Partnerships

Our article Proposed GOP Tax Reform Would Curtail Tax Incentives for Wind and Solar is available from North American WindPower (no subscription required).  The article includes a discussion of the politics of the Senate passing tax reform and a discussion of market implications; however, the discussion of the specific changes to the Internal Revenue Code…

The full text of the article is below or it is available at Solar Industry Magazine:

The solar industry has undergone a tremendous evolution in the course of the last decade. Below we outline some of the more notable developments, with a focus on project financing in the U.S.

In 2007, the largest solar photovoltaic project in the world was an 11 MW project in Portugal, called Serpa, that cost EUR 58 million to build. Today, the largest solar PV project in the world is Tengger Desert Solar Park in China and is 1,500 MW, or more than 100 times the capacity of Serpa, and the cost of building a solar project is a fraction of what it was a decade ago.

In 2007, manufacturers of thin-film solar and manufacturers of crystalline silicon solar were battling to see which would be the predominant technology. Today, there are more manufacturers of crystalline modules than thin film and more projects using crystalline modules than thin film; however, First Solar appears to have found success with rigid thin-film modules.

In 2007, terms like “resi,” “C&I,” “DG” and “community solar,” which are now ubiquitous in our industry, were unknown to most energy financiers.
Continue Reading Solar Industry Magazine Publishes – A Decade of Evolution In U.S. Project Financing

Below are soundbites from panel discussions at Solar Power International in Las Vegas on September 11 and 12. The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or recording.

The topics covered are: Tax Reform  • Tax Equity Volume and Investor Mix • Tax Equity Structuring • Deficit Restoration Obligation Structuring and Senior Secured Debt in Partnership Flips • FMV Valuation Issues and Insurance  • Community Solar • Community Choice Aggregators  • Power Purchase Agreements • Residential and Community Solar Markets • State Policy • Department of Defense Procurement

Tax Reform

ITC has already gone through tax reform and already has a transition rule in place. These arguments resonate pretty well with Republicans. — SEIA, Gov’t Relations

Anyone who tells you where we are now in this tax reform debate, is lying to you. — Boutique Investment Manager

Low likelihood of comprehensive tax reform in 2017. Chances for a tax cut are pretty good. Indemnification for a tax rate cut is built into these transactions. — Boutique Investment Manager

We are using a 25% corporate tax rate in most deals. The specifics depend on allocation of risk [of change in tax law] and [the financial strength of] the counterparty. We are more likely to put in less capital now and contribute more later if there is not a tax rate cut. — Commercial Bank, Head of Business Development Energy Investing

Not one size fits all. We use a 35% tax rate for 2017 and a lower rate for 2018 and beyond. In our deals, for federal tax rates we use between 25 and 30% [for 2018 and later]. If rate reduction doesn’t occur, we then fund more. It frightened me when Paul Ryan said he was aiming for a 22.5% tax rate. [This was before the Republican Big 6 released their proposal with a 20% corporate tax rate.] — Money Center Bank, Managing Director

We have very flexible solutions in place now to address tax rate reduction risk in deals. It is not the headache it was six months ago. — Boutique Accounting Firm, Director

Since corporations generally pay less than 35% in federal taxes now, and $1 of tax credit is $1 of tax credit, it remains to be seen what a lower rate really means [for the solar tax equity market]. — Boutique Investment Manager

The potential change in tax rate means the potential for a cash sweep, which means sponsors can raise less back leverage. — Commercial Bank, Head of Business Development Energy Investing.
Continue Reading Solar Power International 2017 Soundbites

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.

Tax Reform

“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…

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…

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

…

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