Understanding the Inflation Reduction Act and the Infrastructure Investment and Jobs Act

In recognizing the importance of buildings, we must also acknowledge the reality of their energy demands. In fact, the built environment is responsible for nearly 40% of all energy and process-related CO2 emissions.

Commercial real estate developers and owners are now tasked with considering how their building projects will affect the environment. Additionally, the number of U.S. jurisdictions enacting building performance standards has almost doubled since 2020, requiring companies to make the shift toward clean energy. The emergence of legislation such as The Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) incentivizes compliance with tax credits and grants for clean energy development and advancements, adding to the timeliness of a clean energy transition.

Legence held a webinar on July 20 to discuss the IRA and IIJA tax incentives for the built environment with a panel of experts including representatives from the White House, EY, Capitol Funding Solutions, and Black Bear Energy. Below you will find key topics covered during the webinar, including benefits of the IRA and IIJA and provisions to accelerate building projects, an outline of available government programs and funding options for commercial real estate developers and owners, and a look into the application process.

If you have any questions, please reach out to Updates@WeAreLegence.com.

The Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA):

The White House debuted the Inflation Reduction Act (IRA) on August 16, 2022, marking the largest investment in clean energy in the U.S. to date with $750 billion in funding. Born from the Build Back Better initiative, the goal of this bill is to promote the adoption of green energy, encourage increased investment in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40% by 2030.

A large portion of the IRA caters to ESG and sustainability in the built environment, with billions available for corporate, government, and nonprofit organizations to support the building efficiency and performance of assets. While the impact of these efforts will be measured over a long haul, building retrofit programs can be a gamechanger for the present.

Also known as the Bipartisan Infrastructure Law (BIL), the  Infrastructure Investment and Jobs Act (IIJA) was signed into law in November 2021 and is administered by the Department of Energy (DOE). The IIJA holds a title of its own as the largest ever investment in broadband, rail and transit, clean energy and water, and economic resilience, with $1.2 trillion in spending for transportation and infrastructure projects in the U.S.

The additional funding from the IRA will help offset costs across sectors with the hopes of stabilizing the inflated economy. Paired with the IIJA, these funds could drastically reduce the buildings sector’s CO2 emissions by up to 30% of the 2030 goal.

Key Provisions and Benefits

A number of infrastructure development incentives are available under the IRA. Key programs for commercial real estate developers and owners include:

• Energy Efficient Commercial Buildings Deduction 179D – The expansion of the deduction is available to commercial building owners that increase the energy efficiency of their buildings by 25% with improvements including interior lighting; heating, cooling, ventilation, and hot water; and building envelope. Available credits of $0.50-$1 per square foot (and potentially $5.00/sq. ft.) will be dependent upon the increase in efficiency.
• The Green and Resilient Retrofit Program – Owners of HUD-assisted multifamily properties can take advantage of over $1 billion in funding for the improvement of energy or water efficiencies and the sustainability and resiliency of buildings, including indoor air quality, low-emissions building materials, energy storage, and building electrification. Funding also includes energy and water benchmarking.
• Assistance for Latest and Zero Building Energy Code Adoption – States or units of local government have up to $1 billion in grant funding to adopt updated building energy codes, including the zero-energy codes.
• The New Energy Efficient Home Credit 45L - Single and multifamily home builders have access to $5,000 in tax credits for each new energy-efficient home and up to $1,000 for each unit in a multifamily building to produce homes with lower monthly energy costs for owners and renters.

These tax credits offer opportunities for building owners and developers to cut costs to building projects and monthly utility bills. The resiliency of buildings establishes long-term ROI with energy efficiency upgrades and reduces the output of carbon from the built environment. Healthier buildings benefit all and can help accelerate the transition to net-zero.

Energy efficiency improvements in buildings are crucial for executives and corporations as they play a pivotal role in reaching long-term sustainability and resiliency targets. Getting ahead of the energy transition will be key to ensuring an asset portfolio that is both high performing and has longevity. With available tax credits for state and local government entities, energy efficiency will be among top considerations for future building projects. Additionally, retrofit tax credits provide new opportunities to upgrade or renovate existing infrastructure.

