Roundtable Recommends Solutions to Ease Compliance with Labor Rules for IRA Tax Incentives

Workers on sustainable energy project on rooftop of building

The Real Estate Roundtable submitted comments this week encouraging the Treasury Department to provide a compliance “safe harbor” to streamline labor-related requirements necessary to seek “bonus” tax incentives for clean energy building projects under the Inflation Reduction Act (IRA). (Roundtable comment letter, Oct. 30)

Prevailing Wage and Apprenticeship Compliance Burdens

  • The Roundtable letter notes that the IRA’s objective to support retrofits and slash carbon emissions in the built environment will be undermined if the costs of labor compliance far exceed the incentives offered by Congress.
  • The comments explain that wage and apprenticeship compliance burdens would dis-incentivize businesses and taxpayers’ to pursue the IRA’s clean energy bonuses, thereby rendering the bonus credits program illusory in many cases.
  • The letter also emphasizes that a regulatory solution to ease the IRA’s paperwork burdens would spur more clean energy projects in buildings—and encourages Treasury/IRS to conduct its own thorough cost-benefit accounting of Prevailing Wage/Registered Apprenticeship (PW/RA) Requirements before issuing a final rule.

 Contractor Compliance Certifications Sought

rooftop heat pumps with solar panels in the foreground.
  • The “safe harbor” recommendation by The Roundtable would allow building owners/developers to rely on written certifications provided by their General Contractors (GCs), or any other subcontractors (subs), would confirm and fulfill all PW/RA labor requirements.
  • This streamlined approach would reduce the compliance burden and retain the fervor that IRA tax incentives could generate under the IRA. Real estate owners and developers are not the direct employers of electricians, plumbers, HVAC technicians, solar technicians, EV charging installers, or any others that construct or retrofit buildings. GCs and subs directly employ manual laborers.
  • The Roundtable also recommends regulators develop “Recordkeeping Requirements” for PW/RA compliance that reflect the reality of how laborers, mechanics, and apprentices are employed on real estate projects, who is hired by whom, and how hours worked are tracked.

Other targeted tax reforms that will help scale real estate’s transformation toward zero emissions are recommended in The Roundtable letter. These include expanding Section 48 of the Code to building electrification technologies; allowing private owner transfers to unrelated third parties under Sections 45L and 179D; and repealing a Section 179D rule that reduces a property’s basis by the amount of the claimed deduction. (Roundtable comment letter, Oct. 30)

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New Federal Rules Issued Regarding Real Estate Construction, Clean Energy Projects

Housing Construction WorkerThe Biden administration issued two new rules this week impacting real estate construction and investments in clean energy projects. 

  • Davis-Bacon: The U.S. Labor Department on Tuesday issued a final rule to overhaul Davis-Bacon standards that determine prevailing wages for workers on construction projects covered by a federal contract or financially assisted by federal grants, loans, guarantees or insurance.
    • Construction association AGC issued a statement expressing “preliminary” concerns that “this rulemaking critically missed an opportunity” to inject “more accurate data” in processes to establish prevailing wage rates in local markets across the nation.
    • Laborers and mechanics constructing transportation, energy, water, toxic site clean-ups, and other infrastructure financially supported by the bipartisan Infrastructure Investment and Jobs Act (IIJA) must meet the new Davis-Bacon requirements. (IIJA project map)
    • Inflation Reduction Act (IRA) projects receiving clean energy tax incentives are not required to meet Davis-Bacon rules, but they can qualify for increased credits and deductions if workers are paid prevailing wages. (RER’s IRA fact sheets) 
    Solar installation workers

  • “Bonus” Tax Credits: The Treasury Department and IRS on Thursday released final rules explaining how IRA “bonus credits” can be awarded to solar, wind, and associated storage projects in low-income communities. (The Hill, August 10)
    • Qualifying projects in census tracts eligible for new market tax credits (NMTCs) can receive a 10% solar credit boost, while those supported by low-income housing tax credits or Section 8 rental assistance can receive a 20% solar credit increase. (RER’s IRA “bonus rate” chart)
    • The “bonus” incentives – over “base” rate tax credit amounts – are competitive. Bonuses will be awarded through an application process run by the U.S. Department of Energy scheduled to open this fall.

