The energy-related provisions of the American Recovery and Reinvestment Act of 2009 (ARRA) include several tax and other financial incentives that can be utilized by commercial real estate developers, property owners, and investors, including hotels, resorts, retail centers, and commercial office complexes and campuses. 

GENERAL TAX INCENTIVES

Two provisions of ARRA with broader applicability to members of the real estate industry are changes in the tax law regarding accelerated depreciation for certain capital expenditures and the carryback of net operating losses for small businesses.

  • Accelerated capital expenditure depreciation. One of the most significant provisions of ARRA for commercial property developers and owners is the accelerated capital depreciation for capital expenditures incurred in 2009. This provision will allow businesses to immediately write off 50 percent (50%) of the cost of depreciable property. Thus, assuming the availability of funds, commercial property owners who anticipate the need for capital expenditures for their projects within the next few years may wish to incur those expenditures this year in order to benefit from the accelerated depreciation. This provision is not limited to energy-related capital expenditures, yet it provides an additional financial incentive for commercial property owners to consider purchasing and installing on-site renewable energy facilities such as solar panels or fuel cells, or retrofitting buildings to improve their energy efficiency.  
  • Five-year carryback of net operating losses for small businesses (NOLs). NOLs typically may be carried back two years before the year that the loss arises. ARRA extends NOLs for tax year 2008 to five years for eligible small businesses, defined as businesses with gross annual receipts of $15 million or less. Extending NOL carrybacks to five prior years allows such businesses to spread their losses over a higher number of years, including those before the recession when they may have earned larger profits. This provision permits small businesses with losses to invest tax savings generated by increased NOL carrybacks in worthwhile expenditures of any nature, including on-site renewable energy facilities such as solar panels or fuel cells, or retrofitting buildings to improve their energy efficiency.

ENERGY-SPECIFIC TAX INCENTIVES

Provisions of ARRA affecting the Section 48 investment tax credit will be of interest to commercial real estate owners contemplating investments in qualifying equipment for energy production and energy conservation.

  • Elimination of the basis-reduction requirement for Section 48 investment tax credit (ITC) energy equipment. The Section 48 ITC is either thirty percent (30%) or ten percent (10%) of the basis of qualifying property, depending on the technology used, and is claimed in the year the property is placed in service. Qualifying property includes qualified fuel cell property; solar equipment that generates electricity, heats/cools a building or hot water, or illuminates the inside of a structure using fiber optic distributed sunlight; and qualified small wind energy property. Previously, the Section 48 ITC had to be reduced if property qualifying for the credit was financed with tax-exempt private activity bond proceeds or any other federal, state, or local subsidized financing program. ARRA eliminates this limitation, thereby allowing the amount of the Section 48 ITC to be computed on the full basis of the qualifying energy equipment, even when other forms of subsidized financing are utilized to fund the cost of the equipment.
  • Treasury Department grant in lieu of Section 48 ITC and Section 45 Production Tax Credit (PTC). For owners that cannot take full advantage of the Section 48 ITC or the Section 45 PTC, a company can apply for a Treasury Department grant in lieu of the relevant tax credit to defray the equipment costs. In order to qualify for a grant, the energy equipment must generally be placed in service in 2009 and 2010, or construction must begin in those years and be completed prior to the relevant credit termination date for the equipment. The grant amount is equal to thirty percent (30%) of the basis of qualified fuel cell property; solar equipment that generates electricity, heats/cools a building or hot water, or illuminates the inside of a structure using fiber optic distributed sunlight; and qualified small wind energy property; as well as technologies that generally qualify for the Section 45 PTC: wind, closed-loop biomass, open-loop biomass, landfill gas, waste-to-energy, hydropower, and marine renewable facilities. The grant amount is equal to ten percent (10%) of the basis of qualified geothermal, microturbine, combined heat and power, and geothermal heat pump property. Federal, state, or local governments, and non-profit organizations are ineligible for the grants.

ENERGY LOAN GUARANTEES AND GRANTS

Other provisions of ARRA of potential interest to some members of the real estate industry include those that create new loan guaranty and grant programs and fund an existing grant program.

  • Department of Energy "rapid deployment" renewable energy loan guarantees. ARRA includes $6 billion in "rapid deployment" loan guarantees for renewable energy systems. Recipients must be entities borrowing to develop/construct projects using current commercial technology. To be eligible, construction for such systems must commence not later than September 30, 2011.1
  • Smart Grid Demonstration Project Grants. ARRA provides financial support for smart grid demonstration projects, including up to fifty percent (50%) of the cost of qualifying advanced grid technology investments made by qualifying entities to carry out a demonstration project. Such grants can be used to install smart metering technology that can allow energy consumers to track electricity usage and prices in real time, as well as to participate in demand response programs that reduce energy costs not just through conservation, but also through special rates or payments received for participating in such programs. Grants may go only to parties making the smart grid expenditures, which typically will be electric utilities, but commercial property owners can benefit from the resulting energy savings.
  • Energy Efficiency and Conservation Block Grants program. ARRA appropriates $3.2 billion (with $400 million held aside for competitive grants) to fund the Energy Efficiency and Conservation Block Grants program (implementing programs authorized under the Energy Independence and Security Act of 2007).2 Grant funds are allocated by formula to assist state governments (allocated 68% of funding), local governments (28%), and Indian tribes (2%)3 in implementing strategies to reduce fossil fuel emissions and total energy use, such as establishing financial incentives programs for energy efficiency improvements on private property. Real estate developers, investors, and owners should stay tuned for the establishment by the states of such incentive programs, as they may find the return on their energy efficiency improvements to be well rewarded by such incentives. Nonprofit institutions such as universities are likely to have the edge in obtaining such funds.

HOW REAL ESTATE DEVELOPERS, LARGE COMMERCIAL PROPERTY OWNERS AND INVESTORS CAN UTILIZE THESE PROVISIONS

Many hotels, resorts, office, and retail properties have begun to recognize the financial benefits of installing renewable energy equipment, along with the goodwill earned from reducing one’s carbon footprint, with the installation of solar panels, fuel cells, and other renewable/efficient energy sources. ARRA further sweetens the financial incentives to do so. There also are planning structures that can be utilized by developers and owners of commercial property to finance the cost of the renewable energy equipment from capital provided by third parties, such as a lessee of the property or a tax credit investor partner. Under these structures, the ITC generated from the installation of the equipment is passed through to the lessee or to the tax credit investor partner that provided the capital for the equipment. The lessee or tax credit investor can use the tax credits to offset current profits. In addition, many electric utilities and regional electricity markets have "demand response programs that reward customers that are able to rely on their own generation resources (such as solar or other renewables) rather than the grid, when demand is high; smart grid investments encouraged by ARRA can increase demand response participation by large commercial properties.

Ballard Spahr has advised clients on how to structure such deals, utilize the tax credits and loan guarantees that ARRA expands, and take advantage of utility demand response programs.

If you have any questions or would like to know more about how to apply for grants and loan guarantees, or how to qualify for credits or utility demand response programs, please contact:  Mark R. Maichel (maichelm@ballardspahr.com; 303.299.7335); or Daniel R. Simon (simond@ballardspahr.com; 202.661.2212.

1   ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects supported by these loan guarantees.

2   ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects funded directly by, or assisted in whole or in part by and through, the Federal Government under ARRA. 

The remaining two percent (2%) of funds is distributed through competitive grants to public entities.


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