Photo of David K. Burton

David K. Burton is a partner in Mayer Brown's New York office and a member of the Tax Transactions & Consulting practice.  He leads Mayer Brown's Renewable Energy group in New York.  He advises clients on a wide range of US tax matters, with a particular emphasis on project finance and energy transactions. In addition, he also advises clients on tax matters regarding the formation and structuring of domestic and offshore investment funds.

Read David's full bio

Many developers of renewable energy projects have experienced higher than expected transaction costs.  There can be a wide range of reasons for such overages.  One all-too-common reason is project documents that cause tax tensions.  These tax tensions lead to more lawyer time, which leads to higher transactions costs.  Thus, developers concerned about transaction costs should negotiate “tax-friendly” project documents to streamline the tax equity investor’s diligence process.

Project documents are typically presented by the developer to the tax equity investor’s counsel in executed form.  Counsel then reviews these to ensure consistency with the tax analysis of the transaction and for other issues.  When counsel identifies an apparent glitch, she typically tries to rationalize or mitigate it without requesting an amendment to the project document in question.  That analysis can take some time.  If she cannot find another solution, she will propose an amendment.  It takes time to prepare the amendment and often more time to persuade the applicable counter-party to sign it.  That request can then lead the counter-party to propose alternative language and a time-consuming (i.e., expensive) back and forth process.

Below is a list of tax issues for developers to keep in mind as they negotiate project documents.  The list is intended to provide trail markers for the most direct path for developers who would like to streamline the tax diligence process (and the associated costs) for their project documents. The list is not intended to be all-inclusive.  Further, the list is not to suggest that missing one or more of these is necessarily fatal to the tax analysis because (i) there are often multiple paths to reach the desired tax outcome and (ii) some of these are best practices, rather than fatal flaws.  Below is generally intended for wind or ground mounted solar projects, as roof-mounted solar is a somewhat different animal.

There are typically five “project documents” (i) the power purchase agreement  (“PPA”) or other revenue contract; (ii) the site lease or other right (which is sometimes combined with the power purchase agreement) to use the ground or roof on which the project is constructed; (iii) the interconnecting agreement that enables the project to transmit its power to the grid; (iv) the operations and maintenance agreement; and (v) the construction contract. Continue Reading Lower Transaction Costs with Tax-Friendly Project Documents

On June 22, 2018, the IRS released Notice 2018-59 (the “Guidance”).  The Guidance provides rules to determine when construction begins with respect to investment tax credit (“ITC”) eligible property, such as solar projects.  The Guidance was much awaited by the solar industry because the date upon which construction begins governs the determination of the percentage level of the ITC, which is ratcheted down for projects that begin construction after 2019.

In addition to applying to solar and (fiber-optic solar), the Guidance applies to the following energy generation technologies: geothermal, fuel cell, microturbine, combined heat and power and small wind.

Overview of Beginning of Construction

The ITC percentage for a solar project is determined based on the year in which construction of the project begins, provided the solar project is also placed in service before January 1, 2024, as follows: (i) before January 1, 2020, 30%, (ii) in 2020, 26%, (iii) in 2021, 22% and (iv) any time thereafter (regardless of the year in which the solar project is placed in service), 10%.

The Guidance is quite similar to existing guidance for utility scale wind projects.  The utility scale wind guidance is discussed in our 2016 Update.  As expected and consistent with the wind guidance, the Guidance provides two means for establishing the beginning of construction of a solar project (and other ITC technology projects): (i) engaging in significant physical work either directly or by contract the “Physical Work Method”) or (ii) paying or incurring (depending on the taxpayer’s method of accounting) five percent of the ultimate tax basis of the project (the “Five Percent Method”).[1]  As is the case with wind, the Guidance provides that the IRS will apply strict scrutiny of the facts and circumstances to determine if the project was continuously constructed from the deemed beginning of construction date through the date the project is placed in service.[2]

Four Year Placed-in-Service Window

The wind guidance provides a four year window for the project to be completed and to avoid the scrutiny as to whether the construction was continuous.   There had been speculation that the window for solar (or at least some classes of solar) would be shorter because the time to construct solar projects (especially rooftop solar) is generally shorter than the time to construct a wind project.  In what is a relief to the solar industry, the Guidance provides solar, and the other ITC technologies, a four year window as well.        Continue Reading Beginning of Construction Guidance for Solar and Other ITC Technologies

On May 30, A Word About Wind held its first annual Financing Wind New York conference.  Tickets to the conference sold out and the attendees were generally wind pros with considerable experience.  The panelists provided many useful insights regarding the wind industry.