The Roundtable submitted comments in June when the IRS proposed the “bonus credit” program. (Roundtable Weekly, June 30). It will update its summary of IRA-related agency guidance following analysis of the newly issued rule.

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Monetizing Energy Credits: Roundtable Submits Recommendations to Treasury

U.S. Capitol

The Real Estate Roundtable submitted comments today on proposed and temporary tax regulations regarding the transferability and direct payment of clean energy credits under the Inflation Reduction Act (IRA) of 2022. (Roundtable comments, July 28)

 IRA Incentives 

  • Congress passed the IRA last August. The law significantly increases the size of existing tax incentives for energy-saving improvements to commercial real estate. Perhaps even more importantly, the legislation contained key reforms related to the transferability and direct payment of energy tax credits.

  • The reforms have made the incentives relevant to a large and previously untapped segment of real estate owners, including REITs, pension funds, and private foundations. The incentives include:

    • Tax-exempt real estate owners that invest in solar panels and other improvements can elect to receive direct payments from the Treasury in lieu of the expanded investment tax credit.
    • Taxable real estate owners, including REITs, can sell the credits to third parties for cash. 
    • The credit amount can range from 6% to 60% of the qualifying investment, depending on factors such as the size, location, domestic content, and wages paid to equipment contractors.
  • Roundtable comments submitted last year included recommendations on the IRA’s transferability provisions. On June 14, the Treasury Department and IRS issued proposed regulations to implement the provisions, as well as temporary regulations establishing a pre-filing registration process.

  • The IRS rules adopted certain Roundtable recommendations, such as the ability to divide and sell the credits from a single project to multiple transferees. Other recommendations, which would have maximized the value of the credits in mixed real estate partnerships involving taxable and tax-exempt partners, were rejected as contrary to the statute and difficult to administer.  

Energy Credits Monetization  

U.S. Treasury Building
  • Today’s letter from Real Estate Roundtable President and CEO Jeffrey DeBoer commends Treasury for providing greater clarity on its credit monetization mechanism and for laying out a rational process and timeline for property owners to claim and transfer credits or receive payments.

  • The Roundtable’s July 28 letter—developed by a joint working group of the Roundtable’s Tax and Sustainability Policy Advisory Committees (TPAC and SPAC)—also encourages Treasury to revisit the issue of mixed partnerships and asks for clarification that the credits are not “bad assets” for purposes of the 75% REIT asset test.

  • The credit monetization tools enacted in the IRA offer valuable new opportunities to access and raise capital for energy-saving improvements to commercial real estate. The deadline for comments to Treasury and the IRS is August 14, and final Treasury regulations are expected this year.  

The Roundtable’s Energy Credit Transferability Working Group will remain engaged with policymakers as the rules are finalized and implementation continues. 

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2023 Annual Report – Sustained Strength, Sustained Solutions

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    Roundtable, Nareit Critique Proposed International Standard for Building Emissions

    Greenhouse gas emissions

    As the buildings sector makes progress on reducing greenhouse gas emissions to meet global climate goals, The Roundtable and Nareit submitted comments today about proposed guidance that would create “unworkable and unattainable” standards. (RER-Nareit joint comments)

    Science-Based Targets

    • The real estate groups submitted their joint letter to the Science-Based Targets initiative (“SBTi”), a body with global influence. In May, SBTi released extensive draft guidance for companies in the buildings sector to set emissions reduction levels based on climate science. SBTi’s targets aim to achieve a goal of “net zero emissions” by 2050 in accord with the 2016 Paris Agreement administered by the United Nations.

    • The controversial draft guidance was developed by an advisory group comprised largely of academia and environmental organizations—with minimal representation from real estate developers, owners, and financial institutions. SBTi asked stakeholders to comment on its proposal, prompting the letter from The Roundtable and Nareit.

