Here’s a link to Mayer Brown’s white paper – Window of Opportunity: the IRS Releases Initial Guidance on Qualified Opportunity Zone Rules.  The white paper discusses the proposed regulations and a revenue ruling that were released by the IRS on October 19.

The new rules address a number of issues that investors and sponsors were waiting for guidance on.  The IRS has promised further guidance to address issues that remain in need of clarification.

On the heels of this guidance, it is expected there will be many Qualified Opportunity Funds formed, considerable capital invested in them by taxpayers seeking to defer tax on capital gains and significant investment by them in Qualified Opportunity Zones.

 

Below are soundbites from panelists from the Renewable Energy Finance Forum (“REFF”) Wall Street on June 19 and 20. The mood was upbeat.  There were many references to a “wall of cash chasing projects” as a metaphor for how competitive it is to win bids to finance or purchase projects.

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.

The topics covered include the tax equity, debt and M&A markets, C&I solar, offshore wind, bonus depreciation, storage, YieldCos and others.

Tax Equity Market

“Solar tax equity is 30 to 38 percent of the capital stack of a project.  Wind tax equity is 47 to 62 percent of the capital stack of a project.”  – Managing Director, Boutique Investment Bank

“We are seeing a lot more wind.  We are using our tax equity capacity in wind in 2018.  Solar is looking good for 2019 and beyond.”  Managing Director, Trust Company

“This year we will invest more in wind than in solar.” – Managing Director, Money Center Bank

“We are seeing tax equity portfolios that are seasoned trade in a secondary market.  [Generally These are tax equity portfolios] that haven’t flipped on time or that [have the benefit of material cash distributions] but not tax” credits.  – Managing Director, American Multinational Financial Services Company

“There is more tax equity now than there was before tax reform.”  Managing Director, REIT

“2018 is a slow down due to tax reform and tariffs.”  Managing Director, National Bank

“There is a lot less tax equity capacity due to the lower tax rate.” – Managing Director, American Multi-National Investment Bank

[Explained: there may be more tax equity investors in the market than last year; however, last year the corporate tax rate was 35 percent, and this year it is 21 percent, so a typical tax equity investor has 40 percent less tax appetite (and ability to invest in tax equity) in 2018 than it did in 2017.]

“If you are in BEAT [(i.e., the base erosion anti-avoidance tax in enacted as part of 2018 tax reform)], you cannot compete in tax equity.  A couple of investors were hit with BEAT and exited.” – Managing Director, American Multi-National Investment Bank

“We get ten requests for tax equity a week and say ‘yes’ to less than one a week.  We have to prioritize opportunities.”  – Managing Director, American Multi-National Investment Bank Continue Reading Renewable Energy Finance Forum Wall Street Soundbites: the Tax Equity, Debt and M&A Markets, etc.

The U.S. Department of Energy recently released its 2016 Wind Technologies Market Report (available here). The 94-page report provides an in-depth review of the current health and direction of the wind industry, replete with data, analysis and projections. Below are quotes from the report that are of particular interest to participants in tax equity transaction.

Tax Equity Economics in 2016

• [According to AWEA in U.S. Wind Industry Annual Market Report: Year Ending 2016], [t]he U.S. wind market raised more than $6 billion of new tax equity in 2016, on par with the two previous years. Debt finance increased slightly to $3.4 billion. Tax equity yields drifted slightly higher to just below 8% (in unlevered, after-tax terms), while the cost of term debt fell below 4% for much of the year, before rising back above that threshold towards the end of the year.
• According to AWEA [in U.S. Wind Industry Annual Market Report: Year Ending 2016], roughly $6.4 billion in third-party tax equity was committed in 2016 to finance 5,538 MW of new wind projects. This total dollar amount is slightly higher than, but largely on par with, the amount of tax equity raised in both 2014 and 2015. Partnership flip structures remained the dominant tax equity vehicle, with indicative tax equity yields drifting slightly higher in 2016, to just below 8% on an after-tax unlevered basis. Continue Reading DOE’s 2016 Wind Market Report – Tax Equity Highlights

Below are soundbites from speakers and panelists who spoke at Infocast’s Solar Power Finance & Investment Summit on March 22 and 23 in San Diego.  It was Infocast’s best attended event ever, and the mood was relatively upbeat.

