The federal government has acted to spur investment in renewable energy with the recently passed Inflation Reduction Act of 2022 (IRA) that allocates $369 billion toward energy and climate change projects. Substantial tax incentives are on the horizon for commercial real estate owners – including a 30% federal credit claimed against the tax liability of investors in solar energy projects. The benefits to property owners are real. Under the IRA, a system that costs $1 million to install will translate into a $300,000 federal tax credit, along with accelerated depreciation for the system itself. Some state and local benefits are also available in qualified areas. But owners looking to take advantage of these credits may find it far more complex than anticipated.
That's where a trusted partner can help. "When real estate portfolio owners hear about the tax incentives, it's a motivator to pursue solar energy and storage. And many naturally expect to harvest those credits directly. But given partnership tax and accounting rules, it's not always that simple. Most often there are more attractive solutions we can offer through a Power Purchase Agreement (PPA), which allow real estate owners to benefit from the IRA incentives with not upfront capital outlay," says Blair Herbert, chief executive officer of Coast Energy.
How Property Owners Can Reap Benefits
For owners who want to realize the benefits across their portfolio, using a partner can help. Groups like Coast Energy can use their scale to efficiently monetize tax credits on a portfolio-wide basis, structure systems across multiple properties and states and navigating the various state and local regulations and requirements to deliver comprehensive solutions.
"We partner with property owners to analyze their portfolio, identify which assets can benefit from solar energy and storage, and determine how to best optimize the investment and tax benefits," Herbert says, adding that Coast Energy itself isn't taking the tax credit. Instead, the company assembles an efficient mix of capital that includes a tax credit investor, debt financing, and private equity to fund solar projects at scale and deliver a comprehensive and economically attractive solution to commercial real estate owners.
This has potential impact for an owner's net operating income (NOI). Herbert cites a recent solar and energy storage addition in southern California that allowed the owner to realize a NOI increase of $110,000 per year at no cost to the real estate owner up front. "This is for a large office building, and it's not an anomaly," Herbert says. "That's a typical savings for the size of the building they have and the size of the project they were able to introduce."
In addition to navigating the tax code, companies like Coast Energy manage the system installation, optimization and maintain of the solar system and deliver long-term lower cost solar electricity under a Power Purchase Agreement (PPA).
Partnering for Broader Benefits
Commercial owners performing diligence on energy projects are often surprised to learn they can achieve higher NOI through those improvements as well. Owners can sometimes roll non-energy capital expenditures into their solar energy project financing, allowing them to execute on deferred maintenance or other capital improvements sooner than later.
Often we'll meet with a commercial real estate owner who happens to say 'Hey, I'm repaving my parking lot' or 'I have to replace my HVAC,'" Herbert says. "That's interesting because we can fold that into our financing and offset capital expenditures they might have coming up."
For these reasons and others, Herbert recommends working with a trusted advisor who can help navigate these challenges, and advise which assets in a portfolio are well-suited for solar power. "Rather than focus on specifically how the tax credits are captured, we advise commercial real estate owners to take a more sophisticated view on the long-term financial opportunities around solar, and choose the option that maximizes their portfolio value."
As the impact of the solar credits in the IRA become better known, owner interest in their benefits will become more widespread. Still, the challengers are myriad, and the right partner, such as Coast Energy, can help navigate this new world.
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