      SPAC Chair Tony Malkin and Vice Chair Ben Myers
    • A number of real estate companies use science-based protocols to establish portfolio-wide emissions reductions targets. The Roundtable convened a working group of its Sustainability Policy Committee (SPAC) to review and assess SBTi’s draft guidance. [Photo above: SPAC Chair Tony Malkin, left, (Empire State Realty Trust Chairman President and CEO) and Vice-Chair Ben Myers, right, (BXP Senior Vice President, Sustainability)]. Nareit conducted a similar process with its members. These efforts resulted in the organizations’ unified position.

    RER-Nareit Position

    • The Roundtable and Nareit seek a constructive dialogue with SBTi, as their letter explains. However, the real estate groups expressed concern that SBTi’s proposal would require building stakeholders to set emissions targets for sources and operations they do not control, based too heavily on estimates and speculation as opposed to actual and verifiable data.

    • Key points raised in the joint comments include:

      Nareit and Real Estate Roundtable logos
      • Building owners must have options to purchase off-site renewable energy when they set science-based targets. Real estate in dense urban areas faces major barriers to deploy solar panels and similar measures on-site, so owners should be encouraged to increase overall clean energy supplies for broader market availability.

      • There should be no categorical, across-the-board mandate to set emissions targets based on tenants’ energy use because building owners do not control operations in leased spaces. Nor do owners have general access to meter data showing how much energy a tenant uses.

      • Emissions goals should not require, in all circumstances, reporting on “embodied carbon” in materials. Manufacturers do not uniformly provide such embodied emissions data for the concrete, steel, and other products they produce—so building stakeholders should not be required to guess this information in their climate reports.

      • Full-blown building electrification is not practicable, feasible, or even desirable for occupants’ safety and comfort in all cases. SBTi should abandon its proposed ban on all new fossil fuel building installations starting in 2025.    

    Why It Matters

    SBTi logo
    • There is no mandate in the U.S. at the federal level for real estate companies to set science-based emissions targets. However, anticipated rules from the U.S. Securities and Exchange Commission are expected to require registered companies to report to investors on material climate-related financial risks. Those disclosures could include corporate efforts to reduce emissions following SBTi’s and similar standards. (Roundtable Weekly, March 17March 6 and June 10, 2022).
       
    • In addition, key aspects of SBTi’s proposal counter voluntary efforts underway at the U.S. Environmental Protection Agency and the U.S. Department of Energy that recognize advances in low-carbon buildings and portfolios. (Roundtable WeeklyMarch 3 and March 4, 2022)

    • Moreover, varying and often conflicting climate mandates on buildings are proliferating at the local level. (Roundtable Weekly, Dec. 9, 2022). SBTi’s proposed approach should not gain traction in regulatory building performance standards imposed by cities and states. 

    A final version of SBTi’s buildings sector guidance is expected this fall. The Roundtable will continue to track the issue, coordinate with Nareit and other allied groups, and educate policy makers as this matter develops. 

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    Roundtable Comments on Clean Energy Tax Credits for Low-Income Communities, Housing

    Low-income housing development in New Jersey

    The Real Estate Roundtable submitted comments today on a proposed rule from the IRS and Treasury Department regarding “bonus” tax credits for renewable energy investments in low-income communities, passed by Congress as part of the Inflation Reduction Act (IRA). (Roundtable Comment Letter, June 30) 

    Solar, Wind Bonus Credits 

    Roundtable Comments 

    RER chart on Section 48(e)
    • Treasury and IRS proposed a rule on June 1 to implement the low-income bonus program. Today’s comments from The Roundtable seek greater clarity and certainty for building owners that may access the bonus credits, raising the following points:

      • The bonuses are available only for solar or wind projects that generate under 5 megawatts of electrical output. The Roundtable requested a more straightforward rule for what constitutes a “single project” for purposes of this output threshold.

      • The IRA’s text requires that multifamily building owners must share “financial benefits” of renewable energy produced on-site with tenants. The Roundtable’s comments stressed that any such benefits should not depend on utility bill savings that accrue directly to tenants—because owners cannot measure, track or control energy consumption in sub-metered leased units.

