To smooth the path and sweeten the pot for builders to construct more multi-family housing, California has recently enacted several laws and building incentives.

Now, the insidious 16-year buildup of the housing shortage harming California households is being felt across the rest of the nation. This has caught the attention of the federal government. So, Congress has ramped up cashback tax incentives to subsidize and thus stimulate property owners to improve their multi-family residential units and any commercial or residential property over three stories height to be more energy efficient and effective.

For owners of multi-family residential units, Congress In 2022 added and expanded tax-code incentives by enacting the Inflation Reduction Act (IRA), to provide:

  • a tax credit of up to $5,000 per multi-family or single family residential (SFR) unit for owners making substantial renovations producing greater energy efficiency; [Internal Revenue Code §45L; New Energy Efficient Home Credit]
  • a tax credit of up to $1.00 per square foot for energy efficient improvements made by owners of commercial or multi-family buildings greater than three stories in height; [IRC §179D; Energy Efficient Commercial Buildings Deduction]
  • a tax credit of up to 30% of the costs of electric vehicle (EV) charging stations installed by owners of multi-family buildings, an expansion of energy efficient power supply tax credits, like for solar, geothermal and batteries. [IRC §48; Clean Energy and Alternative Fuel Vehicle Refueling Property Incentives]

For double dipping, the tax credit codes no longer prevent owners from cumulatively “stacking” incentives. Now, owners are eligible to take multiple sets of tax credits as part of the incentives to make a single energy improvement. For examples on how an owner stacks incentives, see the rundown provided by the White House.

Looking ahead, Congress also dedicated $8.8 billion to states to provide Home Efficiency Rebates to owners of multi-family residential property who make energy efficient upgrades. Stay tuned for more information as California rolls out the cash in these incentives as California’s share will likely exceed $1 billion, as we are 12% of the US population.

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Creating organic demand

California’s housing shortage is being tackled on a number of fronts, from cutting deeply into the influence of not-in-my-backyard (NIMBY) promoters to smoothing the path for accessory dwelling units (ADUs) and cashback incentives for making improvements.

However, these efforts have barely begun to deliver the number of housing units needed to support California’s population, complicated by the general awareness of the late-arriving recession.

Real estate agents witness the results every day: sellers asking for home prices that exceed the rate of personal income growth, rents that are impossible to achieve for median-income renters in our unit-deprived and ultra-competitive housing markets, calling on agents to waste time submitting multiple offers that are — more often than not — rejected.

Initially, building multi-unit residential properties is the quickest and most efficient way to jump start filling the need to cut down the number of individuals per unit in coastal California. Too many individuals occupy existing units. This “crowding” is returned to normal only by constructing new units at the locations of employment, a concept local zoning has never addressed, until forced to do so.

By eliminating barriers and procedural costs in the permitting process for housing starts, government officials are giving builders reason to build more housing.

Still, don’t expect to see builders to jump on these incentives too quickly. With the real estate sector in recession conditions, which hampers the housing market and looms over the rest of the economy, builder confidence is low.

Watch for construction to pick up following the rebound from the 2024 recession. Around 2026-2027, builders will regain sufficient confidence to place the long-term investment bet required by new development. Then starts will rise. Fast. Everywhere.

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