The climate law is helping bring solar to more apartment buildings

Richards agreed that using this transferability mechanism isn’t as simple as it might sound, particularly for smaller-scale solar projects like those Evergrow has transacted for Black Bear Energy.

“The concept of selling credits should be easy — you just sell them,” he said. ​“But people are finding it much harder to do that.” 

Making tax-credit transferability work for multifamily solar projects

One challenge is size.

“Energy projects have historically been really big — think utility-scale solar in the desert. Those are hundreds of millions of dollars in tax credits, and the big banks do those,” Richards said. ​“But when you get to the edge of the grid, behind the meter, we’re talking hundreds of thousands of dollars, not hundreds of millions.”

To date, most tax-credit transferability deals have targeted larger-scale projects, like the $580 million in wind energy tax credits from a $1.5 billion wind farm that Bank of America unveiled last year. Other big transfer deals have focused on the clean-energy manufacturing tax credits created by the Inflation Reduction Act, like the $700 million in credits sold by First Solar early this year.

Another problem people are confronting, Richards said, ​“is that there’s a lot of complexity.

Tax-credit transfers may not be as thorny as tax-equity deals, but they’re not simple. Each deal has to go through a gauntlet of due diligence to give would-be buyers of credits the confidence that the end result of a transaction — a big reduction on their future tax bills — will go through as planned.

“Right now, the seller is expected to do a lot of that work,” Richards said. ​“They have to go find a buyer, but they also have to go hire an accounting firm to do an analysis, hire an engineering firm to do the technical specifications, and perhaps hire an insurance firm” — to protect against the risk that the IRS may challenge the validity of the credits in future years.

“That might be easy enough if you’re a utility-scale developer who’s done this hundreds of times. But even a large REIT won’t have the people and the expertise” to carry it out, he said.

Giving real estate owners the tools to afford to go green 

Katherine Elliot, assistant vice president of sustainability and green investments at Equity Residential, agreed that the old way of doing tax-credit financing has been a barrier.

Equity Residential manages about $30 billion in multifamily properties and has set a goal of reducing its carbon footprint by 30 percent below 2018 levels by 2030. To carry out that reduction, it has invested in making its properties more energy efficient and has also installed about 8.7 megawatts of solar on 61 of its properties.

“We want to make a commitment to doing solar wherever it’s physically and financially viable,” Elliot said. Equity Residential started by doing its own solar projects and then hired Black Bear Energy in 2018 to expand that work.

Transferability has at least added tax credits to the menu of options for REITs like Equity Residential. But doing a tax-transfer deal is not something that most REITs can easily take on by themselves. Evergrow, Crux, and other companies that take on the roles of brokers and managers for those transactions have stepped in ​“to get a competitive price and have some transparency into the process,” she said.

Being able to tap the value of tax credits won’t make solar possible everywhere, Elliot cautioned. ​“It’s not going to make a project with very poor financial yields look great. But it can certainly help advance more projects on the margins.”

There’s a lot of untapped solar potential on those margins, Stulgis said. A 2022 report from investment bank Morgan Stanley identified 328 gigawatts of solar potential on commercial buildings’ rooftops and parking lots, representing a $492 billion market in the commercial real estate sector. Of that total potential, the report identified a $28 billion market for a ​“select group of REITs, of which we estimate 90% will be ​‘in the money’ by 2025.”

Using some back-of-the-envelope calculations, Stulgis estimated that bringing in the additional revenue from the sale of tax credits to these kinds of commercial buildings’ rooftop solar projects could improve the 20-year internal rate of return — a measure of the long-term profitability of an investment — by roughly 3 percent on average.

Tax-credit transferability will not ​“overnight result in landlords owning every solar project hosted on their roof,” Stulgis said. Many landlords don’t see investing in solar as their core business, she noted, and often they lack the incentive to do so altogether since electricity costs are typically borne by tenants.

“But there are definitely use cases where it makes more sense for the landlord, instead of a third party, to own the solar,” she said. ​“We are really excited about the growth that will be unlocked by the tax credit transfer for those types of projects.”