Below are soundbites from the conference.  They are organized by topic, rather than chronologically, and were prepared without the benefit of a transcript or a recording.

Offshore Wind

“Right now, globally there is 18 GW of offshore wind.”  — North American Leader, European Based Offshore Wind Developer

“Expecting 20 to 30 GW of offshore wind by 2030.  So that means a couple of gigawatts a year of offshore wind.”   — North American Leader, European Based Offshore Wind Developer

“Offshore wind can be very close to the load centers, 20 to 30 miles away from where people are actually using the electricity.  That makes offshore wind easier than onshore wind, which is now facing transmission challenges to get their power to where people actually use it.” — North American Leader, European Based Offshore Wind Developer

“The European model has been to have the local utility build out to the offshore wind.  In the US, the trend appears to be wind generators are responsible for getting their wind to shore.  I expect wind developers will end up paying for the grid connection.  There is a discrete set of permitting and risks building that connection 30 miles out in the water to the project.” – President, Transmission Developer

“Energy is politically driven, so having manufacturing facilities set up here in the US is very important.”   — North American Leader, European Based Offshore Wind Developer

“Energy policy is very much driven by the states.  However, the federal government under Trump has been supportive of offshore wind.  The Trump administration has taken on board streamlining the offshore wind permitting process and has been supportive of new offshore wind leases.”  — North American Leader, European Based Offshore Wind Developer Continue Reading Financing Wind New York Soundbites

In a recent case, the Tax Court ruled in the taxpayer’s favor as to three California distributed generation solar projects’ eligibility for the energy credit under Section 48 and bonus depreciation under Section 168.  However, the Tax Court did reduce the taxpayer’s basis in the projects, and the taxpayer in the case enjoyed significant procedural advantages due to mistakes by the IRS.

In Golan v. Commissioner, T.C. Memo. 2018-76 (June 5, 2018), in late 2010 a solar contractor installed solar equipment on the roofs of three host properties and entered into power purchase agreements (“PPAs”) with the property owners.  The PPAs provided that the hosts would purchase electricity generated by the solar equipment at a discount to utility rates, while the solar contractor would retain the ownership of the equipment, including the right to any tax or other financial benefits, and would service and repair the equipment.

Mr. Golan, the taxpayer, in 2011 purchased the solar equipment, subject to the PPAs, from the solar contractor for a purported purchase price of $300,000, which was the sum of a purported $90,000 down payment, a $57,750 credit for certain rebates, and a $152,250 promissory note (which the taxpayer was the obligor under but the taxpayer also provided a personal guarantee thereof).  The solar projects were not connected to the grid until after the taxpayer acquired them in 2011.  The IRS unsuccessfully sought to disallow the taxpayer from taking energy credit and depreciation deduction with respect to the solar equipment. Continue Reading Tax Court Sustains Energy Credit and Bonus Depreciation for Distributed Generation Solar Projects

Below are soundbites from panelists at Infocast’s Solar Power Finance & Investment Summit from March 19th to 22nd in Carlsbad, CA.  It was an extremely well-attended event and the mood of the participants was generally upbeat.  Many people observed that there was more capital for projects under development or to buy operating portfolios than there was such supply of projects available to meet that demand.

The soundbites are edited for clarity and are organized by topic, rather than in chronological order.  They were prepared without the benefit of a transcript or recording.

