Unlocking Inflation Reduction Act's Financial Incentives for Renewable Energy in Co-ops and Condos

The financial incentives the Inflation Reduction Act (IRA) offers to help co-ops and condos fund electrification projects are real. But at the moment, very few boards are poised to get them — or even understand how to get them. Victor Roggia, the board president of the 14-building, 726-unit Queensview Co-op in Astoria, which has refinanced its underlying mortgage and embarked on a major energy reduction path, says: “I’ve thought of, or tried to think about, just about anything we could do. Every time someone brings the IRA up, I’m like, ‘What is that?’ I know the law was passed, but how it’s going to trickle down to a place like this — no idea. None whatsoever.”

The benefits will begin to trickle down this year, and pick up steam in 2025. “The Inflation Reduction Act provides mechanisms for direct financial rebates, allows for the distribution of tax credits to shareholders and even enables the innovative sale of these credits to external investors,” says Carl Cesarano, a principal at the accounting firm Cesarano & Khan. “Each of these options carries its own set of benefits and challenges, highlighting the importance of strategic planning in navigating the incentives offered by the IRA for clean energy investments.”

What follows is a primer on the major incentives offered by the program, and some considerations each requires. 

Tax Credits

Signed into law in 2022 (and in effect for 2023), the IRA includes more than 20 new or modified tax incentives. Tax credits, which can be used when an individual files personal taxes in April, have been around for a few years, but the IRA has boosted them. Two of the new benefits include increases in the tax credit for certain energy projects and in the maximum amount of the credit an individual can use. These benefits can be found in Sections 25C and 25D of the Internal Revenue Code. 

For co-ops and condos that have never taken advantage of these types of credits, it’s fairly simple to do so. The cost of any energy project that qualifies (and you’ll find this in Sections 25C and 25D) can be apportioned out to all shareholders according to their proportionate interest in the corporation. These new credits will have to be itemized in the annual tax deduction letter prepared by your co-op’s accountant and distributed to shareholders. The familiar 1098 form that cooperators get every year doesn’t have a spot for energy credits.  Condos that qualify for these credits will probably get a separate letter detailing them from either the managing agent or the accountant. 

Direct Payments

In addition to tax deductions, the IRA is providing direct payments “for specific items like electrical upgrades to apartments, heat pumps and electric panel replacements,” says Thomas Morrisson, the director of energy management at En-Power Group. “There’s a whole number of things that have an itemized dollar for specific funding. I think the big story is really when you see the electrification rebate: $4,000 for an electrical panel, $840 for an electric stove, $2,500 for electric wiring, and $8,000 for heat pumps. That’s real dollar-for-dollar money that is going to be made available to cooperators and condo owners, where that type of thing had only been for single-family homeowners.”

The Department of Energy has allocated IRA funds to each state. As of February 2024, four states, including New York, had applied for the funds. New York’s allocation is expected to be around $318 million, and the funds will be distributed through NYSERDA. The two programs being funded are the Home Efficiency Rebates (HER) for $159.3 million and the Home Electrification and Appliance Rebates (HEAR) for $158.4 million. According to a spokesperson, NYSERDA hopes to make the initial phase of HEAR available this summer, with additional HEAR and HER rebates to become available in subsequent phases. 

Selling Credits for Cash

Tax credits and cash rebates are easy to understand, but the third benefit, the sale of credits to third-party investors, is more complicated. “This approach facilitates the conversion of these credits into liquid funds, with the co-op or condo board receiving the proceeds minus a nominal fee,” Cesarano says. “This could offer a more equitable solution for sharing the financial rewards of clean energy improvements among all residents.” 

While the majority of the credits that can be transferred include projects that are not within a co-op or condo’s realm, such as zero-emission nuclear power production or production of clean hydrogen, the IRA has made the installation of solar, energy storage (batteries) and electric vehicle charging stations a transferable credit. That process involves finding a broker, who in turn will find a buyer. It also involves a lot of documentation that needs to be reviewed or “diligenced,” says Ben Ullman, the founder and CEO of Common Forge, a tax credit transfer platform. There are many rules governing this process, Ullman says, and one of the distinctive ones is that the project needs to remain in the project owner’s hands and be operational for a five-year period. If it doesn’t, the IRS can take back or “recapture” the tax credits claimed and penalize the entities that used these credits on their tax returns. Buyers are risk averse, Ullman says, and want protection against those claims to ensure that their 10%-12% tax bill savings are not clawed back. To insure against this possibility, he adds, most transfer of tax credits will include either the purchase of an insurance policy called recapture insurance or indemnities or guarantees provided by the seller.

If your building has a project that qualifies, the transaction timeline is between four and twelve weeks. Ullman says a small project can expect to recover between 80% and 85% of the value of its tax credits through a sale to a third party. The tax credits can be worth between 30% and 50% of a project’s costs, depending on several factors such as location, resident incomes and project equipment sourcing. “Co-ops and condos are actually a great asset class,” he says, “because a lot of the recapture rules are very much about not selling or foreclosing on the asset within the first five years of a project’s operations. Insuring against that risk can be difficult at small projects, but since the co-op or condo building is not going to get sold, these projects are great candidates for transfers.”

Despite being considered a good asset class, the tax credits generated in most co-ops and condos will be relatively small within this marketplace. For buyers of these credits, Ullman says, there’s a dollar-per-headache cost. It takes about the same amount of time to review a small project as it does a large project, so it might make sense for several co-ops or condos to band together, agree to the same terms and then go to market. This could happen under the umbrella of a contractor, a lawyer, a management company or any entity that can aggregate a group.

