By Monte Hilleman – Vice President of Environmental Resiliency, Compliance & Investment
Sustainable Investment Group (SIG)
Taking effect in January 2023, 2024 is the first year the nearly $400B of tax incentives and grants/loans in the Inflation Reduction Act (IRA) will be monetized. Monte Hilleman, SIG Vice President of Environmental Resiliency, Compliance & Investment, shares his version of Wrapped regarding the IRA in 2023.
“Federal agencies were on a tear in 2023 to produce guidance to inform developers, asset and property managers, tax attorneys and CPAs, designers, lenders, investors, and other commercial real estate professionals on the implementation of the IRA. The hundreds of billions the IRA provides will start flowing in 2024 with the filing of corporate tax returns for projects placed in service in 2023. Below are my thoughts on the Greatest Hits of the IRA in 2023…”
- In January, the IRS affirmed the ASHRAE reference standards required to secure various levels of the Section 179D Energy Efficient Commercial Building Deduction. Notably, beating ASHRAE 90.1 (2007) by 50% is eligible for the maximum $5.00/SF deduction (pre-IRA max was $1.88/SF), whereas in 2027, the standard to beat increases to ASHRAE 90.1 (2019).
- In June, the IRS released guidance on Elective Pay (aka ‘Direct Pay’) for several IRA tax credits. This allows most tax-exempt entities to receive the tax credit as a direct cash payment from the federal government by filing a tax return. The pre-filing requirement (also required for Transferability below) to receive a registration number required for the tax return opened late this fall to allow projects to prepare to file for Elective Pay in 2024.
- Also in June, the IRS released guidance on the new ability under the IRA to transfer to an unrelated third party (“Transferability”) the Section 48 Investment Tax Credit (ITC) for a cash payment. Unlike the use of New Markets Tax Credits or Low-Income Housing Tax Credits, this new option for the ITC is intended to function much more simply than traditional tax equity partnerships. Transferability transactions began in Q3 and have already been entered into by key players in the marketplace, and transactions have closed in less than one month. Credits appear to be transacting around $0.90/$1.00, depending on multiple factors.
- In October, the IRS released guidance for the Section 45L Multifamily tax credit, confirming that to secure the maximum $5,000/unit, you need to achieve the US DOE’s “Zero Energy Ready Homes” certification. The 45L requires multiple onsite visits and specific documentation by a RESNET HERS certified inspector throughout the construction process, so be aware to get started early in the project development to maximize and spec these requirements.
- PRO TIP: While the 45L can earn you $5,000 per unit, there are IRA funds that went to US DOE -> state departments of energy ~$100MM – $200MM for rebates (HOMES and HEERA) and in my home state of Minnesota you can receive up to an additional $20,000 per unit in rebates!
- In November, my new department at SIG, Climate Investment Solutions, started delivering to clients novel financial models (“Net Zero Proformas”) that bring the IRA impacts ‘above the line’ and help decision-makers understand the project-specific financial returns resulting from the IRA tax treatments. While conventionally thought to be ‘non-accretive’ to a project, the IRA and other Green Finance strategies are so inextricably intertwined with the green design criteria of the ‘project’ it is clear these strategies are accretive to the project and the ownership organization(s).
Reach out to Monte early in your project to build a Green Finance roadmap to make sure you’re not leaving this historic amount of money for green building on the table!
Monte Hilleman, an expert in sustainable urban development and leader of the Climate Investment Solutions department at Sustainable Investment Group (SIG), has a rich background in financing decarbonization efforts and sustainable redevelopment. Educated in Urban Infrastructure and Ecology at the University of Minnesota, he is also a licensed MN Commercial Real Estate Broker and a noted lecturer. His career spans two decades, including a significant tenure at the Saint Paul Port Authority and accolades like Brownfield Renewal Magazine’s Person of the Year. Hilleman’s work focuses on green financing, Net Zero Energy projects, and revitalizing urban cores, showcasing his commitment to sustainable growth and innovation. Reach out to Monte here.
MN Commercial Real Estate Broker
© 2023 Sustainable Investment Group (SIG). All rights reserved.