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.

Tax Equity Structures

“The tax equity flip [partnership structure] is more complicated, [than a sale-leaseback], in particularly if there is back leverage.”  Director of Investing, Solar Company

“The optimal structure for C&I [for a partnership flip with back leverage] is 40 percent tax equity, 45 percent back leverage debt” and 15 percent sponsor equity.  Director of Investing, Solar Company

“Last year it was almost universally inverted leases; this year mostly partnership flips.”  Banker, Specialty Bank

“There is a more pronounced tension between back leverage and tax equity in an investment tax credit transaction, [than a production tax credit transaction,] because of the risk of recapture of the investment tax  credit.” Managing Director, Tax Equity Investor

“There is increased tension between back leverage and tax equity, whether the stress is cash step ups for under performance or other matters.  What we thought were normal structuring techniques the back leverage lenders take exception to.”  Managing Director, Money Center Bank

Selecting a tax equity structure should be “all about velocity.  Really, [the sale-leaseback] is what is easiest to do.” Managing Director, Regional Bank

“A cash strapped sponsor is not the best candidate for a partnership flip; they are better off with a sale-leaseback.” Executive Director, Non-Traditional Tax Equity Investor

“Some tax equity ask us to lend at the project level – senior secured – for capital account reasons.  But by the time you negotiate the forbearance and related debt/equity terms, you might as well be back leverage.”  Group Head, Regional Bank’s Capital Markets

“We only consider project level debt as a lender.  We have negotiated dozens of forbearance agreements with tax equity.” Banker, Specialty Bank

State of the Tax Equity Market

“There is enough [supply of] tax equity for 2017 [projects].  We are seeing some 2018 transactions being pushed by developers into 2017.”  Advisor, Boutique Accounting Firm

“We like to take our limited [annual] tax capacity and spread it over a greater volume of deals, so we prefer wind” which has a ten year production tax credit, rather than a 30 percent investment tax credit in the first year.  Managing Director, Consumer Finance Bank

“In wind, you [(i.e., the tax equity investor)] are a bigger piece of the capital stack.  In solar, it is smaller piece because the investment tax credit is all up front.  [The sponsor] wants to minimize the tax equity to maximize the back leverage, which is cheaper capital.” Advisor, Boutique Accounting Firm Continue Reading Infocast’s Solar Power Finance & Investment Summit Soundbites

“PACE” – Is it the new buzzword? Lately, it seems I keep hearing about securitizations backed by PACE financings. What is a PACE financing program, and what is happening in the securitization market?

“PACE” stands for Property Assessed Clean Energy. Under PACE programs, municipalities and counties form special tax districts to help residential, commercial or industrial property owners finance energy efficient upgrades or renewable energy installations to their properties through payments of additional property taxes. While the specific details vary by state, the basic premise is that the property owner is allowed to finance 100 percent of the cost of the energy property through increased property tax assessments – the “PACE” assessments. The PACE assessments are typically for 15 to 20 years and operate similar to loan payments in that these property tax payments repay the initial financing cost for the energy upgrade. The PACE assessments, however, are legally property tax assessments and, thus, have the benefit of being secured by senior liens against the taxpayer’s property.

The way the financing works is specific to the individual programs, but the funds typically come from some form of private / public partnership, which allows the state or municipality to encourage identified property upgrades to achieve environmental and energy efficiency goals without having to raise funding, and provides investors with new opportunities to invest in a secure asset in the green energy space. The benefit to the property owner is typically the ability to realize immediate cost savings in reduced energy costs while paying for the improvement over a 15 to 20 year period, and also being able to finance 100 percent of the cost. Continue Reading “PACE” for Residential and Commercial Renewable Energy Projects – What is it?

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 Power 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

First Published in May 2014 in North American Wind Power

Many wind developers regularly require additional capital infusion and keep their eyes peeled for opportunities to raise it. Three recent trends in public equity transactions for developers are yieldcos, listing on the Toronto Stock Exchange (TSX) and the declining use of real estate investment trusts (REITs).

Please click this link to read the rest of the article: Article-North_American_Wind_Power_Burton_2014