Updates to Internal Revenue Code §48 contained in last year's Inflation Reduction Act (IRA) targeted to spurring investment in underserved communities may be sufficient reason for affordable housing developers, sponsors, and investors to consider investing in solar and wind facilities in connection with upcoming developments. As discussed below, when added to the credit, including available adders, already available under §48, the IRA's new bonus credit could be significant enough (potentially as high as 70%) to consider including such a facility to potentially lower operating and utility costs.

This article outlines the credit rate and potential adders for consideration when planning a development. For example, if a project meets all qualifications for the bonus rate (30%), is located within an "energy community" because it is in a census tract in which after December 31, 1999 a coal mine has closed (with a 10% adder), and is part of a low-income housing tax credit (LIHTC) development that is a qualified low-income residential building project (i.e., a Category 3 project with a 20% adder), the project would be entitled to a 60% credit. The capital contribution associated with that credit will likely be less than the full 60%. How does that work in your model? After equitably allocating the financial benefits of the electricity produced by the facility among the occupants of the dwelling units, will the remaining financial benefits cover (a) the balance of the cost of the facility itself and all costs associated with the use of the credit and construction of the facility and (b) lead to cash flow? What if it is not located within an "energy community"? Does it only work if the 10% "domestic content" adder (where any steel or iron used to produce project components and at least 40% of other manufactured products were produced in the United States) comes into play? Thus, it is imperative to closely look at the rates, adders, and requirements and to run projections.

What is §48?

Under §48, taxpayers are entitled to an investment tax credit (ITC) for a portion of the expenses they invest in "energy property" that they place in service during the taxable year. Energy property includes solar and wind facilities and a list of additional facilities identified in §48.

Base Rate 6%)

The ITC for a given tax year is calculated by multiplying the "energy percentage" by the basis of the energy property placed in service during that year. The energy percentage is a base rate of 6%.

Bonus Rate (30%)

The energy percentage is increased to a bonus rate of 30% [i.e., 5 times the base rate] for projects that have a maximum net output of less than 1 megawatt (MW) or for larger projects that satisfy prevailing wage and apprenticeship requirements. As a practical matter, a 1 megawatt (MW) facility should produce more than enough electricity to power most multifamily residential facilities.

10% Adders

In addition to the bonus rate of 30%, the energy percentage for projects satisfying the prevailing wage and apprenticeship requirements can be further increased by a 10% "energy community" adder and a 10% "domestic content" adder.

10% "Energy Community" Adder

The energy community adder applies to projects located within an "energy community", which means a brownfield site, a metropolitan statistical area (MSA) or nonmetropolitan statistical area (non-MSA) that has had either certain levels of oil and gas or coal activities after December 31, 2009 or which has an unemployment rate above the national unemployment rate for the previous year, and/or a census tract or adjoining census tract in which after December 31, 1999, a coal mine has closed, or after December 31, 2009, a coal-fired electric generating plant has been retired. The IRS has issued guidance identifying locations which qualify as an energy community and, as one might guess, many locations within Appalachia qualify.

10% "Domestic Content" Adder

To qualify for the 10% "domestic content" adder, the owner of a project must demonstrate via a "Domestic Content Certificate Statement" that any steel or iron used to produce project components and at least 40% of other manufactured products were produced in the United States.

Low Income Communities Bonus Credit Program Adder (10% or 20%)

The IRA has created an additional adder under §48(e) known as the "low-income communities bonus credit". The additional credit applies to "eligible solar and wind facilities" with a maximum net output of less than five MW (as measured in alternating current (AC)). The credit increase is (a) a 10% bonus credit for such facilities that are (i) installed in a "low-income community" (a Category 1 Project) or (ii) on "Indian land" (a Category 2 Project) or (b) a 20% bonus credit for such facilities which are part of (i) a "qualified low-income residential building project," which includes LIHTC developments (a Category 3 Project) or (ii) a qualified low-income economic benefit project (a Category 4 Project). Under the IRA, there is no reduction in LIHTC eligible basis by the amount of the ITC. As noted above, the IRA provides that prevailing wage and apprenticeship requirements must be complied with in connection with a project with a maximum net output equal to or greater than 1 MW.

The Department of Energy (DOE) will jointly administer the program with the Internal Revenue Service (IRS), subject to final regulations issued by the Treasury on August 15, 2023 and Rev. Proc. 2023-27, which was simultaneously issued by the IRS.

Allocations of Credit for 2023 and 2024

The annual capacity limitation for each of calendar years 2023 and 2024 is 1.8 gigawatts of direct current capacity, allocated as follows:

  • Category 1 Project: 700 megawatts
  • Category 2 Project: 200 megawatts
  • Category 3 Project: 200 megawatts
  • Category 4 Project: 700 megawatts

Half Reserved for Facilities Meeting at Least One of the "Additional Selection Criteria"

At least 50% of the allocation limitation in each category is reserved for facilities meeting at least one of the "additional selection criteria" – based on satisfying ownership criteria or geography criteria.