      • Low-income housing supported by non-federal programs through state- and local-level housing finance agencies or public housing authorities should also be eligible for the IRA’s low-income bonuses.

      • The proposed rule would offer a preference, not based in the statute, for non-profit owners to receive bonus credit allocations. The Roundtable’s comments urge there should be no bias against business taxpayers to receive the bonus to further the Biden administration’s climate policy goals for rapid deployment of renewable energy investments in low-income communities.  

    • Future Roundtable comments on IRA topics are in the works. Feedback on a proposed rule to buy-and-sell certain clean energy credits is due August 14. In addition, proposed rules to implement the 179D tax deduction for energy efficient retrofits of commercial buildings are expected this summer. 

    Prior comments, information and summaries on The Roundtable’s advocacy efforts regarding clean energy tax incentives are available on our Inflation Reduction Act resources page and in Roundtable Weekly (Dec. 2, 2022 and Nov. 4, 2022).  

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    House Republicans Advance Tax Package, Biden Administration Proposes Rules for Energy Tax Credits

    Republican members of the House Ways and Means Committee approved their proposed tax legislative package along party lines this week, including measures on business interest deductibility, bonus depreciation, and opportunity zones. (Tax Notes, June 14 | Ways and Means Committee, June 13 and Roundtable Weekly, June 9)

    Tax Measures and CRE

    Roundtable Chair John Fish with Jeffrey DeBoer and House Ways and Means Committee Chairman Jason Smith (R-MO)

    • On Wednesday, Ways and Means Committee Chairman Jason Smith (R-MO), Committee Member Brad Schneider (D-IL), and Ways and Means staff spoke with Roundtable Members about the tax measures and other issues at The Roundtable’s all-member Annual Meeting in Washington, DC during the Tax Policy Advisory Committee (TPAC) session. [Photo left to right: Roundtable Chair John Fish (Chairman and CEO, SUFFOLK), Roundtable President and CEO Jeffrey DeBoer, and Committee Chairman Jason Smith]
    • The three tax bills sent to the House floor for a potential vote next week contain $237 billion in business and individual tax cuts, financed by the repeal or modification of several energy tax incentives enacted in last year’s Inflation Reduction Act (IRA). However, differences in the GOP caucus and requests from some Republicans to include a boost in the $10,000 deduction cap on state and local taxes (SALT) could push a vote until after the congressional July 4 recess. Any Republican tax package passing the House would face significant opposition in the Democrat-controlled Senate and the White House. (Tax Notes, June 16)
    • The committee’s proposals relevant to real estate include:

    House Ways and Means Committee

      • Business interest deduction. The Build It in America Act would provide a 4-year extension (through 2025) of certain, taxpayer-favorable business interest deductibility rules that applied from 2018-2021. The proposal would allow more real estate businesses to operate under the general rules of section 163(j) and its preferable cost recovery schedules. (H.R. 3938 and summary)
      • Bonus depreciation.  H.R. 3938 also includes a 3-year extension (through 2025) of 100% bonus depreciation for qualifying capital investments, including equipment, machinery, and interior improvements to nonresidential property (“qualified improvement property”).  Bonus depreciation is 80% in 2023 and gradually phasing down. 
      • Opportunity Zones. The Small Business Jobs Act would establish special, favorable rules for investments in rural opportunity zones. It would also create a new and detailed information-reporting regime for all opportunity funds. (H.R. 3937 and summary)

    Energy Tax Credits Transferability

    Chicago evening

    • The Biden administration this week proposed rules on transferring clean-energy tax credits under the IRA. Treasury’s proposed guidance released on June 14 seeks to clarify numerous issues, including which entities would be eligible for each credit monetization mechanism, laying out the process and timeline to claim and receive an elective payment, and transferring a credit. (Tax Notes, June 15 |The Wall Street Journal, June 14 | IRS news release)
    • Secretary of the Treasury Janet Yellen stated, “The Inflation Reduction Act’s new tools to access clean energy tax credits are a catalyst for meeting President Biden’s historic economic and climate goals. They will act as a force multiplier, bringing governments and nonprofits to the table.” (CNBC and Treasury news release, June 14)
    • The Roundtable’s Tax Policy Advisory Committee (TPAC) and Sustainability Tax Policy Committee (SPAC) will analyze the impact of the transferability rules on commercial real estate for potential comments on the proposed rulemaking. SPAC’s meeting on Wednesday during The Roundtable’s Annual Meeting included a presentation about an online marketplace for exchanging such tax credits.

