For years, REITs watched from the sidelines as other industries reaped the benefits of clean energy tax credits. Without sufficient tax liability to take advantage of these incentives, many property owners were effectively locked out of this source of capital for project finance. 

But that’s all changed. Thanks to legislation changes, REITs can now cash in on these valuable tax credits — potentially unlocking up to $500,000 in benefits per $1M invested — even if they don’t have the tax liability to use those credits directly.

Here’s how:

The Evolution of Clean Energy Tax Credits

Clean energy tax credits have been around since 2006, traditionally enjoying bipartisan support. However, as noted above, commercial real estate entities like REITs historically couldn’t capitalize on these tax credits due to their tax profiles. Fortunately, the game-changing Inflation Reduction Act (IRA) of 2022 dramatically expanded the scope and accessibility of clean energy tax credits. 

The most significant change was the introduction of transferability, which allows clean asset project owners to sell their tax credits directly to other parties with significant tax liabilities, like corporate entities. This is a particularly valuable option for REITs and other commercial real estate owners who might not have sufficient tax liability to utilize these credits themselves.

Why This Matters for Commercial Real Estate

The commercial and industrial (C&I) solar market is experiencing unprecedented growth, with projections showing 2-3 GW of new solar installations annually over the next five years. This growth is driven by several factors:

• Installation costs have dropped 75% in the last 15 years
• Natural disasters and growing electrical load requirements have increased demand for on-site power solutions
• Grid capacity constraints in urban areas are making on-site generation more attractive
• The combination of solar with battery storage is becoming more common

For commercial real estate, this growth can translate into a number of benefits. Forward-thinking REITs who invest in clean energy can get up-front financing for these projects, and then sell their tax credits (with no tax on the proceeds). Buyers of these tax credits get an immediate return as they’re traded at a discount, and the tax credit purchase can help meet investor ESG goals. 

Making Tax Credits Work for Your Property

The process of monetizing tax credits has become significantly more streamlined thanks to the passing of the IRA. Here’s what commercial real estate owners need to know:

1. Size Flexibility: Projects no longer need to be massive to qualify. Even smaller installations generating $50,000-60,000 in tax credits can now find buyers in the marketplace.
2. Financial Impact: Tax credits typically cover 30-50% of the installation costs. For example, a recent REIT project costing $1.6 million received approximately $400,000 in cash through tax credit transfers — a significant offset to their initial investment, and proceeds they could then use to further their sustainability program.
3. Risk Management: While there is a five-year “recapture” period during which the IRS can potentially claw back credits, recapture is incredibly rare. The total tax credit value at risk of recapture decreases by 20% each year and can be mitigated through proactive maintenance and clean documentation.

Best Practices for Success

To maximize the value of clean energy investments, commercial real estate owners should:

• Prioritize properties with high electricity rates and favorable state incentives
• Establish clear internal processes for project approvals
• Identify potential deal-breakers early (such as planned property sales or tenant concerns)
• Partner with experienced owner’s representatives to navigate the complex landscape
• Consider working with platforms that specialize in tax credit transfers

Clean Energy Tax Credits: Looking Ahead

Despite some political uncertainty, the outlook for clean energy tax credits appears to be stable, with many projections expecting significant acceleration in participation, especially given the ramifications of Basel III on tax equity financing. The program’s benefits are written into law and would require congressional action to change. Moreover, many of these incentives have strong bipartisan support in the U.S., particularly in states that have benefited significantly from clean energy investments.

For commercial real estate owners and investors considering solar installations, the time to act is now. Projects that begin construction under current rules are typically safe-harbored against future changes, providing a degree of certainty for those ready to move forward.

The combination of transferable tax credits, declining installation costs, and increasing tenant demand for reliable power has created an unprecedented opportunity for commercial real estate owners to benefit from clean energy investments. By understanding and utilizing these incentives effectively, property owners can significantly offset their initial investments while contributing to a more sustainable future.