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45L Credit Extension Expands Clean Energy Possibilities for LIHTC Developers

Published by Brent R. Parker and Nick DeCicco on Friday, May 5, 2023

Journal Cover May 2023   Download PDF

Last year’s Inflation Reduction Act (IRA) and its nearly $370 billion in provisions for green energy endeavors included a 10-year extension of the Section 45L Energy Efficiency Home Credit. The extension provides a long runway for an incentive that previously was renewed on short-term bases.

That instability was sometimes a factor in whether developers would use the incentive when building low-income housing tax credit (LIHTC) properties. However, the biggest limitation in the use of Section 45L was the fact that, prior to the IRA, the credit would reduce LIHTC eligible basis. The IRA eliminates this reduction and allows properties to be able to earn Section 45L credits without a corresponding reduction in LIHTC eligible basis.

The extension also upgraded the standards for energy efficiency. The new bar is Energy Star or the U.S. Department of Energy Zero Energy Ready Home (ZERH) Standards. Properties built to qualify for Energy Star standards could garner between $500 and $2,500 per apartment depending on whether they are paying prevailing wage. Properties built to qualify for the ZERH standard could earn between $1,000 and $5,000 per apartment depending on whether they pay prevailing wages. Prior to the IRA, the legislation provided a maximum of $2,000 per apartment in tax credits under the previous Energy Star standards.

The credit applies to new single-family, multifamily and manufactured homes, as well as existing homes that undergo a deep retrofit. Homes and dwellings certified to meet ZERH standards must clear a higher bar. While prior to the IRA, for properties to qualify for the Energy Star Section 45L credit, they could be no more than three stories tall, the new standards do not include this Energy Star limitation for the $500/$2,500 credit. However, the ZERH standards do appear to include a limitation, at least applicable to 2023, wherein properties cannot be taller than five stories to qualify for the $1,000/$5,000 credit.

The IRA extended the previous Energy Star credit through Dec. 31, 2022, and the new Energy Star and ZERH credits apply to projects that qualify between Jan. 1, 2023, and Jan. 1, 2033.

There’s no application process to use Section 45L credits. It is an as-of-right credit, provided developers qualify, which would typically include consulting with a Section 45L consultant and evaluator early in the process. Many states and local municipalities already require dwelling units to comply with Energy Star or greater thresholds so the marginal added cost to generate credits would be de minimis compared to the benefit.

Those curious as to whether their property might qualify or are interested in the possibility should speak with a tax professional and find a 45L evaluator prior to development, if possible. The credit is earned immediately, upon placement into service, and allocated to owners of the property partnership or LLC in the same year. As such, it is important to determine what credit you plan to be eligible for, contact a tax credit professional, and begin discussions with investors to maximize the benefit to your property.

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