In the commercial real estate world, financial considerations are paramount. When it comes to the implementation of renewable energy systems, the prospect of long-term operational cost savings is enticing. However, the initial upfront expenditure required for installation can be daunting. This is where an understanding of renewable energy tax incentives and credits becomes a vital tool in the CRE stakeholder’s kit. The U.S. government and state entities have established a broad array of financial incentives designed to make renewable energy solutions more attainable and financially attractive for commercial property owners. These incentives serve to lower the initial barrier of entry, increase return on investment, and hasten the payback period, transforming renewable energy adoption into a sound business strategy.
Common Incentives Offered for Renewable Energy Projects Include:
- State and Local Tax Incentives: Many states offer additional tax incentives, such Investment Tax Credit (ITC), Renewable Electricity Production Tax Credit (PTC) and Modified Accelerated Cost-Recovery System.
- Renewable Energy Certificates (RECs): Provide a financial incentive for generating renewable energy by granting certificates that can be sold or traded to meet renewable energy targets. Also known as green tags, green energy certificates, or tradable renewable certificates.
- Grants and Rebates: Various federal, state, and local programs offer grants and rebates to support renewable energy projects and encourage their adoption.
- Green Bonds: Investors can purchase green bonds issued by governments, corporations, or organizations to support renewable energy and sustainable projects. Some of the largest issuers of green bonds include: Wells Fargo, Bank of America, Duke Energy, and Fannie Mae.
A Closer Look at Common Financial Incentives and Funding:
The most common types of financial incentives include:
The Inflation Reduction Act of 2022:
A legislation that made significant changes to various tax credits and incentives related to renewable energy. Some key provisions of the act include:
- Modified Tax Credits: The act expanded and modified existing tax credits to promote clean energy production and investment.
- Prevailing Wage and Apprenticeship Requirements: The act established new prevailing wage and apprenticeship requirements for larger renewable energy projects to qualify for the full tax credits. Projects that meet these requirements can benefit from increased tax credit amounts.
- Bonus Credits: The act introduced bonus credits to incentivize certain criteria. For example, projects that meet domestic content requirements for steel, iron, and manufactured products can receive additional bonus credits. Additionally, projects located in energy communities or those associated with low-income residential or economic benefit projects can also qualify for bonus credits.
- Credit Monetization: The act established procedures for the monetization of certain tax credits, allowing eligible parties to directly monetize the credits or transfer them to unrelated taxpayers.
179D Commercial Buildings Energy-Efficiency Tax Deduction:
Provides a tax incentive for owners of qualified commercial buildings and designers of energy-efficient installations. Eligible buildings must meet ASHRAE standards and achieve a minimum energy savings of 25%.
- The deduction is based on the cost of installed property or savings per square foot, ranging from $0.50 to $1.00. Starting in 2023, taxpayers paying prevailing wages and meeting apprenticeship requirements can receive an increased maximum deduction.
The Investment Tax Credit (ITC):
The Investment Tax Credit (ITC) offers a tax incentive for investment in renewable energy projects. Eligible technologies encompass a broad array of solutions including fuel cell, solar, geothermal, wind, energy storage, microgrid controllers, and combined heat and power properties. For solar, the credit extends not only to systems generating electricity, but also to technologies that utilize solar energy for heating, cooling, or hot water purposes in a structure, and to illumination systems leveraging solar energy through fiber-optic distributed sunlight or electrochromic glass.
- The base ITC amount stands at 6% of the qualified investment, or the basis of the energy property. However, the Inflation Reduction Act of 2022 introduced several enhancements, allowing for substantial increases in the credit amount.
- For projects that adhere to prevailing wage and registered apprenticeship requirements, the credit can be amplified by fivefold. Additionally, certain domestic content requirements concerning steel, iron, and manufactured products can boost the credit by up to 10 percentage points. Projects located in energy communities can also benefit from a further increase of up to 10 percentage points in the credit value.
