CREJ - Multifamily Properties Quarterly - August 2016
There currently are two potential ways to obtain tax savings through energy efficiency – during the design and construction of multifamily and commercial developments and government-facility improvements. These include maximizing the benefits available through the Internal Revenue Code Section 45L New Energy Efficient Home Credit and Internal Revenue Code 179D Energy Efficient Commercial Buildings Deduction. New Energy Efficient Home Credit The Energy Efficient Home Credit (45L) provides a tax credit of $2,000 per qualifying dwelling unit. Developers and investors of apartments, senior living facilities, student housing, affordable housing, mixed used developments and condominium developments may apply for the credit. For a dwelling unit to qualify for the credit, the heating and cooling energy consumption per unit must be a minimum of 50 percent less than a baseline building designed, according to the 2006 International Energy Conservation Code, and the building envelope must provide a level of heating and cooling that is a minimum of 10 percent less than the baseline unit. The building must be three stories or less in height above grade, with the first units being leased after Jan. 1, 2011. There are a number of new building design improvements that may allow units to qualify. They include the following: • Energy Star appliances. • Air-conditioning units with a minimum SEER of 13. • Minimum wall insulation of R-21. • Heater efficiency greater than 90 percent. • Heat pump systems or hydronic heat systems. • Window glazing that provides a solar heat gain coefficient and U-factor of 0.3 or less. • Building wrap over exterior wall sheathing. • High-absorbent exterior paint. • Cool roof designs. Not all improvements are required, but a well-designed combination may provide added tax benefits without adversely impacting the overall building costs. The 45L tax credit will be recorded as a general business credit on the tax return. Tax returns can be amended retroactively to claim the credit in open tax years. The tax credit is not refundable and not subject to recapture rules. The credit does not reduce alternative minimum tax, provides a carryforward of 20 years and a carryback of one year. Energy-Efficient Commercial Buildings For multifamily residences greater than three stories above grade, the Energy Efficient Commercial Buildings Tax Deduction (179D) is an incentive provided by the federal government, which allows a deduction of up to $1.80 per square foot for the implementation of energy efficient improvements or new construction. The building owner or lessees of privately owned buildings and the designer (architect, engineer, contractor, energy services provider) of government buildings may qualify to receive the deduction. The deduction can be used on new construction, renovations or additions to commercial and government buildings as well as multifamily developments four stories or higher. A third-party licensed engineer or contractor must certify the building’s energy cost reduction through a site inspection. The building’s interior lighting, HVAC, domestic hot water and envelope systems are modeled using Department of Energy-approved software, including DOE 2.2, Trace 700, eQuest and EnergyPlus. The new building construction is compared to a baseline building following ASHRAE 90.1-2001 standards. Construction placed in service in 2016 will go under ASHRAE 90.1-2007 standards. If the modeling results show a reduction of 50 percent or more as compared to the baseline building, the building is defined as a fully qualifying property and the owner, lessee or designer receives a deduction of $1.80 per sf. If the results show a reduction of between 10 and 50 percent, the building is deemed partially qualifying property and a partial deduction of 60 cents per sf for each qualifying system is awarded. For example, in order for buildings constructed between 2012 and 2016 to qualify for a partial deduction, one of the following must be met: • The building’s interior lighting system must decrease overall energy costs by 25 percent; • The HVAC and domestic hot water systems must decrease the overall energy costs by 15 percent; or • The building envelope system must decrease overall energy costs by 10 percent. Tax savings through energy-efficiency incentives is a proven way to help offset development costs, while providing a higher-quality living environment with lower utility costs for property managers and residents of all types of multifamily housing. These tax incentives through energy-efficient design and construction are a valuable benefit for owners, developers and designers of high-performance buildings that should be considered for new properties or existing properties that have significant energy-efficient improvements completed on them. For multifamily properties consisting of three stories or less, the 45L tax credit provides a $2,000 credit per unit that qualifies. For developments greater than three stories, the 179D tax deduction can provide an owner or designer up to $1.80 per sf of building.