The passing of the Inflation Reduction Act marks a significant turning point for the United States in combating climate change. While less far-reaching than the Build Back Better Act proposed last year, it is still the largest climate investment in U.S. history, and puts the United States on a path to reduce its emissions by 40% by 2030. 

In addition to a significant extension of the Affordable Care Act and deficit reduction, the bill includes a $370 billion commitment to energy and climate provisions focused on lowering consumer energy costs, supporting the production of clean energy, decarbonizing the economy, investing in disadvantaged communities and environmental justice, and advancing solutions for rural and coastal communities on the forefront of climate change.

So what does this mean for commercial real estate? On the whole, the bill has taken a carrot-vs-stick approach, which means expanded tax credits for owners of energy efficient commercial buildings, more rebates for energy saving projects, new clean electricity and electric vehicle incentives, and expanded grants to state and local governments, among others. 

Specific highlights include:

Tax Deduction for Energy Efficient Commercial Buildings

• Expands the incentive from 2 to 10 years and from $1.80 per square foot currently to a sliding scale of $2.50- $5.00 per square foot, which includes a new pathway for existing building retrofits to access the deduction. 
• REITs also now become eligible for deductions. 
• Provisions to allocate deductions for public projects.

Tax Credit for Large Multifamily Residential Buildings

• Credits of $2,500 per unit for meeting ENERGY STAR or $5,000 per unit for meeting DOE zero-energy ready (not limited to buildings 3 stories or less). 
• Developers can take both 45L and LIHTC for affordable housing projects.

Clean Electricity Incentives 

• Expands and extends clean power technologies including the Investment Tax Credit (ITC) and the Production Tax Credit (PTC) for renewable energy projects.  
• For construction beginning after 2024, the incentives are replaced by new tech-neutral incentives based on emissions reduction, and covers new technologies such as energy storage and microgrid controllers, among others. 
• $40B available until 2026 for loans from the DOE Loan Programs Office to support the commercial deployment of new clean energy technologies.

Federal Building Upgrades 

• $250M to be spent by 2031 to convert GSA-owned or managed buildings to high-performance green buildings. 

Electric Vehicle (EV) Incentives

• Expands existing 30D clean vehicle tax inventive through 2032 for a $7,500 tax credit on purchases of qualifying clean vehicles.  
• Implements a new credit of up to $4,000 for qualifying used clean vehicles, up to 30% of sales price. This also includes a new tax credit for clean commercial vehicles and invests $1B in clean heavy duty vehicles for states municipalities and non profit school facilities. 

Grants for State and Local Governments to Adopt and Implement Building Energy Codes 

• $1B total with $330M for meeting 2021 IECC or ANSI/ASHRAE/IES 90.1-2019.
• $670M for meeting or exceeding the zero energy provisions in the 2021 IECC or an equivalent stretch code. 

Greenhouse Gas Reduction Fund

• $27B to the EPA for a greenhouse gas reduction green bank initiative to fund state, local, nonprofit and other government entities engaging in emissions-reducing or avoiding projects, including the rapid deployment of low- and zero-emissions technologies such as solar. 

Overall, the expanded credits and rebates are good news for real estate, as they will encourage owners and developers to build more energy efficient buildings and invest in energy efficiency and carbon-reducing projects for existing buildings. However, there are still some bigger-picture questions that remain unanswered. 

For one, in the absence of more stringent regulation, will the bill’s expanded incentives and tax credits be enough to garner the level of mass participation needed to really move the needle? We can look to Texas and other states and cities that have taken this participatory approach to climate and energy policy, and the evidence points to varied results. Furthermore, is the signal from the federal government in supporting carbon-reducing activities strong enough to encourage states and cities to go even further, and initiate legislation in the vein of Local Law 97 in New York?

Other more specific questions include: will the supply of more electric vehicles meet or exceed the infrastructure needed to store and charge said vehicles? Will the 10 year extension be enough to encourage building owners to participate in the incentive programs?

Only time will tell, but regardless – the possibilities that this bill introduces are good steps in the right direction. Now it will be up to us as real estate professionals to leverage these new resources to continue to improve the performance of our buildings – and with major target emissions deadlines growing closer each day, there is no time to waste. 

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