Our article AZ Companies Win Preferential Tax Treatment for Solar Panels was recently published in State Tax Notes. The article analyzes a favorable opinion by the Arizona Supreme Court in a case brought by SolarCity and SunRun. The Arizona Supreme Court that held that an Arizona law allowing taxpayers to attribute no value for property tax purposes to solar panels leased to customers did not violate the Arizona Constitution.
The American Wind Energy Association’s (AWEA) annual conference, WindPower, was held in Anaheim, California. Below are soundbites from panel discussions on May 24, 2017. The soundbites were prepared without the benefit of a transcript or recording and were edited for clarity. Further, they are organized by topic, rather than appearing in the order in which they were said.
Each year WindPower seems to devote less space on its schedule to topics related to tax equity. This year there was only one panel that purported to address tax equity; it was a panel about tax reform. It also appeared that there were fewer conference attendees who work in the tax equity space.
“There’s lots of tax equity in the market today. Deals are getting done regardless of uncertainty [with respect to tax reform].” Managing Director of a Money Center Bank
“There’s so much tax equity capacity right now that should there be tax reform [with a reduction in the corporate tax rate] there should [still] be enough tax equity out there.” Managing Director of a Money Center Bank
“A lot of people are handicapping [tax reform] as rate reduction that is less severe than what’s in [any of the Republican] proposals.” Managing Director of a Money Center Bank
“Tax reform will have a negative net present value impact on projects’ economics. To maintain the same return level, sponsors will need to drive down costs or increase revenue. Revenues have been going down, but costs have been going down faster. If we can keep that up, [the wind industry] may be able to absorb the cost of a change in the corporate tax rate. Managing Director of a Money Center Bank
“The cost of tax law change will not be as high as some people have projected.” Managing Director of a Money Center Bank
“Our intelligence shows support [on Capitol Hill] for maintaining the PTC phase-out as it is today, but we don’t take that for granted.” SVP Federal Legislative Affairs of AWEA
“The general consensus among tax equity investors and sponsors is [any tax reform would include] minimal change to depreciation benefits and no change to the PTC phase-out.” Managing Director of a Money Center Bank
“For now, people are making [tax reform assumptions in financial models] and getting deals done, but that could change with more tax reform proposals. What the market wants is certainty.” Managing Director of a Money Center Bank Continue Reading WindPower 2017 Soundbites
On June 28, Mayer Brown and Alfa Energy Advisors presented the webinar Tax Structuring and Impact of Potential Tax Reform. An audio recording of the presentation with video of the slides is available here (the button is near the bottom of the page). A pdf file with just the slides is available here.
Below are the questions submitted by the webinar audience with answers:
1. Question: For solar projects that use a third-party investor to monetizes the tax benefits, what is the split between the use of a sale-leaseback, partnership flip or an inverted lease structure in the market today?
Answer: There is no published data on this question. An educated guess in the current market is that partnership flips are more than half the market, inverted leases are less than ten percent of the market with the remaining portion made up of sale-leasebacks.
2. Question: In today’s solar tax equity market, are time- or yield-based flips more prevalent?
Answer: Yield-based flips are more prevalent. However, one very large tax equity investor prefers time-based flips. A generalization is that solar tax equity investors that started in wind projects prefer yield-based flips as that is what is sanctioned in the safe harbor for wind projects in Revenue Procedure 2007-65, while investors that started in tax equity by investing in historic tax credits prefer time-based flips. Continue Reading Presentation from Tax Equity Structuring & Impact of Potential Tax Reform and Q&As from the Webinar
Please join Mayer Brown and Alfa Energy Advisors for another session of our popular webinar addressing how tax reform could affect various tax equity structures, how the market is allocating tax reform risk between sponsors and tax equity investors.
Key Event Information
Date & Time
Wednesday, June 28, 2017
12:00 p.m. – 1:30 p.m. EDT
Register here for this complimentary webinar.
Topics to be covered in the seminar will include:
• Trends in the tax equity market
• Impact of potential tax reform on flip partnership structuring
o Wind PTC projects
o Solar ITC projects
o Earnings per share impact analysis
o Key takeaways
• Comparison of time- and yield-based partnership flip structures
• The IRS’s updated “start of construction” guidance for tax credit qualification
Below are soundbites from panelists at the Solar Energy Industries Association’s (SEIA) Finance & Tax Seminar in New York City. The seminar was held on June 1 and 2, but only comments from the second day are reflected below. The soundbites were prepared without the benefit of a transcript or recording and were edited for clarity. Further, they are organized by topic, rather than appearing in the order in which they were said.
