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45L Tax Credit: Energy-Efficient Credit for Multifamily Developers

Multifamily owners and developers are familiar with the substantial upfront costs of building, renovating and upgrading properties, especially when it comes to energy-efficient units. Although it tends to be an expensive endeavor, eco-friendly units not only provide long-term sustainability and benefits to the environment, but to the property’s residents as well as the developer.

There are several federal incentives in place for energy-efficient developments and upgrades, including the 45L Tax Credit. For multifamily developers, the benefits of this credit can outweigh the burden of upfront building costs. While it does not apply to every developer, it could influence your next acquisition and project. 

What is the 45L Tax Credit?

Originally made effective on Jan. 1, 2006, the Energy-Efficient Home Credit (45L Tax Credit) offers developers and contractors $2,000 per dwelling unit for properties with energy consumption levels significantly less than certain national energy standards.

Congress recently extended this tax credit, making it retroactively available for developments placed in service from 2022-2032. This includes renovation projects that make substantial energy efficient upgrades. It’s also available for units that were built, renovated, sold or leased between 2018-2021.

Qualifications

Based on modern construction trends, many developers are already utilizing environmentally friendly methods, materials and infrastructure. We recently helped a client in Utah determine a projects eligibility for the credit. After examining previous and current project plans, we discovered projects from several years ago that qualified for the credit. Our client was able to amend their returns and received a million dollars back in tax credits.

Many developers may have projects that qualify for this credit without knowing, especially due to certain state’s building codes that require eco-friendly infrastructure. All developments completed or substantially upgraded over the past four years are worthy of assessing for 45L Tax Credit qualification. Eligible developers that have not claimed the credit on past tax returns, can still claim it on future returns for up to 20 years.

In order for a project or development to qualify, it must be three-stories above grade or less, excluding underground parking, and must consume at least 50 percent less energy for heating and cooling than a non-energy-efficient unit.

A development’s building envelope is also required to account for one-fifth of the energy-efficient improvements and prove to be 10 percent more efficient than that of a similar non-efficient unit. Building envelopes pertain to the walls, windows, roofs and foundation that separate the conditioned and unconditioned environments.

 Multifamily properties that can meet the above requirements include:

  • Apartment buildings
  • Assisted living facilities
  • Affordable housing projects
  • Residential condominiums
  • Student housing
  • Reconstruction or rehabilitation

Whether the multifamily development is a new build or rehabilitation project, it must encompass energy efficient features such as reflective roofing materials, hydronic heating systems, double or triple pane windows, extra insulated foundations and slabs, vinyl low E windows, insulated exterior doors and more.

How does it work?

The 45L Tax Credit is only available to an eligible contractor in the year the dwelling units are leased or sold. To determine the eligible contractor, it must be someone who owned or had basis in the development or unit during its construction or rehabilitation. If a third-party contractor is hired by someone who owns and has basis (they’ve invested) within the development during its construction, the person who hired the third-party would be deemed the eligible contractor and not the third-party contractor.

Before applying for the credit, the eligible contractor must receive project certification from an accredited certifier that utilizes an Internal Revenue Service approved rating network and software. The certification process involves computer modeling, on-site testing and a per-unit fee. There is no limit for the number of units that can be certified for the credit within a development or project.

After the units are certified, the eligible contractor can use Form 8908 to apply for or claim the credit, which will pertain to the year the certified units were leased or sold. The credit tends to work best in a nine-percent Low Income Housing Tax Credit (LIHTC) transaction for both new builds and rehabilitation projects. The nine-percent figure accounts for approximately nine-percent of the project’s construction costs for projects without federal subsidies.

What does the 45L Tax Credit extension mean? 

Originally having expired at the end of 2021, recent legislation on the 45L Tax Credit has been retroactively extended for the next 10 years, from 2022-2032. 

The approved legislation extends the current tax credit through this year with no adjustments to the value of the amount credited. In 2023, the maximum tax credit will increase to $5,000 per dwelling unit for both single-family and multifamily developments. The energy efficient criteria will also change to align with Department of Energy programs for Energy Star and Zero Energy Ready Homes, allowing all residential developments to become eligible instead of only low-rise residential developments.

The 45L Tax Credit is an essential incentive to influence developers towards creating more energy-efficient housing options. Ultimately, it creates benefits for our environment, developers and residents.

 

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