Below are soundbites from panel discussions on September 14, 2016 at Solar Power International in Las Vegas.  The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or a recording.

Supply of Tax Equity Investment

“There are 32 tax equity investors in the renewables market, about 26 of those invest in solar.” — Managing Director from a Money Center Bank

“It is very challenging when syndicators are trying to bring in new investors.  Each new investor takes nine to 15 months to work through its approval issues.” — Director, Renewable Energy Investments for a Commercial Bank

“We continue to see insurance companies get into the market.  They like the asset.  You might have newcomers that invest in 20 MW of projects in commercial transactions.” — Managing Director of a Boutique Financial Advisor

“There are more investors for solar than wind.  Wind is limited to experienced project [financiers].  Overall there is enough tax equity capacity for solar.” — Managing Director of a Boutique Financial Advisor

“We prioritize tax equity investment opportunities based on:

  1. Basic project finance fundamentals – quality of the sponsor and its management team, the quality of the power purchase agreement (“PPA”), the quality of the equipment and its warranties, and pro forma stress tests.
  2. The minimum amount out the door.  For solar, we want to be investing $75 to $100 million per transaction.  If the transaction involves commercial and industrial or residential projects, we like it to take no more than six to nine months to deploy that amount.
  3. Repeat business.  Does the sponsor have a pipeline of projects, so we can reuse the papers we have” negotiated. —  Managing Director from a Money Center Bank

Continue Reading Solar Polar International Panel Discussions Soundbites

On August 30, 2016, the US Internal Revenue Service (“IRS”) finalized regulations that clarify the definition of real property for purposes of the real estate investment trust (“REIT”) provisions under Section 856. The final regulations generally are consistent with the proposed regulations that were released in May 2014. (See our earlier update, “Proposed Regulations Provide REITs a Framework for Solar Energy Property,” from May 14, 2014.) Certain solar industry participants were advocating for solar to be a REIT-eligible asset class in an effort to create a new market for solar projects in the event that the investment tax credit (“ITC”) declined to 10 percent after 2016. In December 2015, Congress extended the ITC with a gradual phase-down. (See our earlier update, “Certain US Energy Tax Credits Extended, But Phaseout Dates Scheduled,” from December 28, 2015.) The extension made the need to make solar a viable asset class for REITs a less pressing issue. It is fortunate for the solar industry that it does not have to rely on REITs, as the new regulations only enable REITs to own solar projects in limited situations.

The final regulations keep the facts and circumstances framework, as opposed to bright-line rules, for determining whether property is real property for purposes of Section 856. Therefore, all of the specific facts of a particular solar energy property will need to be analyzed to determine its REIT classification. The final regulations apply for taxable years beginning after August 31, 2016. Continue Reading As Expected, Final REIT Regulations Offer Little Help for Solar

 

Below are soundbites from panelists at the Renewable Energy Finance Forum Wall Street held in New York City on June 21 and 22, 2016.  The soundbites are divided by topic below: market conditions, the tax equity market, cost of capital, community solar, challenges facing the renewables market, net metering, the YieldCo market, economics for utilities and storage.

Market Conditions

“The market is long capital and short projects.”  Boutique Investment Banker

“The brightest spot in clean tech today is that panels, turbines, batteries and balance of system are all moving down in cost.” Bulge Bracket Investment Banker

“Year over year there have been very precipitous declines in the cost of these technologies.”  Boutique Investment Banker

“Before the expiration of the production tax credit, wind will reach grid parity [with electricity from natural gas] in many parts of the country.” Bulge Bracket Investment Banker

Background: The production tax credit is available for projects that “start construction” prior to 2021, and to meet the Internal Revenue Service safe harbor a wind project would have to be placed in service prior to 2026.  Our article discussing the start of construction rules for wind projects is available here.

Continue Reading Soundbites from 2016 Renewable Energy Finance Forum Wall Street

Senator Martin Heinrich (D-NM) introduced  S. 3159 (available at: www.heinrich.senate.gov/download/energystoragetaxincentiveanddeploymentact2016) to make energy storage eligible for an investment tax credit (ITC) under section 48.  The bill introduced last month would make energy storage systems with a capacity of at least five kilowatt hours, regardless of whether it was supplied by a renewable resource, investment tax credit eligible.  For instance, a stand-alone storage project that drew power from the grid would be ITC eligible under this bill.

The bill would also allow individuals to own a storage system with a capacity of at least three kilowatt hours used at their homes and to claim a residential energy efficient property tax credit under section 25D.  Like the proposed ITC rules for storage, an individual could qualify for the credit even if the storage system was unrelated to a solar system.

