With the passing of the Inflation Reduction Act (IRA) in August 2022, several new and reinstated energy-related tax laws were locked into place for the next decade, giving affordable housing developers unprecedented foresight in planning future deals and making renewable projects possible.
Let’s look at five ways organizations can maximize the latest IRA tax credits, rebates, grants, and loans on top of low-income housing tax credits (LIHTCs).
Investment Tax Credit (ITC) Section 48
Under the Section 48 energy credit, a component of the ITC, project owners or investors are eligible for federal business energy investment tax credits for installing any designated renewable energy generation equipment by an end date that varies depending on the type of project. Certain property, such as geothermal heat pumps, will qualify if placed into service before the end of 2034, and other property will qualify if placed into service before the end of 2033. Solar is generally eligible under Section 48 until 2024, and then may be eligible through 2033 under 48E if annual greenhouse gas emissions standards have been satisfied.
Section 48 allows a credit equal to a percentage (energy percentage) of the basis of energy property placed in service during the tax year. There is a base energy percentage of 30% if the project has a maximum net output of less than one megawatt of electrical energy. From there, additional bonus energy credits and kickers for domestic content, energy communities, and more may apply.
The energy percentage for any energy project satisfying the domestic content requirement is eligible for an additional bonus credit; most will get 10%. To receive this credit, a taxpayer must certify that 100% of any steel or iron used in the project and at least 40% of other manufactured products were produced in the United States.
For any energy project placed in service in an energy community, most real estate projects will qualify for an additional 10%. An energy community is defined as a brownfield site or a metropolitan statistical area (MSA) or a non-MSA that has .17% greater direct employment or 25% or greater local tax revenues related to extraction, processing, or storage of coal, oil, or natural gas, and has an unemployment rate at or above the national average unemployment rate for the previous year. Mapping tools are available to identify energy communities.
For projects located in low-income communities, there will be an opportunity to apply for the 10% environmental justice solar and wind capacity credit this year. Projects that are part of a specific covered affordable housing program (Violence Against Women Act of 1994, housing administered by a Tribally Designated Housing Entity, or programs administered by the Department of Agriculture under Title V of the Housing Act of 1949) can get allocated up to an additional 10%. Projects in which at least 50% of the financial benefits of the electricity produced by such facility are provided to households with incomes less than 200% of the poverty line/less than 80% of the area median gross income can get up to an additional 20%.
A major benefit of these credits is that the percentage can be stacked. Each 10% is independent and can be stacked on the base 30%. Further, the eligible basis is not reduced for LIHTC purposes.
There are further benefits to note when it comes to solar equipment. It is depreciated as five-year personal property and therefore may be eligible for applicable bonus depreciation (i.e., 80% immediate cost recovery if placed into service in 2023, 60% if placed into service in 2024, 40% if placed into service in 2025, and 20% if placed into service in 2026). Other benefits include that the solar credit is transferable (meaning the credit does not need to stay within the partnership where the equipment is located) and is eligible for direct pay for a nonprofit-owned project.
To get a sense of how all these credits can come together, here is an example of how a solar project can take advantage of investment-based credits up to 87% of eligible costs, based on federal calculations between solar and LIHTCs.
Example of calculation of federal credits generated for a 4% LIHTC project in a qualified census tract (QCT); assuming 50% solar credit
Cost of solar equipment $400,000
Federal solar credit 50%
Solar credits $200,000
Cost of solar equipment $400,000
Federal LIHTC 4%
LIHTC credits $208,000
Total federal credits $408,000
Pricing (for demonstration; will vary) $0.85
Total federal tax credit equity $346,800
Percent of solar equipment paid for 87%
Alternative Fuel Vehicle Refueling Property Credit (30C)
The IRA extends the credit for 30% of qualified vehicle refueling and recharging property placed in service through 2032. The credit is reduced to 6% for depreciable property used in a trade or business unless it satisfies wage and apprenticeship requirements. The credit is limited to $100,000 per property placed in service after 2022 if used in a trade or business (the credit limit applies on a per location basis for property placed in service prior to 2023). To be credit-eligible, property placed in service after 2022 must be either in a low-income or rural area.