Implications

While the IRA offers a number of financial solutions to an otherwise expensive transition to energy efficiency, there are certain requirements to qualify for funding. For example, while the IRA allows for the sale of both investment tax credits (ITC) and production tax credits (PTC), the business claiming the ITC must retain ownership of the system until the sixth year of the system’s operation. Additionally, to qualify for ITC adders up to an additional 70% for solar energy installations, your facility must be located in an energy or low-income community and use materials manufactured in the U.S.

Sections 6417 and 6418 are subject to certain rules to receive funding. For instance, under Section 6418, the generator of a tax credit has the right to transfer the credit to a third party; however, buyers are subject to IRC Section 469, which largely eliminiates high net worth individuals as potential buyers. For any of the available tax credits provided through the IRA, the risk of audit or recapture of unvested funds if the property is sold sits with the buyer except in limited cases. Overall, without the proper assessment of building plans for potential qualifiers, businesses pose the risk of missed funding opportunities.

Stacking Government Incentives

Some existing government programs and funding options for commercial real estate developers and owners have been extended and can be coupled with IRA and IIJA incentives and credits. Stacking incentives and leveraging financial support can further cut costs and get projects off the ground much more quickly.

Other available tax credits and financing resources include:

Getting to Green: Paying for Green Infrastructure – a detailed guidebook of financing options for decision makers
Environmental and Climate Justice (ECJ) program – funding for financial and technical assistance
Investment Tax Credit (ITC) – extended at 30% for 10 years for solar
Production Tax Credit (PTC) – for renewable electricity
Modified Accelerated Cost-Recovery System (MACRS) – an 80% special depreciation allowance for certain qualified properties
Direct “Elective” Pay - refunds for certain clean energy tax credits
IRA Contribution Eligibility - TIAA – IRA contribution limit calculator

Application Process

With billions of dollars on the table, the process for claiming funds can be intimidating. However, with the right support and guidance, it doesn’t have to be. There are ways to ensure your application gets approved by providing critical information that reviewers are looking for.

Here are some things to keep in mind when applying:

• Project description - Describe what your program is about and what problem you are trying to solve. Explain why it’s important to your community/region or future, including supporting research or statistics.
• Readiness - Detail your projected timeline with milestones. Explain if you have any strategic partners with defined roles and whether required permitting is complete or in progress.
• Budget - Describe whether your pricing has remained consistent, how your budget corresponds to your timeline, and your strategy for matching fund requirements.
• Timing- Remember that Federal grants are reimbursement grants. Make sure you can front the cost while waiting for funds to arrive within 30-90 days.
• Current Administration priorities - Community Benefit Plan (Justice40 Initiative, Support for Underserved Communities, Job Creation/Unions), Environmental impact, Build America, Buy America Act.

Rather than chasing programs, prepare projects to be eligible for funding. There are a number of agency tools you can utilize to set your application up for success. To help ease some ambiguity, review previous awards. Mirroring language in the announcement will make it easier for the reviewer to assess if your application meets requirements. It’s always a good idea to have someone with fresh eyes review before submitting. Lastly, make sure to submit early!

Next Steps

The IRA and IIJA are among the most recent bills to support a transition to clean energy in the built environment. Paired with other available government funding and a commitment to sustainability, the industry is poised to lead the energy transition. The goal of these bills and government programs is to encourage clean energy advancements to new and existing infrastructure, establish better wages and working conditions to foster job growth, produce a resilient and sustainable economy, and decarbonize buildings for a healthier planet.

To maximize potential impact, these financial incentives should be coupled with plans to design effective state and local programs that educate and attract consumers and contractors, develop the necessary workforce to meet the demand of a growing industry, and fold together existing state and utility energy efficiency and electrification programs.

Adaptation in an unprecedented time for the planet is no longer an option, but a necessity. With government support for commercial real estate, and companies like Legence with stackable solutions, we can decarbonize the built environment and accelerate the transition to net zero. We break down the details so you can build up your resiliency and ROI. Watch our webinar to learn more, and reach out to Updates@WeAreLegence.com with any questions.

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