for Sustainable Development 

The Inflation Reduction Act (IRA) does provide some direct legislative benefits for developers, especially those interested in sustainable and climate-friendly projects. Developers and owners of multifamily housing will be able to take advantage of several building-related tax incentives and financing tools aimed at making buildings more efficient, climate-resilient, and less carbon-intensive. Forward-thinking developers who are willing to use sustainable materials or invest in clean energy sources will not only save on initial projects but can also take advantage of potential tenants who are increasingly seeking out eco-friendly spaces. 

The IRA expands several tax credit programs including the New Energy Efficient Home Credit, which provides credit to newly constructed and rehabilitated multi-family homes that meet certain ENERGY STAR or Zero Energy Ready Home Program standards. The legislation also expands clean energy and alternative fuel vehicle property incentives, meaning building owners who install qualifying geothermal, solar, battery, or other alternative energy sources will be eligible for a variety of incentives to offset building and installation costs. 

The bill also allocates $250 million to standardize the Environmental Product Declaration to help your team better evaluate sustainable materials on projects. $100 million will also be allocated to identify and label low-carbon materials. In addition the bill provides $10 billion to provide an incentive to developers who use clean energy technology in manufacturing facilities. Overall, the legislation puts a significant amount of money toward climate programs your development team can take advantage of, and the credits and incentives are worth exploring as your portfolio grows. 

Strategies for Adapting to the Inflation Reduction Act 

The Federal Reserve’s efforts to quell inflation through high interest rates and ongoing uncertainty in the economy have created a challenging capital environment in 2024 for developers looking to get projects off the ground. Developers and owners should be aware the legislation is not expected to have an immediate or dramatic impact on interest rates. Competitive firms are rounding out advanced capital stacks with alternative funding sources such as low-income housing tax credits (LIHTC), Commercial Property Assessed Clean Energy (C-PACE) financing, or transit-oriented development tax credits. The incentives offered for sustainable development through the IRA can also play a role in helping your team offset construction costs. 

In addition to pursuing alternative financing options, your team can also use technology to be in the best possible position to take advantage of the Inflation Reduction Act’s opportunities and thrive even in a challenging investment environment. Here’s how modern real estate development software can play a role: 

Creating a Strong Budget 

Ensuring your team has done thorough due diligence and created a realistic budget for your projects will continue to be a valuable practice as your team looks to take advantage of IRA-related incentives or tax credits. Be aware that tax credits and other government incentives come with strict expectations around budgeting, and your team will also need to complete thorough compliance and reporting. Technology can help your team keep track of how budget lines are being allocated, and automatically create reports at any stage of the development process. 

Financial Forecasting 

Modern real estate development software can help with your financial forecasting, tracking every element of your project's finances including contingency, variance, available funds, cost per square foot, and more. The ability to forecast a project’s finances more accurately will allow you to confidently take on sustainable projects or renovations eligible for IRA funding. Technology can also provide proactive alerts when budget line items are at risk of running over and allow you to address issues before a project’s timeline is derailed. 

Improving Efficiency 

Boosting your development’s team efficiency can help your team operate with more agility and be prepared for any market conditions. Automation can help your team eliminate manual data entry and tedious administrative tasks. Northspyre automatically captures and organizes every project document, extracting data and categorizing it across budget lines in minutes. This allows your project managers to stop wasting time on unnecessary administrative tasks and focus on high-level strategic decision-making. 

Learn More About Northspyre 

Northspyre is a purpose-built, single software solution designed using automation to reduce manual data entry, increase productivity, and maximize your returns from pre-development to project completion. The platform is designed to inform you of every aspect of your project, including opportunities to save money and eliminate overspending, and notifies you about potential exposures, spend forecasting, and remaining contingency to ensure your project comes in on time and on budget. 

Download our white paper “Maximizing Returns: Operating in a New Normal” to learn more about how to navigate the current economic environment and come out of this period with a competitive edge.