45L Energy-Efficient Home Credit
The energy-efficient home credit (the 45L credit) has been revamped. Under the old law, units purchased or leased prior to Jan. 1, 2023, had different standards for energy efficiency and different credits. Under the new law, eligible contractors can receive a $500 to $5,000 tax credit for each multifamily energy-efficient dwelling unit.
For a multifamily project to be eligible, it must meet two characteristics: It will likely need to be three stories above grade or less (we’re still waiting on full clarification) and must have some energy-efficient features, such as wall insulation R-13 through R-19+, roof insulation R-38+, double- or triple-pane windows, vinyl low-E windows, insulated exterior doors, reflective roofing materials, extra insulated foundations and slabs, air conditioning with SEER ratings 13+, 80%+ efficiency gas furnaces, or hydronic heating systems.
The base credit threshold requires the units to be certified under Energy Star Version 3.1 energy-efficient home program as applicable to the building location. Certified units will yield a $500 credit per multifamily unit. Since both the Energy Star 3.1 certification and the Section 45L certification could cost up to $500 per unit, it may not make financial sense for most developers to pursue the credit.
The next 45L threshold increases to a $1,000 credit per unit. These units must meet the Energy Star 3.1 along with the Zero Energy Ready Home (ZERH) program requirements. A ZERH fundamentally requires units be constructed to allow for easy installation of solar energy that results in the unit consuming a net-zero energy consumption if renewable solar energy is operable.
The largest 45L credit must meet the “prevailing wage” standard. Those who have received Department of Housing and Urban Development (HUD) financing already abide by that standard. Certain state financing also requires home builders to follow Davis-Bacon Act prevailing wage stipulations. Combining the Energy Star 3.1 requirement and prevailing wage multiplies the $500 credit by five times to a credit of $2,500 per unit. If ZERH requirements are met, the $1,000 per unit credit increases five times to $5,000 per unit.
High-Efficiency Electric Home Rebate Act
The HEERA helps make home electrification possible for America’s most energy vulnerable households. It helps low- and moderate-income (LMI) households afford the energy-efficient upgrades needed to lower costs and greenhouse gas emissions. HEERA designates $4.275 billion in rebate funding to be distributed by state energy offices and $225 million to be distributed by tribal governments; establishes point-of-sale consumer rebates for “qualified electrification projects,” up to $14,000 per household; covers 100% of electrification costs for low-income households and 50% of costs for moderate-income households; extends rebates to multifamily buildings in which 50% of residents are LMI; and incentivizes contractors to perform electrification projects in LMI communities.
Green and Resilient Retrofit Program (GRRP)
The $4.8 billion GRRP offers developers and owners direct grants and loans to improve HUD-assisted properties. Eligible owners include those who receive HUD rental assistance under these programs: Multifamily Section 8 project-based rental assistance, Section 202 Supportive Housing for Low-Income Elderly, and Section 811 Supportive Housing for Low-Income Persons with Disabilities. The awards are categorized into three cohorts: Element Awards, Leading Edge Awards, and Comprehensive Awards.
Element Awards are for properties that are materially advanced in a recapitalization transaction that includes targeted utility efficiency, carbon emissions, reduction, renewable energy, and/or climate resilience measures. HUD expects to make approximately 200 awards available with $140 million in funding. This could be funding of up to $40,000 per unit, or $750,000 per property.
Leading Edge Awards are for properties with a significant capacity to execute a rehabilitation that will achieve an advanced green certification. HUD expects to make approximately 100 awards available with $400 million in funding. This could be funding up to $60,000 per unit, or $10 million per property. Leading Edge applicants have plans for advanced green certifications and are developers with a strong track record completing other green projects. As such, leading Edge awards have different scoring criteria to reflect more sophisticated projects.
Comprehensive Awards are for a range of properties, including those just beginning to think about a recapitalization plan where the property owner is interested in improving the utility efficiency and properties’ resiliency to climate hazards. HUD expects to make approximately 300 awards available with $1.47 billion in funding. This represents funding of up to $80,000 per unit, or $20 million per property.
To note, a developer’s chance of securing a GRRP grant or loan is significantly increased if they apply now because, in addition to rolling deadlines, there are caps on the total dollar amount of awards per cohort.
The IRA and its associated benefits are a bit of a Rubik’s Cube that require time, effort, and professional guidance to maximize the full benefits.