Production Tax Credit for Electricity from Renewables:
Incentivizes the production of electricity from renewable sources by offering a tax credit. Eligible recipients include facilities generating electricity from wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, and marine and hydrokinetic renewable energy.
- The PTC offers a corporate tax credit of up to 1.3 cents/kWh for electricity generated from landfill gas (LFG), open-loop biomass, municipal solid waste resources, and small irrigation power facilities, or up to 2.6 cents/kWh for wind, closed-loop biomass, and geothermal resources. The credit is valid for ten years after the equipment is installed. Projects meeting prevailing wage and registered apprenticeship requirements receive a fivefold increase in the credit, while those meeting certain domestic content requirements for steel, iron, and manufactured products enjoy a 10% boost.
- Projects located in energy communities also receive a 10% credit enhancement. These provisions encourage the expansion of renewable energy production and support the transition to clean and sustainable sources of electricity.
The Modified Accelerated Cost-Recovery System (MACRS):
A tax depreciation framework that allows businesses in the U.S. to recover capital costs over specific periods through accelerated annual deductions. In the context of renewable energy systems—which often fall under a five-year property class in MACRS—this leads to a more immediate return on investment.
- In 2023, stakeholders can use a one-time bonus depreciation to depreciate 80% of the cost in the first year. However, this bonus decreases annually, reducing to 60% in 2024 and tapering down to 0% by 2027. This sharp contrast to the conventional 39-year straight-line depreciation basis for commercial heating and cooling systems makes renewable energy projects much more financially appealing in the commercial real estate sector.
Fannie Mae Green Financing Business:
Offers mortgage financing specifically designed for energy and water efficiency property improvements in apartment buildings and cooperatives with five or more units. The program includes Green Rewards, which provides preferential pricing and additional loan proceeds based on projected energy and water savings. Eligible properties include conventional and affordable multifamily properties, cooperatives, seniors, military, and student housing.
- To qualify, property owners must commit to making improvements that reduce annual energy and water consumption by at least 30%, with a minimum of 15% attributed to energy savings. Fannie Mae also offers preferential pricing for acquisition or refinance loans on properties with an eligible Green Building Certification. All Fannie Mae green loans are securitized as Green Mortgage Backed Securities. Property owners interested in these programs should work with a Fannie Mae DUS Lender.
Rural Energy for America Program (REAP):
Provides financial assistance to agricultural producers and rural small businesses in the U.S. It supports the purchase, installation, and construction of renewable energy systems, energy efficiency improvements, and participation in energy audits. REAP offers grants and guaranteed loans for projects such as wind, solar, biomass, and geothermal energy.
- Eligible applicants include small businesses, agricultural producers, and other determined entities. Project costs covered include equipment purchases, energy audits, permits, and retrofitting.
Commercial Property Assessed Clean Energy (C-PACE):
A financing program that enables commercial property owners to fund energy efficiency, renewable energy, and water conservation projects. C-PACE provides long-term, low-cost financing that is repaid through a voluntary assessment on the property’s tax bill. The program allows property owners to overcome the upfront costs of energy upgrades and repay the loan over an extended period. C-PACE financing is available for a range of projects, including building retrofits, HVAC upgrades, solar installations, and water conservation measures.
- The program is typically administered at the state or local level and offers attractive terms, such as fixed interest rates and transferable assessments. C-PACE can be a valuable tool for commercial property owners looking to improve their building’s energy efficiency and reduce operating costs.
*Remember guidelines could be subject to change, for the most accurate information, always refer to the latest IRS publications or consult with a tax professional.
The renewable energy revolution presents promising opportunities for CRE stakeholders. By incorporating renewable energy projects into your commercial real estate ventures, you can not only benefit financially but also contribute to a more sustainable future.
At AEI, we understand the importance of renewable energy and its impact on the commercial real estate industry. We offer a range of services to support you throughout your renewable energy journey, including pre-development and due diligence, ALTA survey and zoning, design and engineering, site construction, and post-construction activities. Our experienced team is here to guide and assist you in navigating the complexities of renewable energy projects.
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