Impact of Tax Reform on the Tax Equity Market

Impact of the Corporate Tax Rate Reduction on the Supply of Tax Equity, Yields and the Capital Stack

“This year we can do $9 million in tax credits; before we could do $15 million.”  [The implication is that a 21 percent federal corporate tax rate is 40 percent less than a 35 percent corporate tax rate, so the tax appetite has declined by 40 percent.]  Vice President, Industrial Bank

“The [supply side of the] tax equity market has declined by 40 percent; some tax equity investors are taking a pause.”  Vice President, Regional Bank

“Our bank this year is slightly below the billion dollars of tax equity it originated last year for its own book.” Vice President, Midwestern Bank

Some “mainstream tax equity investors have taken a pause [from investing] to figure out what the 21 percent corporate tax rate means for them.  It is an investors’ market, but we nervously see a sponsors’ market ahead.”  Managing Director, Financial Advisory Firm

Traditionally, rates for tax equity have been a function of supply and demand, but now we are seeing real pressure on rates.”  Managing Director, Money Center Bank

[It is difficult to jibe this banker’s quote regarding pressure on tax equity rates with the quotes above regarding the supply of the tax equity market being smaller due to tax reform.  Possibly, tax equity investors are agreeing to share some of the yield detriment of the depreciation being less valuable and that has resulted in reduced after-tax yields.]

“Some utilities that had tax appetite no longer have tax appetite and need to raise tax equity for their projects.”  Director, Money Center Bank

“We are trying to get back to the same all-in return where we were before tax reform.”  [As the depreciation is less valuable at a 21 percent tax rate than it was at a 35 percent tax rate, this means either (i) contributing less for the same 99 percent allocation of the investment tax credit or (ii) contributing the same amount and requiring a distribution of a larger share of the cash.]  Vice President, Midwestern Bank

“Tax reform helped us because it means tax equity contributes less to the project, so it makes our loan product more necessary.” General Manager Renewable Energy Finance, Small Business Bank

“The debt market has come in and is filling the decline in tax equity.” Executive Director, Manufacturing Corporation

“The buyouts of [tax equity investors’ post-flip interests] are more valuable because of the lower tax rate.”  Partner, Big 4 Firm

“We see sponsors’ financial returns over a 35-year project life increase due to the tax rate reduction.”  ” Managing Director, Structuring Advisory Firm Continue Reading Infocast’s 2018 Solar Power Finance & Investment Summit Soundbites

Pratt’s Energy Law Report has published our article 2018 and Onward: The Impact of Tax Reform on the Renewable Energy Market. We are pleased to be able to make a PDF version of the article available.  (The article starts on page 6 of the PDF).

The Bipartisan Budget Act of 2018 (H.R. 1892) (the “Act”) was enacted on February 9, 2018.  The Act is a two-year budget agreement that includes a number of provisions extending lapsed renewable energy-related tax credits; however, the Act does not change the amount or timing of the tax credits for utility scale wind or for solar.

The Act retroactively renews the tax credits for the so-called orphaned technologies that were left out of the 2015 extension for wind and solar, but for some of the orphaned technologies the tax credits are only available for projects that started construction prior to 2018; thus, limiting the tax planning opportunities, while rewarding bold developers that started construction in 2017 while the credits were lapsed.

Excise tax matters and energy related tax credits for homes, buildings, vehicles, nuclear power plants, Indian coal, biodiesel and biofuel are beyond the scope of this blog post. Continue Reading Bipartisan Budget Act Partially Reinstates Orphaned Energy Tax Credits

The Equipment Leasing and Finance Association has published our article The Impact of Tax Reform: What Leasing Companies Need to Know (subscription required).  We are also pleased to be able to make the article available in PDF format.  The article addresses equipment leasing generally, rather than being renewables or tax credit focused.

A Word About Wind has published our article What Is the Impact of Tax Reform on US Wind Tax Equity Deals? in its blog (subscription required) and newsletter.  If you are unable to open the blog post, the text of the article is available below:

On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some of the ramifications of the reforms on wind tax equity transactions.

Corporate Tax Rate Reduced to 21%

In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.

Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.

100% Bonus Depreciation

A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation. Continue Reading What Is the Impact of Tax Reform on US Wind Tax Equity Deals?