What is it?
In August 2022 as energy costs soared, the Inflation Reduction Act was signed into law. It is the world’s largest investment in fighting climate change.
Of the $740 billion investment, $369 billion is earmarked to advance climate change initiatives.
The goal of these initiatives is for the US to reduce greenhouse gas emissions by 40% by the year 2030.
The president of the American Council on Renewable Energy claims, “We have never had policy in the United States that was actually geared to drive the transition to clean energy and address the climate crisis. And we’re looking now at a measure that is up to the task.”
The strategy is multi-pronged and includes energy-efficiency rebates, tax credits for retrofits, state funding to adopt building energy codes, tax credits for electric vehicles, and the promotion of clean energy options so they’re more accessible to consumers, including training a workforce to manufacture alternatives to fossil fuel (like solar panels and wind turbines).
Our Role and Responsibility
The real estate industry is driving 40 percent of the world’s carbon dioxide emissions. In the U.S., homes (including multifamily properties) are responsible for 20 percent of the country’s greenhouse gases.
The Inflation Reduction Act offers a bounty of incentives and opportunities for the real estate industry. $4.3 billion is earmarked for retrofitting existing properties with energy-efficient options. A portion of the Home Owner Managing Energy Savings (HOMES) rebates will be available for owners of multifamily properties to retrofit their units or buildings. Among the energy-efficient options are water heaters, HVAC systems, clothes dryers, heat pumps, service panel upgrades, windows, and insulation.
Properties might be eligible for $2,000 per unit, and more depending on the modeled energy savings. For low- and moderate-income buildings, these figures increase to $4,000 and $8,000 per unit, respectively.
Sustainability and Your Portfolio
Today’s tenants actively seek out sustainability and energy efficiency. Furthermore, sustainability is now an important criterion in real estate investment. Now is a good time to mention environmental, social, and governance (ESG) criteria, defined by Investopedia as “a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.”
According to RetrofitMagazine.com, owners who invest in climate-friendly buildings see higher rents and NOI. In fact, Barron’s 10 most sustainable REITs had an average dividend yield nearly 1 percent higher than their peers in the S&P 500.
The Bottom Line
Tax incentives are one component of the new law’s climate package. In addition, the law makes available tens of billions of dollars in rebates, grants, low-cost loans, and other forms of financing. The core components of the new law, specifically clean energy tax incentives and investments will remain in effect for at least 10 years. And throughout 2023 we can expect to see further announcements with new details to be introduced.