Ownership Criteria

A facility meets the ownership criteria if it is owned by one of the following: a Tribal Enterprise, an Alaska Native Corporation, a renewable energy cooperative, a qualified renewable energy company (QREC) meeting certain characteristics, or a qualified tax-exempt entity.

Geographic Criteria

To meet the geographic criteria, a facility must be located in a persistent poverty county (PPC) as described or a census tract that is designated in the Climate and Economic Justice Screening Tool (CEJST) as disadvantaged.

Eligibility for Category 1 (low-income community) and Category 2 (Indian land) Projects is location-based. Eligibility for Category 1 generally tracks with New Marking Tax Credit census tracts. DOE has a mapping tool that can be used to locate qualified low-income communities. Eligibility for Category 2 Projects is dependent on the project being located on "Indian lands" as defined in 25 USC §3501.

While all of the bonus categories provide opportunities for affordable housing developers, sponsors, and investors, Category 3 is of particular interest for projects currently in the planning phase.

Considerations for a Category 3 Project (Qualified Low-Income Residential Building Project, including LIHTC Development)

Category 3 is a benefit-based category that comes with a trade-off in exchange for the higher credit increase (20%). A Category 3 facility is "installed on a qualified residential property" participating in a LIHTC program or other covered housing program (including 202, 811, public housing and vouchers, among others). The facility qualifies if it is installed on the building, the same parcel of land as the qualified residential property or a parcel of land adjacent to the parcel of land on which the qualified residential property is located. Unlike Category 1 facilities, the project must "equitably allocate" the "financial benefits" of the electricity (energy) produced by the facility among the occupants of the dwelling units. This requirement is satisfied if at least 50% of the financial value of the energy produced by the facility is equitably allocated to the qualified residential property's low-income occupants. To the extent a developer pursues an allocation under Category 1 rather than Category 3 in order to avoid providing such financial benefits to residents, the applicant should be aware that 490 megawatts out of the 700 megawatts of capacity reserved for Category 1 Projects are reserved for "eligible residential behind-the-meter (BTM) facilities" (i.e., its primary purpose is to provide electricity to the utility customer of the site where the facility is located) and only 210 megawatts out of the 700 megawatts of capacity reserved for Category 1 Projects are reserved for "Front-of-the-meter facilities (FTM) and nonresidential BTM facilities" (i.e., facilities which are directly connected to a grid and intended to provide electricity to one or more offsite locations via such grid or utility meters).

Category 3 encourages affordable housing developers, investors, and sponsors to add solar or wind facilities to their new projects and retain a portion of the generated power onsite. This should reduce operating costs for the development and reduce utility costs for tenants.

If the facility is a solar facility, applicants must follow HUD guidance, if applicable, on the Treatment of Community Solar Credits on Tenant Utility Bills (July 2022), Community Solar Credits in PIH Programs (Aug. 2022), or future HUD or other applicable agency guidance. Similar principles apply to wind facilities. If such HUD guidance applies, utility bill savings cannot be allocated among the residents based on a unit's electricity usage. If financial value is not distributed via utility bill savings, financial benefits are considered to be equitably allocated if at least 50% of the financial value of the energy produced by the facility is distributed to occupants using one of the methods described in HUD guidance, if applicable, on the Treatment of Solar Benefits in Master-metered Building (May 2023) or future HUD or other applicable agency guidance. If the facility is a solar facility, applicants must comply with applicable HUD guidance for how residents of master-metered HUD-assisted housing can benefit from owners' sharing of financial benefits accrued from an investment in solar energy generation. Similar principles apply to wind facilities.

Application, Review and Allocation

Those interested in the Low-Income Communities Bonus Credit Program must register in DOE's application portal. Once registered, an applicant may then apply in the same portal for an allocation of credit. The DOE has announced that on October 19, 2023, it will begin accepting applications across all four categories. DOE's web page, Low-Income Communities Bonus Credit Program, will be updated to provide additional information about the application opening date and materials, including program resources (e.g., additional mapping resources, geographic selection criteria, eligible covered housing programs for Category 3, and Household Income Limits for Category 4). Applications will require information such as the applicable category, ownership, location, facility size/capacity, and whether the applicant or facility meet additional selection criteria.

DOE will review applications and provide a recommendation to the IRS as to whether to award an applicant bonus credits. All applications submitted within the initial 30-day period will be treated as submitted on the same date and at the same time. The initial 30-day application period will be followed by rolling application review if environmental justice solar and wind capacity limitation is not fully allocated after the initial application window closes. During the rolling review period, DOE will review applications and provide recommendations to the IRS in the order applications are received until the IRS allocates all capacity limitation in a program year.

Based on DOE's recommendation, the IRS will either award the applicant an environmental justice solar and wind capacity limitation allocation or reject the application. Projects must be placed in service within four years after the date of the allocation to the facility of which such property is part. An applicant cannot administratively appeal decisions regarding capacity limitation allocations.

Summary

The Low-Income Communities Bonus Credit Program provides a new opportunity for affordable housing developers, sponsors, and investors to add tax credits to their capital stacks. Interested parties should start reviewing eligibility requirements and limitations now. As with any new tax credit program, especially one involving multiple federal agencies, rules and guidelines are developing and changing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.