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    August 31, 2022

    How the Inflation Reduction Act Impacts Real Estate Developers

    In mid-August, Pres. Joe Biden signed the Inflation Reduction Act (IRA) of 2022 into law, which aims to significantly reduce the United States’ carbon footprint, cut prescription drug prices, and curb inflation. The $430 billion legislation includes provisions designed to bolster green building projects and energy-efficient renovations via major tax incentives. 

    Energy Innovation, a San Francisco-based policy firm, believes the law can help make the U.S. energy grid up to 85% clean by 2030.

    For real estate developers and property owners, the IRA opens the door for cost-effective, environmentally friendly projects in a variety of asset classes at a time when such opportunities are badly needed.

    How the Inflation Reduction Act Supports Green Real Estate Development

    The first green real estate development incentive provided by the IRA is a major boost to the 45Q tax credit.

    Enacted as part of the Energy Improvement and Extension Act of 2008, the 45Q initially provided a credit of $20 per metric ton of permanently stored carbon dioxide (CO2). Moreover, organizations had to store 25,000 metric tons of CO2 to claim the credit. But with the passage of the IRA, 45Q now provides a credit of $60 per metric ton of carbon stored and lowers the claim minimum to 12,500 metric tons. And firms take advantage of the benefit during the project’s first five years after carbon capture equipment has been brought online.

    On its face, 45Q might not seem relevant to the commercial real estate sector. Capturing and sequestering carbon involves injecting CO2 into large underground geological formations like caves or caverns. Legislators drafted the bill to offset the greenhouse gas emissions of large industrial facilities like gas-fired power plants. But thanks to recent innovations in environmentally friendly architectural design, developers who work outside the utility segment can contribute to the push for carbon sequestration.

    In addition, the new law has extended the solar panel installation tax credit through 2034. Commercial property owners can now get 30% of the cost of their new solar panels back, retroactive to January 1, 2022.

    The IRA also increased the 179D tax deduction property owners can claim for green commercial real estate projects from $1.88 per square foot to $5 per square foot. The deduction applies to ground-up construction and retrofit commercial and multifamily buildings and can be claimed in the first year of project development.

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    How Developers and Property Owners Can Take Advantage of The IRA’s Provisions

    One of the best aspects of the IRA is that it’s a rising tide that can raise all ships. Because its provisions don’t target one particular asset class, it can support your apartment/hotels, multipurpose office building, or arts and culture institution project by making them more cost-effective.

    For example, hempcrete is a potentially revolutionary building material made from the hemp plant. Researchers found that dried woody hemp cores could be mixed with a lime-based binder to create concrete-like panels and blocks. Though hempcrete lacks the weight-bearing capability of its namesake, it possesses a high thermal capacity and strong moisture absorption properties. That means it can replace plaster and drywall in a wide range of ground-up and renovation projects. And unlike concrete – which is responsible for 8% of society’s CO2 output - hempcrete can sequester 19 pounds of CO2 per square foot.

    Forward-thinking developers might consider using hempcrete as a building material across their portfolio. By leveraging its tax benefits, you could make your projects more profitable and more appealing to the growing number of environmentally-conscious tenants. While hempcrete hasn’t gone mainstream in the United States yet, it’s been utilized successfully throughout Europe and Australia. With the IRA giving 45Q a major boost, there’s now a financial incentive to introduce green construction innovations to the U.S. market.

    Similarly, equipping commercial properties with solar energy systems is easier than ever.

    The Solar Energy Industries Association published a white paper discussing how installing photovoltaic cells can help property owners slash their electricity bills by up to 40% and generate extra income by selling their excess energy to their local utility provider. Thanks to the IRA’s provisions, installing solar panels on commercial properties has never been more cost-effective.

    Moreover, First Solar, America’s leading solar panel manufacturer, recently announced plans to build a $1 billion factory in the Southeastern United States and to invest $185 million to upgrade its Ohio-based plant. The firm is expanding its production capacity because it recently revealed that its products are sold out through 2025. Its success is indicative of a real hunger in the U.S. market for large-scale renewable energy solutions.

    Finally, the IRA’s enhancement of the 179D tax deduction makes implementing environmentally friendly building initiatives possible. In the past, you may have crunched the numbers and determined that completing a green retrofit of an office complex was too expensive. But with Washington’s new incentives in place, you might find that installing energy-efficient HVAC, interior lighting, and hot water systems in a building is financially viable.

    Since the United States entered a recession, real estate projects are getting harder to execute. Financers are increasingly concerned that macroeconomic instability will affect their long-term investments. While the IRA can’t make those anxieties disappear, it does provide a financial cushion for certain projects. With federal subsidies on the table, real estate developers and owners can improve their earnings during a challenging period while also doing their part to protect the environment.

    Become a subscriber of our Real Estate Development Digest today to gain more insights about the latest happenings shaping the U.S. marketplace.

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