SIDEBAR

Be Aware: IRA Wrinkles 

Communicate. Because IRA credits are in their early days, the communication process necessary to highlight a project that is eligible for a tax credit isn’t yet established. Who will communicate what to your building’s accountant needs to be sorted out between energy professionals, managers and boards. You’ll want to make sure that this discussion occurs between these parties and that all projects are analyzed for potential tax benefits. If your accountant hasn’t been informed that one (or more) of your capital projects is an energy-efficient one that potentially qualifies for a tax credit under the IRA, he or she will not report it in the tax deduction letter.

Educate. If one or more of your projects qualifies for a tax credit to be proportionally distributed, understand that each shareholder or unit-owner may or may not be able to use it. It all depends on their personal circumstances. Like real estate taxes, mortgage interest and amortization, it is not up to the board to make these decisions. It might be worthwhile to hold an informational meeting to educate residents about the credit and how it can get used, particularly if you assessed or raised maintenance to fund energy projects.

Calculate. It would be great if every board had a financial planner on it, because it seems that figuring out the best way forward, financially speaking, requires it. Someone needs to run several financial scenarios for energy projects to figure out what incentives are available, what tax credits are available, and if the project is more viable using credit transfers to a third party. And don’t forget return on investment, which overlays all these strategies.

Don’t wait. One thing to know is that the IRA funds NYSERDA will receive and then distribute are finite. Once the funds have been disbursed, that’s it. “It’s first come, first serve,” says En-Power’s Thomas Morrison. “For buildings considering electrification, the time to plan is now. When the money comes out, you’ll know you can get $10,000 or $15,000 per apartment unit, and maybe that’s going to cover up to half of the cost of your building’s electrification. For buildings considering electrification projects, it’s important to get your plans in place.”

As Victor Roggia, the board president, says, everyone has heard about the IRA, but most are unsure how to get their hands on the money and which hands have to reach for it. Unlike a simple application for funds, securing funding or taking advantage of tax credits will likely be a group effort between the various professionals your co-op or condo employs. For the sake of your building’s residents, who will end up paying for all energy initiatives one way or another, it’s probably time for everyone to take on this task. 

SIDEBAR

Solar: Climbing the Incentive, Credit and Abatement Ladder

In Park Slope, Brooklyn, an eight-unit limestone co-op embarked on a solar journey that twisted and turned, and scooped up the many incentives to install rooftop solar today. But it started, like many projects do, with an ordinary refinance of its underlying mortgage. “In 2021, we refinanced our mortgage to take advantage of lower interest rates,” recalls the co-op’s treasurer, David Kagan. “Somewhat coincidentally, we took out extra money, and this led to a spirited discussion about two potential projects — solar and redo of some of our windows. Fortunately we had enough money from the refinancing, and from what was already in our reserves, to do both.”

Doing both projects, however, didn’t mean that there were enough cash reserves to pay for the solar in full. But today, a building doesn’t actually need enough cash to fund a solar project. Tax credits and incentives play a key role in solar, and they did in this $89,000 project. First was the NYSERDA incentive of about $27,000, which brought the project’s cost down to $62,000. From this net amount, tax credits whittled the cost down further. On the federal level, the Inflation Reduction Act, which provides a 30% tax credit that can be apportioned to shareholders, helped. “The way we thought about the IRA credit was to multiply $62,000 by 30%,” Kagan says. “All the apartments are the same size in our building, and everyone has the same number of shares. The IRA math works out to a little under $19,000, and we just divided that number by eight.” This means that each shareholder could, on his or her personal federal tax return, deduct around $2,300 from the total amount of personal tax owed. Additionally, New York state has a tax credit of 25%, which in Kagan’s co-op meant that each shareholder could deduct approximately $1,900 from their personal state income tax. (This math mimics that of the federal IRA: $62,000 multiplied by 25%, then divided by eight).

Of course, the whole point of doing solar is to save on the electric bill. In Kagan’s building, the savings are being realized now on its common meter, which powers lights in the building’s common areas and its laundry machines, and will be realized when the benefits of the community solar program (of which it is a part) begin in full. Many in the energy community have complained about the rollout of this program, and Kagan’s co-op is not an exception. The way it’s supposed to work is that the solar array sells kilowatt-hours back into the grid each month, and in Kagan’s case, the co-op’s shareholders will get credit for what is sold. That hasn’t happened on a consistent basis yet, but when it does, the credit will get divided by eight and subtracted from each unit’s electric bill. “I’ve sent Con Ed multiple emails,” Kagan says. “They’re implementing an automated system that should, according to them, take care of the credit. But it seems like it’s taking them an unconscionably long time to get the system in place.”

On top of all the credits and incentives, Kagan’s co-op will benefit from the New York City property tax credit. This will allow the co-op to deduct 20% of the net solar cost from its property tax bill over a four-year period. While all the incentives from the solar project brought the actual cash outlay down, the co-op still spent its reserves on solar and window replacement. “We’re generally a prudent building,” Kagan says. “So we wanted to build up our reserves.”

The method shareholders voted for was to impose a special assessment after everyone had paid their state and federal taxes in April. “The special assessment was less than the projected tax credits” for each shareholder, Kagan says. “If we had never done the solar project, we would not have gotten the approximate $4,000 tax credits for each shareholder.”

Despite the delays in the community solar benefits, Kagan is pleased. “It’s really a twofold thing,” he says. “On the one hand, it’s certainly saving us money, and eventually it’ll make us money once we pay back the costs. I mean, I don’t want to sound naive, but it’s a good thing to do.”