The Inflation Reduction Act (IRA) changes the rules for real estate investment trusts (REITs), allowing them access for the first time to a wide range of tax credits for investment in sustainable energy.
The potential for the ability to transfer — essentially sell — benefits of the Investment Tax Credit is “a big change, a really big change,” says Michelle German, Vice President, ESG for LBA Realty, a private REIT that owns and operates office and industrial buildings in major markets across the United States. For Catalyst, German and Chief Operating Officer Perry Schonfeld discussed the IRA’s potential impact on their business.
What effect do you think the IRA will have on your business?
Michelle: From a private REIT perspective we’re focused in two areas — the solar and the EV credits. We can potentially monetize those credits now, whereas before it was much more difficult. We’re still in the exploratory phases of how this will be functionally implemented into our company, as many of the regulations have yet to be released by Treasury.
Do you feel like it’s going to move the needle?
Perry: We’ve been doing this many years, but we have always been constrained on what we can do as a private REIT. Now there is the potential to frame this in a more macro spectrum where these tax credits could find a secondary market, which could be an accelerant. We’re investing capital money in the normal course of business and of value. This provides us a potential avenue to monetize.
Michelle: For companies who aren’t as far along in their ESG journey, it could be a needle mover. They may view ESG and conclude it’s just an added cost. Going forward, there’s potential money on the table to help offset their project costs.
For companies who aren’t as far along in their ESG journey, it could be a needle mover… Going forward, there’s potential money on the table to help offset their project costs.
What are the key elements for you?
Perry: For us, the elements that have the most impact are the ones that are of value to the tenants and their employees. Sustainability becomes a value-add to their respective businesses.
Michelle: Historically, we couldn’t capitalize on the credits as a REIT. What’s very new in the IRA is the potential ability to monetize these credits. We’re able to sell them to a third party who can monetize the tax credit, which will allow us to participate in the tax benefit and increase the business case for solar.
For example, when you’re installing solar on your roof you can take 30% off the top of the project cost with the federal tax incentive. Previously, as a private REIT, we have not been able to utilize this incentive without intricate structuring through a taxable REIT subsidiary, which was of little benefit. With the new IRA legislation, we may be able to benefit from this tax incentive to a much greater extent.
Are tenants asking for this?
Michelle: We are seeing tenants asking for this. This is coming up a lot more in all different types of deal structures, either tenants paying for the solar or they’re looking to us for assistance. The focus on our customer side has greatly increased from just last year.
Perry: I would add that it’s not just tenants. It’s joint venture partners, equity capital and lenders. This entire area has become a risk-mitigation element. If you don’t embrace this, it could impact you on the asset exit. It’s generally a positive move in the right direction, and it’s important for the ESG movement.
Read more about the IRA’s impact on the building industry in “New Incentives.”