    Climate Disclosure RegsSEC logo - image

    • Separately, the Securities and Exchange Commission (SEC) expects to issue new climate disclosure rules by October, a year later than the original target date. The new date was included in a SEC rule-making agenda and schedule released on Tuesday.
    • Legislation to constrain future SEC disclosure requirements was reintroduced this week by Sen. Mike Rounds (R-SD) and nine of his Senate colleagues. The bill includes language stating that an “issuer is only required to disclose information in response to disclosure obligation adopted by the Commission to the extent the issuer has determined that such information is important with respect to a voting or investment decision regarding such issuer.” Rep. Bill Huizenga (R-MI) is sponsoring a version of the bill in the House. (Sen. Rounds news release and Politico Pro, June 15)

    The Roundtable’s SPAC will continue to track any developments related to the SEC’s forthcoming rule on climate reporting, including its proposal for sweeping disclosures on Scope 3 GHG emissions affecting CRE. (Roundtable Weekly, March 10) 

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    Federal Appeals Court Strikes Local Natural Gas Ban on New Construction

    San Diego G&E natgas pipeline

    A federal appeals court on Monday struck a local law that banned natural gas hook-ups to new buildings. (Wall Street Journal, April 17 and AP News, April 18)

    State and Local Gas Bans

    • In California Restaurant Ass’n v. City of Berkeley, the Ninth Circuit Court of Appeals ruled that a Berkeley, California ordinance was illegal because federal law “preempts” local building codes that try to prohibit stoves, furnaces and other appliances that use natural gas. (Politico E&E News, April 18).
    • Dozens of cities including New York, Washington, D.C, Los Angeles, and Chicago—and the states of California, Colorado, Maryland, and Washington—have passed building electrification mandates requiring new construction to install expensive heat pumps and other electric equipment for heating, cooling, and cooking.
    • New York Governor Kathy Hochul (D) has proposed a similar statewide ban on natural gas furnaces as a way to fight climate change. (Bloomberg, Jan. 23)

    Impact of Court Ruling

    Ninth Circuit Court of Appeals

    • The Ninth Circuit’s reasoning will likely prompt federal preemption challenges and may pose a “chilling effect” to similar state and local building decarbonization laws. (E&E News, April 18). Yet, environmental advocates maintain that the ruling is limited in scope and will not call into question other gas bans. (POLITICO, April 18)
    • Meanwhile, about 20 states have gone the other way with “bans on bans.” These laws would prohibit their cities and municipalities from stopping natural gas distribution and requiring all-electric new buildings.
    • “States and localities can’t skirt the text of broad preemption provisions” in a law passed by Congress to address the 1970s energy crisis, Judge Patrick Bumatay wrote for the Ninth Circuit’s unanimous opinion.

    As its next litigation option, the City of Berkeley might ask for a fuller panel of Ninth Circuit judges to uphold its ordinance. The Roundtable will continue to monitor how local natural gas bans and related building performance standards impact federal-level policies that address real estate’s role to help tackle climate change. (Roundtable Weekly, March 3 and Jan. 20)

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    Roundtable Comments on EPA’s Proposed Voluntary Label for Low-Carbon Buildings

    EPA NextGen logo

    The Real Estate Roundtable submitted comments to the U.S. Environmental Protection Agency (EPA) yesterday on the agency’s proposed voluntary label for low-carbon buildings. (Roundtable letter, March 2)

