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 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%
Please join Mayer Brown, Alfa Energy Advisors and Bloomberg BNA for a seminar at Mayer Brown’s New York office. We will address how tax reform could affect various tax equity structures, how the market is allocating tax reform risk between sponsors and tax equity investors and these topics:
- The IRS’s updated “start of construction” guidance for tax credit qualification
- Trends in the tax equity market
- Impact of potential tax reform on flip partnership structuring
- Wind PTC projects
- Solar ITC projects
- Earnings per share impact analysis
- Comparison of time and yield based partnership flip structures
Tuesday, May 2, 2017
12:00 p.m. – 12:30 p.m. Registration & Lunch
12:30 p.m. – 2:00 p.m. Program
1221 Avenue of the Americas
New York, NY 10020-1001
+1 212 506 2500
Attendance in person at the live event is free of charge. Click to Register to Attend in Person (or go to http://reaction.mayerbrown.com/reaction/RSGenPage.asp?RSID=HNeQeRsxYjYPrH4jAN4fZqQ2XuFuZTe2pLLslTkJ177lkEoGqbiUt_0a9DqRcwMz)
If you are unable to join in person, the program will also be available via webinar.
Bloomberg BNA Registration: $224
For 25% off registration, use promo code: FIRMDISC17
Click to Register to Participate via Webinar (or go to https://www.bna.com/tax-equity-structuring-m57982085993)
David K. Burton
Vadim Ovchinnikov, CFA, CPA
Alfa Energy Advisors
Alfa Energy Advisors
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
Below are soundbites from panelists at the Infocast Wind Power & Finance Investment Summit on February 28, 2017 in Rancho Bernardo, California. The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or a recording. The soundbites were edited for clarity.
Prospects for Tax Reform
“Generally in Congress things take longer than they want them too.” – In House Lobbyist
“Tax reform won’t take shape until next year, and that is probably early.” – Regulatory Affairs Executive
“Amidst the unknowns, if you are not taking into account the uncertainty of the corporate tax rate, you are probably not getting it right.” – Regulatory Affairs Executive
“If tax reform is good for corporate America, then in the grand scheme it is good for us, given the [number of] corporate buyers” of wind power. – CEO of Texas Wind Developer
Allocation of Tax Reform Risk in Transactions
“There is a risk that early deals that have to get done set a standard for the allocation of tax reform risk [between the tax equity investor and the developer] that is not sustainable.” – Renewable Energy Executive
“If corporate tax reform remains uncertain, it poses a risk of such a big swing in the economics [of a wind project] that no one is prepared to absorb that risk.” – Executive from East Coast Utility
“Our [utility] commission has been okay with a clause in a power purchase agreement requiring renegotiation of the pricing for tax changes. If there is an adverse tax change, we will be buying power at the higher rates in any event at that time.” – Executive from Midwest Utility
On January 19, 2017, the US Internal Revenue Service (IRS) released Revenue Procedure 2017-19 (the “Rev. Proc.”) providing a safe harbor for certain alternative energy sales contracts with federal agencies to be treated as service contracts under Section 7701(e)(3). The safe harbor is important because, if such a contract is treated as a lease to the federal agency, a solar project would constitute “tax-exempt use property” that is ineligible for the investment tax credit (ITC) and accelerated depreciation (including bonus depreciation).