Importantly, the bill has a Republican co-sponsor: Senator Dean Heller (NV). To emphasize, the bipartisan support of the bill, Senator Heller issued a press release (available at http://www.heller.senate.gov/public/index.cfm/pressreleases?ID=E2A22E55-5453-4CD6-B6B7-49AF0D22F0F6).  Five other Democrats co-sponsored it: Franken (MN), Merkley (OR), Reed (RI) and Hirono (HI); further, Senator King (I-ME) co-sponsored it. Continue Reading Senators Introduce Storage ITC Bill

First Published in Tax Notes on July 18, 2016

Below is a link to my  Tax Notes article that discusses three IRS letter rulings involving the investment tax credit eligibility of reflective roofs that bolster the electricity produced by a related solar project.  Further, in light of the IRS letter rulings, the article makes suggestions for the regulations the IRS announced in Notice 2015-70 that it is working on to update the definition of investment tax credit eligible property.

Here’s the link to the article: Solar Reflective Roof Article 7-18-16 152tn0405-Burton

New Tax Regulations Curtail Pass-Through Lease Structure Benefit

The US Internal Revenue Service (IRS) recently released new proposed and temporary regulations addressing certain investment tax credit issues in a so-called “pass-through lease” structure. A pass-through lease is a structure in which the lessor of an investment tax credit-eligible asset makes an election to pass through the investment tax credit to the lessee of the asset, which lessee is frequently a partnership. The term “inverted lease” is sometimes used to refer to a pass-through lease structure in which each of the lessor and the lessee is a partnership, and the lessor and lessee partnerships are related to each other. The new regulations apply an “aggregate” treatment to partnerships (and S corporations) to ensure that any investment tax credit is appropriately taxable to the taxpayer that used the credit.

As discussed in more detail below, if a partner in a partnership that claimed an investment tax credit transfers its partnership interest during the deemed income period, these new regulations require the remaining income inclusion to be accelerated and to be recognized by the transferor. Further, under these regulations, the deemed income inclusion occurs at the partner level such that it does not result in an increase to the partners’ outside basis.

Although these temporary regulations are primarily directed at the structuring of historic tax credit transactions, the temporary regulations do have a limited effect with respect to solar transactions where the credit is passed through to a partnership (particularly the outside basis adjustment in the case of partnership lessees, as discussed below). Continue Reading New Tax Regulations Curtail Pass-Through Lease Structure Benefit

We are pleased to make available the materials from our June 29 tax equity seminar.

Here’s is the link to a PDF of the slides: Seminar Slides PDF.

The webinar audience submitted questions that we did not have time to answer.  The questions were:

1.  Why do balance sheet players have an advantage in obtaining power purchase agreements?

2.  What size of transaction supports the cost of the work needed for pass through and inverted leases?

3. Is there clarity as to a “reasonable” level of developer, project management, legal fees and finance costs as a percentage of the cost of the project?

4. For SolarCity stated tax equity returns in 2015 referenced in the presentation, in your experience, what have you generally seen the range of allocations for returns to be?

Our answers are available here: Q&A Link

Finally, I want to thank Gintaras Sadauskas of Alfa Business Advisors for presenting with me.

First published by Law 360 on June 27, 2016

On April 21, 2016, Rep. Jared Polis, D-Colo.,[1] introduced in the U.S. House of Representatives the Solar Expansion of Distributed Generation Exponentially Act (the Solar EDGE Act) to provide a two-year increase in the credit available under Section 25D and Section 48 of the Internal Revenue Code for certain solar energy property that has a nameplate capacity of less than 20 kilowatts.[2]

Section 25D of the code provides a tax credit (residential solar tax credit) to individuals for expenditures for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence[3] by the taxpayer (qualified solar electric property expenditures). Continue Reading Bill to Increase Solar Tax Credits Highlights Inconsistent Standard for Residential Credit

Hannah Hawkins, Attorney-Advisor in the office of Tax Legislative Counsel of the United States Treasury was a panelist at the Renewable Energy Finance Forum in New York on June 21 and commented on investment tax credit (“ITC”) related guidance that Treasury is working on.

With respect to the solar version of the “start of construction” guidance for determining tax credit eligibility that parallels what was issued for wind in Notice 2016-31, Ms. Hawkins stated that “it is the next thing on our plate.  We hope to have guidance in the fall [or] winter.” Continue Reading Treasury Attorney Discusses Pending ITC Guidance at REFF