Many developers are facing financing challenges this year, reporting a growing number of projects that have been stalled or canceled because of a lack of funding. In most cases, high interest rates, falling demand for commercial office space, and continued high costs for materials and labor are to blame.
As a nonprofit that works with developers and other stakeholders to increase the sustainability of new and existing buildings, Southface Institute has identified solutions that have both environmental and financial benefits. The two biggest opportunities, operational efficiency improvements and building performance upgrades that are eligible for newly expanded federal incentives, create short- and long-term value that counteracts rising costs.
Operational efficiency
Operational efficiency is easy to deprioritize when an owner does not intend to hold onto a building for long. But for those who intend to own buildings for more than five years, investing in higher performing building envelope and mechanical systems is a major opportunity. The payback periods for these investments are much shorter than they were several years ago and serve to hedge against rising utility costs.
These greatly reduced operational costs can increase the net operating income from a project, and in some cases, they can even be capitalized to add upfront value to a project. Low air leakage rates, high insulation specifications, and mechanical systems that use heat pump technology are often worthwhile investments. Passive improvements like these can enable smaller (and therefore lower cost) mechanical systems, creating value above and beyond the ongoing savings of resource efficiency.
Federal incentives
The 2022 Inflation Reduction Act renewed and expanded tax credits and deductions, which has further enabled sustainability to be the answer to the question of where to find value for new buildings. The three programs that should be on every developer’s radar are the Section 179D tax deduction, the Section 45L tax credit, and the Greenhouse Gas Reduction Fund.
Commercial buildings or multifamily buildings over three stories that fall under the commercial energy code (ASHRAE 90.1) are eligible for the § 179D tax deduction, which now offers up to $1.00 per sq. ft. depending on performance. Meeting prevailing wage and apprenticeship requirements can quintuple the payout, up to $5.00 per sq. ft. For a 50,000 sq. ft. conditioned building, a 50% improvement over ASHRAE 90.1-2019 can mean $250,000 in tax deductions for builders offering prevailing wages and apprenticeships.
For multifamily buildings achieving ENERGY STAR Multifamily certification, the § 45L tax credit now offers up to $2,500 per unit if meeting prevailing wage and apprenticeship requirements. Achieving EPA’s Zero Energy Ready Home certification doubles the credit to $5,000 per unit for projects offering prevailing wages and apprenticeships. A 120-unit multifamily residential development can add $300,000 to $600,000 of value to the project with this tax credit.
In Atlanta, Southface is working with Atlanta Housing, The Republic Family of Companies, The Michaels Organization, and Sophy Capital to integrate parts of these tax incentives into their Civic Center redevelopment plan. Southface is similarly consulting with Pennrose on the Herndon Square II mixed-income rental community.
Another important change with the Inflation Reduction Act is that nonprofits, schools, and other entities that are exempt from federal taxes can now benefit through a direct-pay mechanism that treats eligible credits as a payment of tax, resulting in a refund of the total credit amount. This can add substantial value that did not exist for exempt entities only two years ago.
Lastly, EPA’s Greenhouse Gas Reduction Fund was awarded to three nonprofits in April 2024 to establish financing and programs to assist projects delivering high-impact environmental and community benefits. Per the EPA, Climate United Fund, a nonprofit formed by Calvert Impact, Community Preservation Corporation, and Self-Help Ventures Fund will, among other things, “develop customized financing solutions to make critical decarbonization projects a reality.” As these solutions are developed, Southface finds that this financing is a powerful enabler for projects serious about sustainability.
In a high-interest-rate development environment, stakeholders may be quick to dismiss sustainability as an optional and costly endeavor. But with operational savings and lucrative federal incentives, developers increasingly recognize that sustainability is a win-win solution to projects seeking to add value, make budgets work, and soon, break ground.
Learn more about working with Southface to maximize the sustainability and value of your commercial, residential, or mixed-use project.
Article originally posted by SaportaReport and written by Southface Staff
