Federal Tax Incentives for Multi-Family Developers
Developers in the multifamily industry are faced with the decision to build their projects to more energy efficient specifications or to keep them standard. The question for many has been – whether the prospective tenants will pay more in rent for a more energy efficient "green" property. Findings have indicated that residents, especially students, prefer to live in a community that is environmentally focused and energy efficient, but they are not willing to pay more for these types of features. With that in mind, developers may need a more compelling reason to build more energy efficient properties, and aside from good public relations, and lower operating costs, there is another very irresistible reason to have their projects designed with energy efficiency in mind.
The IRC section 45L tax credit, is a federal tax incentive that has not many are aware of, but one that packs a powerful punch! This is good news that will help developers increase cash flow from their past projects, and to help incentivize designing future projects with energy efficiency in mind.
The federal government states that the new IRC Section 45L tax credit allows garden-style multifamily developers to pursue a $2,000-per-unit general business tax credit for each unit that qualifies as energy-efficient. These new tax credits are part of the government's economic stimulus policy to provide incentives to developers that design with energy efficiency in mind. The process of obtaining these credits requires a detailed energy analysis that must be certified by a qualified third-party consultant. You may ask, "Does my project have to be LEED certified to qualify?" The answer is no! Good candidates include Energy Star homes, participants in utility rebate programs, LEED developments and affordable projects. The building codes in many states already call for standards that mirror or exceed the qualifications for the tax benefit.
The credit is a one-time credit that can be used to offset federal tax liability, including the gains from a sale of the project. Developers can look back three tax-filing periods to pursue credits from projects already built and in service. With no recapture on this incentive, it is a perfect fit for the merchant-build strategy. Savvy developers who have pursued the credits, in some cases, have secured millions of dollars here. With a 20-year carryforward, some of the developers who explored/will explore this incentive, are not going to pay federal taxes for many years to come!
Here's an example: Student housing developer Dinerstein Companies, based in Houston, was able to take advantage of the incentive for a project delivered in 2011. Dinerstien's projects are designed with energy efficiency in mind (this project was LEED certified), and Don Brooks from Dinerstein said:
"We were pleasantly surprised that our project in Greensboro, N.C., qualified for $150,000 in tax credits, thanks to the expertise of KBKG. Without Dori Eden of KBKG's help, we wouldn't even have known that our project qualified. We are looking forward to working with them on future projects to see what other tax advantages we can use to increase our ROI."
The moral of the story is that there is a monetary reward for electing to go green.
A developer in the South also had tremendous success with the 45L tax credits. After learning about the 45L Tax Credits, the principals were very keen on pursuing them for their recent projects. After KBKG evaluated 17 projects the developer had delivered from 2009 to 2011, they secured in an excess of $4 million in tax credits. In one of the projects, the developer was surprised that units that were leased in 2011 qualified for the credits, but the units that were leased in 2012, in the same community did not qualify.
When the legislation was extended — it had expired on Dec. 31, 2011 — to include units leased or sold in 2012 and 2013, the IRS made the baseline energy code requirements more stringent. Communities that had success when we were comparing their new units to 2006 energy standards were now seeing lower success rates, or none at all for units leased in 2012. With that information, the principals at this firm wanted to ensure that no money was left on the table. Going forward, their team elected to have us assist in designing their future projects, so that 100 percent of their units would qualify for the credits. The cost of building them to qualify for the credits made sense for the developer to make a few design changes. If the numbers work to install more energy-efficient windows, for example, and the timing is right, it can make sense for you to pursue these tax credits, too.
If you are wondering how units qualify, here is the explanation that the code provides: In order to qualify, a dwelling unit must provide a level of heating and cooling energy consumption that is significantly less than certain 2004 energy standards (note that projects placed in service in 2012 and 2013 will be compared to the 2006 energy code). Given that current energy codes have evolved tremendously over the past six years, many developers are already building to specifications that qualify them for this credit.
In addition to buildings recently completed, there is also an opportunity to retroactively claim any missed tax credits if you amend your return before the three-year federal statute of limitations. This means that for any building constructed in 2009, (and leased units from Jan. 1, 2010) your deadline to amend is quickly approaching depending on when you filed that year's tax return.
To learn more about the incentive, and see if it is a good for your firm's principals or investors, call us or fill out the qualification form.
Dori Eden is the director of business development for KBKG, Inc., a specialty tax firm headquartered in Pasadena, Calif.