    Voluntary Building Label

    • EPA’s NextGen building label would expand upon the agency’s successful ENERGY STAR program for assets that attain high levels of energy efficiency.
    • The NextGen label would allow companies to highlight buildings that go beyond top efficiency performance—and further rely on renewable energy use and reduce their greenhouse gas (GHG) emissions. (EPA’s proposal and Roundtable Weekly, Jan. 27)
    • NextGen recognition has great potential for widespread market acceptance, The Roundtable stated in its comments.
    • EPA’s proposed program could create a uniform, voluntary federal guideline to simplify the confusing patchwork of city and state climate-related building mandates that exists across the country. (EPA Policy Brief, Jan. 19; Roundtable Weekly, Jan. 20)
    • EPA staff discussed its NextGen proposal with The Roundtable’s Sustainability Policy Advisory Committee (SPAC) at the “State of the Industry” meeting in January. (SPAC slide presentation)

    Roundtable Recommendations

    SPAC Chair Tony Malkin and Vice Chair Ben Myers

    • The Roundtable’s SPAC, chaired by Tony Malkin, above left, (Empire State Realty Trust Chairman President and CEO) and vice-chaired by Ben Myers, right, (BXP Senior Vice President, Sustainability), convened a working group to develop the comments submitted to EPA.
    • The Roundtable stated that NextGen recognition criteria “must be grounded in financial performance that offer building owners reasonable returns on their investments.”
    • The Roundtable’s comments suggested refinements to improve EPA’s proposed components, including:
        

      • Efficiency:
        Significant and demonstrated reductions in a building’s energy use should be eligible for the NextGen label (as an alternate, additional criterion to EPA’s proposal that only ENERGY STAR certified buildings could qualify).
      • Renewable Energy:
        The NextGen proposal would require that 30% of a building’s energy use must derive from renewables. The Roundtable recommends that the level should start at 20% and adjust over time to reflect the changing status of the electric grid as it decarbonizes through increased reliance on solar, wind, and other clean power sources.
      • GHG Reductions: 
        The Roundtable supports EPA’s proposal for a GHG “intensity target” that reflects a building’s unique weather conditions by a factor known as heating degree days (HDD). The Roundtable worked closely with EPA in the pre-pandemic era to consider HDD as a key variable in the underlying ENERGY STAR building score process. (Roundtable Weekly, July 19, 2019)
      • Renewable Energy Certificates (RECs):
        The Roundtable explained that voluntary NextGen recognition can provide much-needed guidance on corporate accounting for REC purchases and enhance credible claims on the environmental benefits from offsite clean power procurement.  

    The Roundtable further advised EPA that it should conduct a pilot of the low-carbon label with private and public building owners before broad release to U.S. real estate markets. EPA intends to make the NextGen label available in 2024.

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    EPA Invites Comments on Proposed Label for Low-Carbon Buildings

    EPA NextGen Certified Building logo

    The Environmental Protection Agency (EPA) opened a comment period this week on its proposed ENERGY STAR NextGen certification, a voluntary public-private partnership program that would recognize low-carbon buildings. (EPA’s NextGen webpage)

    NextGen Criteria

    EPA's NextGen criteria slide

    1.)   Demonstrate High Energy Efficiency
    Building is ENERGY STAR certified and has a score of “75” or higher on EPA’s rating scale. 

    2.)   Renewable Energy Use
    Building must obtain at least 30% of the total energy it consumes from renewable sources through any combination of (a) onsite renewable generation, (b) renewable energy certificates (not “offsets”), (c) biofuels or other renewable fuels, or (d) renewable thermal certificates. 

    3.)   Onsite Emissions Target
    Building must meet a greenhouse gas emissions target unique for its asset class that is also “normalized” by regional weather conditions through a metric known as “heating degree days.” 

    Next Steps

    EPA NextGen slide - next

    • Comments are due to EPA by March 2. (Comments Submission Form).
    • SPAC has formed a working group to develop The Roundtable’s comment letter

    EPA aims to make ENERGY STAR NextGen certification available in early 2024.

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