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

Continue Reading Tax Equity Structuring & Impact of Potential Tax Reform Webinar June 28

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.[1]  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?

Answers:

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?

Answers:

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?

Answers:

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

Location
Mayer Brown
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)

Speakers

David K. Burton
Partner
Mayer Brown

Vadim Ovchinnikov, CFA, CPA
Director
Alfa Energy Advisors

Gintaras Sadauskas
Director
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 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

 

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

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.

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