CREJ - Multifamily Properties Quarterly - July 2015
T here are currently two potential strategies for obtaining income tax savings during the design and construction of multifamily residential - 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 Section 179D Energy Efficient Commercial Buildings Deduction. New Energy Efficient Home Credit The New Energy Efficient Home Credit (45L) provides an income tax credit of $2,000 per qualifying dwelling unit. Developers and investors of apartments, senior living facilities, student housing, affordable housing, mixed-use developments, condominium developments and singlefamily homes may apply for the credit. For a dwelling unit to qualify, the heating and cooling energy consumption must be a minimum of 50 percent less than a baseline unit 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. There are a number of new building design improvements, which may allow units to qualify and they include the following: • Energy Star appliances; • Air-conditioning units with a SEER greater than 13; • Minimum wall insulation of R-13; • Heater efficiency greater than 88 percent; • Heat pump systems or hydronic heat systems; • Window glazing, which provides a solar heat gain coefficient and U-factor of 0.35 or less; • Building wrap over exterior wall sheathing; • High reflective exterior paint; and • Cool roof designs exhibiting high reflectivity. Not all improvements are required, but a well-designed combination may provide added tax benefit without adversely impacting the overall building costs. The 45L income tax credit will be recorded as a general business credit on the income tax return. Tax returns can be amended to claim the credit in open tax years. The tax credit is nonrefundable and is not subject to recapture rules. The credit does not reduce the alternative minimum tax, and provides a carryforward of 20 years and a carryback of one year. Energy Efficient Commercial Buildings Deduction For multifamily residences greater than three stories, the Energy Efficient Commercial Buildings Deduction (179D) is an incentive provided by the federal government allowing a deduction of up to $1.80 per square foot for the implementation of energy-efficient improvements. The deduction can be utilized on new construction, renovations or additions. Energy-efficiency improvements to commercial and government buildings such as college dorms may also qualify. A third-party licensed engineer or contractor must perform a site inspection to certify the building’s energy cost reduction. The building’s interior lighting, heating, ventilating and air conditioning, domestic hot water, and envelope systems are modeled using Department of Energy approved software including DOE 2.2, Trace 700, eQuest or EnergyPlus. The new building construction is compared to a baseline building following ASHRAE 90.1-2001 standards. If the modeling results show a reduction of 50 percent or more compared with the baseline building, the building is defined as a fully qualifying property, and owner, lessee or designer receives a deduction of $1.80 per sf. If the results show a reduction between 10 and 50 percent, the building may be deemed a 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 2014 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 in all types of multifamily housing. These tax incentives are a valuable benefit for owners, developers and designers of energy-efficient buildings, and should be considered for new properties or existing properties that have had significant energy-efficient improvements.