Renewable Energy Incentives Offer Extra Benefits for Real Estate Projects; New Changes Promise New Opportunities
By Caitlin Jones
7 min read
Tax Credit Advisor, August 2009: Newly implemented changes made by this year’s economic stimulus act promise new opportunities and shifts in the use of federal renewable energy tax credits. This applies both for real estate projects where the energy credits are used alone, and where paired with federal low-income housing, historic preservation, or new markets tax credits. (See p. 11 for chart on federal energy tax credits.)
Renewable energy tax credits can help developers and owners raise extra equity by “selling” the tax credits to syndicators or corporate investors. And in affordable multifamily rental housing, renewable energy systems such as solar can help a developer win an award of low-income housing tax credits (LIHTCs) under the state’s qualified allocation plan (QAP).
Renewable energy “is not only a good thing to reduce your energy costs, but it helps you get the tax credits, too,” says Boston attorney James Duffy, a partner in the law firm of Nixon Peabody LLP. He noted state QAPs and other incentives for solar energy and energy efficiency have “really accelerated” in the past 18 months.
New Options
Last fall’s financial rescue act extended the lifespan of federal renewable energy tax credits, the deadlines by which energy equipment or projects must be placed in service. In addition, the stimulus legislation, the American Recovery and Reinvestment Act (ARRA), made two radical changes that will alter the use of federal energy tax credits in the near term. These changes relate to the two types of federal renewable energy tax credits: the investment tax credit, or ITC, and the production tax credit, or PTC.
One change permits owners of new projects that qualify for the PTC to elect to take the ITC instead. In June, the Internal Revenue Service issued guidance (Notice 2009-52) that describes the procedures taxpayers must follow to elect to take the ITC instead of the PTC. (Notice: http://www.irs.gov/pub/irs-drop/n-09-52.pdf)
The second change permits owners of new projects that qualify for the ITC to elect to obtain a cash grant from the U.S. Treasury Department in lieu of the tax credit, similar to the LIHTC “exchange” program established by ARRA.
On July 9, Treasury issued guidance, requirements, and a sample application form regarding the election to obtain a cash grant in lieu of the ITC. As of 7/15/09, Treasury wasn’t yet accepting applications. (Guidance, other materials: http://www.treas.gov/recovery/1603.shtml; Nixon Peabody memo, http://www.nixonpeabody.com/publications_detail3.asp?ID=2830)
Under both options, projects generally must begin or complete construction by year-end 2010.
Duffy said both new elections may be combined. For instance, the sponsor of a new energy project qualifying for the PTC could elect to take the ITC and then apply for a cash grant in lieu of the ITC.
The options will enable developers or owners to obtain equity or cash upfront. Obtaining cash instead of taking and then trying to “sell” the ITC will enable sponsors to bypass the current challenges in the energy tax credit equity market.
Duffy said today there probably are only four or five large energy tax credit investors that are still very active, and “all of them have sort of limited demand for credits.” But he added there also are some small regional banks or companies “doing much smaller numbers.”
Duffy indicated current pricing for energy ITCs is probably about $1.10 per dollar of tax credit, down from around $1.20 a year or two ago.
Types of Energy Credits
Taxpayers can use either the production tax credit or the investment tax credit to reduce federal corporate or individual income taxes. Taxpayers don’t have to obtain an allocation of these energy credits for a renewable energy system or facility, unlike with the LIHTC.
The production tax credit is available for facilities that generate electricity from certain eligible renewable energy sources (e.g., solar, wind, biomass, geothermal). The credit is claimed annually, and the annual credit amount is based on the amount of electricity produced that year. The PTC generally hasn’t been paired with low-income housing or historic tax credits, but has been paired with the new markets tax credit for energy projects such as solar or wind “farms.”
The ITC is available for qualifying renewable energy systems (e.g., solar, geothermal heat pumps, small wind turbines). The credit amount is claimed entirely in the first year and is equal to a percentage (30% for solar) of the cost of the energy equipment, including installation.
Solar Most Popular
“Typically the renewable energy credit that affordable housing and historic developers are using is solar,” says Duffy. The ITC for solar photovoltaic (PV) is more popular than that for solar hot water systems. While both utilize solar panels, PV systems generate electricity for use in a property, while solar water systems produce hot water for the building.
There generally are no rules of thumb for determining the appropriate size of a solar PV system for an affordable housing project. The size will be shaped by various factors, such as the sponsor’s budget and preferences, available funding and incentives for the system (governmental, utility, other), the efficiency of the system, space constraints (i.e. the total area available and suitable on rooftops or elsewhere for installation of solar panels), and the number of peak sun hours per day at the site. Systems may supply all or a portion of the property’s electric needs.
Pairing the solar tax credit with the LIHTC can reap several advantages. The solar tax credit can raise additional equity to help pay for the equipment and installation. In addition, much of the cost of the solar energy system can be included in LIHTC eligible basis and generate additional housing credits. Pairing the solar with historic tax credits also generates extra equity.
Certain precautions are necessary, though. For example, solar PV systems in LIHTC projects generally supply power just for common areas and not for tenants’ units since the sale of electricity to residents can risk the loss of housing credits.
Another beneficial change made by ARRA is that the amount of the energy ITC is no longer reduced if the cost of the energy system is funded by grants or by “subsidized energy financing,” such as tax-exempt bond proceeds. “For most solar installations,” Duffy notes, “you can now use below-market loans or tax-exempt bonds without having to reduce the amount of ITC you claim.”
Advice to Developers
Duffy advises LIHTC and historic tax credit developers and owners to consider the use of renewable energy “on any project where it is feasible” Ã both in new construction and in rehabilitation. He recommends that developers and owners identify the public and private energy incentives available in their state and determine how much of the energy system’s cost can be paid for from the combination of these and the federal incentives.
Many states offer tax credits, other tax incentives, grants, low-interest loans, or other assistance for renewable energy systems and energy efficiency. Many utilities offer rebates. (For comprehensive state-by-state list, go to http://www.dsireusa.org.)
Duffy advised developers thinking of incorporating a renewable energy system (such as solar) into a new construction or rehabilitation project to investigate the concept early in the planning process and talk to their architect. “Maybe you might want to tweak the plans that you’ve been using faithfully for 10 years on every project you do, and see if a roof design would give you even better solar access,” he says.
Developers and owners can seek an initial analysis from a solar installer à a company that designs and install solar systems. With an existing building, Duffy says, “Some of these guys can go right on Google Earth and look at your rooftop and where the trees near your building are and [tell] you, right [from] the desktop, whether it makes sense to even look at it, or whether it’s just not going to work for your deal.”
If a building hasn’t been constructed, Duffy says, “you can always plan to make it work.”
