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Federal Incentives for Sustainable Development

Client Advisory

March 31, 2009
Private financing is undoubtedly more difficult to obtain these days.  But the economic downturn may lead to some new types of financing for certain types of projects. The Emergency Economic Stabilization Act of 2008 and American Recovery and Reinvestment Act of 2009 have created or expanded funding and tax credits for green buildings, renewable energy, neighborhood preservation, low-income housing and brownfield remediation. Several key legal developments are summarized below.
 
Extended Funding for Green Building and Sustainable Design Projects 
  • The American Jobs Creation Act of 2004 authorized states and local governments to issue up to two billion dollars in tax-free bonds to provide funding to environmentally sustainable projects. Projects must have the following characteristics: LEED certification, brownfield redevelopment, state or local financial support, one million square feet of development space or 20 acres, use of proceeds only for the sustainable component and creation of at least 1,500 full-time jobs. The law originally required issuance of bonds by September 30, 2009. 
  • The Emergency Economic Stabilization Act now permits issuance of such bonds for sustainable projects through September 30, 2012.[1] This extension may allow states and local governments to raise funding for private or public projects to the extent the two billion dollars is not already spoken for.
Creation of Qualified Energy Conservation Bonds
  • The Emergency Economic Stabilization Act originally authorized states and localities to issue up to $800,000,000 in tax-free bonds (allocated to states based on population) for any “qualified conservation purpose,” which includes reducing energy consumption in public buildings, renewable energy and implementation of green community programs.[2] This may prove to be a lucrative source of funding for energy efficiency measures in existing buildings and, depending on the law’s interpretation, new green building projects. 
  • The American Recovery and Reinvestment Act quadruples the available bonds to 3.2 billion dollars and expands the program so that the bonds may be used to provide loans, grants or other repayment mechanisms for qualified conservation purposes.[3]  
Qualified Redevelopment Bonds
  • States can still issue tax-free “Qualified Redevelopment Bonds” for “redevelopment purposes in designated blighted areas.”[4] Redevelopment purposes includes governmental acquisition of distressed property, site preparation, site rehabilitation or relocation of tenants. Blighted areas include neighborhoods with excessive vacant land or buildings, substandard structures, vacancies or tax-delinquent buildings.
  • Although this program hasn’t changed, economic circumstances have. The bonds may have renewed importance for states in addressing communities with high vacancy and foreclosure rates.
Funds in Lieu of Low-Income Housing Tax Credits
  • Since 1987, developers have been able to claim a tax credit for construction of affordable housing. Eligible projects must set aside (a) 20% or more of residential units for individuals whose income is 50% or less of the area median gross income or (b) 40% of the residential units for individuals whose income is 60% or less of area median gross income.[5] The U.S. Treasury Department allocates tax credits to states annually, which the states then distribute to private developers.
  • The American Recovery and Reinvestment Act made one significant change to the program, allowing states to directly allocate funds (rather than tax credits) equal to their unused 2009 tax credits. These funds must be distributed by January 1, 2011 and will target ongoing affordable housing projects that face financing shortfalls.[6]
Extended Deduction for Remediation Costs 
  • The Internal Revenue Service allows an income tax deduction for certain environmental remediation costs, which are capital costs incurred in abatement or control of hazardous substances (including petroleum) at designated sites.
  • This deduction originally expired on December 31, 2007, but the Emergency Economic Stabilization Act extends it to expenses incurred through December 31, 2009.[7] 
Although tax credits are only useful when there is financing in the first place, developers should keep in mind that there are a number of other lucrative federal tax credits for certain kinds of projects. These include tax credits for investments in low-income communities[8] and restoration of historic buildings. [9]

Questions regarding this advisory should be addressed to Christopher Rizzo at (212-238-8677, rizzo@clm.com), Dan Pittman (212-238-8854, pittman@com.com), Zara Fernandes (212-238-8827, fernandes@clm.com), or Clifford P. Case (212-238-8798, case@clm.com).


Endnotes


[1] 26 U.S.C. § 142(l) (“Qualified Green Building and Sustainable Design Projects”); see also H.R. 1424, 110th Congress, § 307 (2008).

[2] H.R. 1424, 110th Congress, § 301 (2008) created IRS Code Section 54(D), “Qualified Energy Conservation Bonds.”

[3]H.R. 1, 111th Congress, § 1112 (2009) (“Increased Limitation on Issuance of Qualified Energy Conservation Bonds”). Among several other important incentives for clean energy, the American Recovery and Reinvestment Act also extends the Production Tax Credit for renewable energy through 2012 (for wind) or 2013 (for other types of renewables).

[4] 26 U.S.C. § 144(c). 

[5] 26 U.S.C. § 42.

[6] H.R. 1, 111th Congress, § 1602 (2009) (“Grants to States for Low-Income Housing Projects in Lieu of Low-Income Housing Credit Allocation for 2009”).

[7]26 U.S.C. § 198; H.R. 1424, 110th Congress, § 318 (2008).

[8] New Markets Tax Credits can fund a wide variety of projects in low income communities, which include census tracts with a poverty rate of at least 20% or a median family income of up to 80% of the area’s median family income. 26 U.S.C. § 45D. Investors that provide cash to qualified community development entities that are investing in these census tracts may receive tax credits worth up to 39% of their investment over seven years.  

[9] 26 U.S.C. § 47(a). The tax credits for historic buildings include (a) 20 percent of the qualified rehabilitation expenditures with respect to any certified historic structure on the National Register of Historic Places or within a register district; and (b) 10 percent of the qualified rehabilitation expenditures for other buildings “placed in service” before 1936.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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