Don't leave energy tax credits on the table

Dori Eden, business development director for KBKG, is an expert in cost segregation and energy tax benefits. Dori Eden, business development director for KBKG, is an expert in cost segregation and energy tax benefits.

Smart developers who take advantage of the 45L energy tax credits program that rewards energy-efficient apartments are boosting the bottom line

By Dori Eden

The majority of seniors housing developers are unfamiliar with energy tax credits and how to use them to wipe out federal tax payments. By taking time to learn about the advantages of energy tax credits, they can avoid leaving hundreds of thousands of dollars on the table. 

Developers continually wrestle with the decision to design projects to higher energy-efficient standards. Two of the questions developers ask themselves: “Will tenants pay more in rent for a ‘green’ project versus a community that is not known to be energy efficient?” Also, “If we install more energy efficient systems, will the project sell for a higher price in the event we decide to sell?” 

The prospect of lower operating costs is only one reason for a developer to construct green buildings. Section 45L of the Internal Revenue Code offers a significant federal tax incentive that should encourage developers to build more energy-efficient buildings. 

Here’s how it works: The federal government allows garden-style multifamily developers to pursue a general business tax credit worth $2,000 for each unit that qualifies as being 50 percent more energy efficient than the requirements set forth in the International Energy Conservation Code of 2004 and 2006. These new tax credits are part of the government’s economic stimulus policy to provide incentives to developers that design and build with energy efficiency in mind. 

The credits can be pursued for recently completed projects as well as projects completed as far back as 2010. For older projects, developers can retroactively claim any missed tax credits, if they amend their return before the three-year federal statute of limitations. 

This means that for any newly constructed or significantly rehabbed building, where units were first leased as early as Jan. 1, 2010, you may be able to secure tax credits now. The credits can be used to potentially offset past, current and future federal tax payments. 

The credits can be used to offset a tax liability from a capital gain incurred from the sale of a project. Since there is no recapture on this incentive, it is often a perfect fit for the merchant or condo developer. With a 20-year carry-forward provision, some developers are not going to pay federal taxes for many years to come.

Real-life examples

A few case studies in the seniors housing and market-rate apartment market highlight the savings. Carefree Development LLC, based in Oak Park, Ill., developed Zurich Meadows, a seniors housing community in Lake Zurich, Ill. in 2012. The 95-unit, three-story project made an excellent candidate for the tax credit program. The owners were rewarded with a $190,000 tax credit, since all of the project’s 95 units qualified for the 45L tax credits. 

With several projects in the pipeline, the principal at Carefree is hopeful that the 45L tax credit legislation will be extended so he can maximize these credits for his upcoming projects. 

In another instance, a market-rate developer in the southern U.S. enjoyed tremendous success with the 45L tax credits. Upon learning about the credits, the principals were keen on pursuing them for planned projects. KBKG, a national firm specializing in securing and certifying the 45L energy tax credits, evaluated 17 projects the developer had delivered in years 2009-2011. As a result, the developer secured in excess of $4 million in tax credits. 

In Saratoga Springs, N.Y., Capital District Properties (CDP) developed The Paddocks of Saratoga, an apartment community. The project was delivered in phases, and 46 of the 336 units leased in 2008 and 2009 qualified the owners for $92,000 in credits. 

An additional 14 units leased at The Paddocks of Saratoga in 2010 that qualified for the program resulted in $28,000 worth of tax credits. In 2012, CDP delivered and leased another phase in the community and leased 60 units that year, but none of those units qualified for the tax credits. 

Toby Milde, president of Richbell Capital, the parent company of Capital District Properties, says his team always considers the potential tax incentives available for a development project. “In the past, we have used historic credits, tax pilots and other incentives, but we were not aware of the 45L tax credits until KBKG introduced them to me at the time they were doing a cost segregation study for us. We have pursued the 45L tax credits on all of our entire garden-style projects since learning of them.”

The 45L energy tax credit is a win-win for everyone, explains Milde. “The credits have incentivized us to utilize higher-quality materials, which in turn lower the tenants’ cost for utilities, lower our operating costs, and the government rewards us by giving us tax credits.”

Thrilled to secure $120,000 in tax credits, Capital District Properties is planning on pursuing the tax credits on its newest project in Half Moon, N.Y.

What’s next? 

The legislation has yet to be extended to include lease-ups and sales for 2014 and 2015. However, on April 3, Senate Finance Committee Chairman Ron Wyden (D-Ore.) led the Senate Finance Committee to pass a bill renewing a set of provisions known as “tax extenders” that expired at the end of 2013. 

The bill, titled the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, was approved by a strong bipar-tisan voice vote. 45L energy tax credits are included in the bill, and it is expected that the Senate will be addressing this bill soon with another vote. 

To learn more about the incentive and determine if it would benefit your firm’s principals or your investors, speak to a qualified consultant. And always seek the opinion of your tax advisor to find out if this incentive is a good fit.

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