Tax Equity Market in 2017
- It has been a slow start to the year. We will see a down year [compared to the $11 billion of tax equity funded in 2016]. – Executive Director, Energy Investing, Money Center Bank
- There is relatively smaller tax equity flow in 2017, but there is continued demand for good projects with experienced sponsors. – Director, Investment Fund Manager
- We saw a lag coming into this year. We haven’t seen a large uptick in investment. – Director, Structured Finance, Solar Services Company
Partnership Flip v. Sale-Leaseback Structures
- A partnership flip provides an attractive balance for a cash equity investor to invest at scale and earn an attractive yield. The structure is attractive to cash equity investors because it raises less cash than a sale-leaseback. [A cash equity investor is, generally, an investor other than the developer of the project. Such investors are eager to invest, but typically do not have tax appetite. Therefore, the partnership flip suits them well as it allows the tax equity investor to monetize 99% of the ITC, and much of the depreciation, while still requiring a significant cash equity investment.] – Director, Investment Fund Manager
Tax Equity Investors’ Reaction to the Possibility of Tax Reform
- We are putting into our documents cash sweeps for the risk of tax reform resulting in a lowering of the tax rate. – Business Development Officer, Retail Bank
- We want to be sure that if a tax law change occurs, we are protected with a step-up in our cash-sharing percentage or an indemnity. – Executive Director, Energy Investing, Money Center Bank
- There is the potential for a tax equity investor’s economics to improve with a reduction in tax rates, if the reduction occurs after the losses are used. – Director, Project Finance, Solar Services Company
On May 11, 2017, Senators Edward J. Markey (D-Mass.) and Sheldon Whitehouse (D-R.I.) introduced the Offshore Wind Incentives for New Development Act or, simply, the Offshore WIND Act (here). The Offshore WIND Act would extend the 30% investment tax credit (ITC) under Section 48 of the Internal Revenue Code (Code) for offshore wind through 2025. Continue Reading Wind in the Sails of Offshore Wind Farms: Recent Developments in Incentives for Offshore Wind Generation
On May 4, 2017, Maryland became the first state in the country to offer a tax credit for energy storage systems with Governor Larry Hogan’s (R) signing of Senate Bill No. 758 (available here).
The law provides a tax credit for certain costs of installing an energy storage system. Energy storage systems include systems used to store electrical energy, or mechanical, chemical, or thermal energy that was once electrical energy, for use as electrical energy at a later date or in a process that offsets electricity use at peak times. The tax credit is not limited to storage systems that are charged by renewable energy sources. The tax credit is up to $5,000 for a system installed on a residential property and the lesser of $75,000 and 30 percent of the cost of the energy storage system for a system installed on a commercial property (which presumably would include a utility). The tax credit would apply to systems installed between January 1, 2018, and December 31, 2022. The tax credit may only be used to offset Maryland income tax liability (i.e., it cannot be applied against other types of Maryland taxes such as excise tax) and may not be carried forward to another taxable year. The law sets a limit of $750,000 on the aggregate tax credits issued to all taxpayers in a taxable year; such credits to be issued on a first-come, first-served basis. Continue Reading Maryland Enacts First in the Nation Energy Storage Tax Credit
On May 2, Mayer Brown and Alfa Energy Advisors presented the seminar/webinar Tax Structuring and Impact of Potential Tax Reform. A copy of the presentation is available here. The webinar was sponsored by Bloomberg BNA.
The webinar participants (but not the seminar participants) had the opportunity to answer polling questions. The sample size, which varied by question, may not be large enough to be statistically valid. Here are the webinar polling results:
1. How likely is it that a reduction in the corporate tax rate will be effective in 2018?
Very likely – 0%
More likely than not – 42.9%
Somewhat likely – 57.1%
It is not going to happen – 0%
2. How likely is it that the federal corporate income tax rate will be reduced below 30% during the current Trump administration?
Very likely – 14.3%
More likely than not – 21.4%
Somewhat likely – 57.1%
It is not going to happen – 7.1%
3. Which is your preferred partnership structure for solar tax equity transactions?
After-tax IRR based flip – 72.7%
Time based flip – 27.3%