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On July 11, 2017, the Connecticut General Assembly enacted H.B. 7208 (“Revised C-PACE Statute”) to make several minor changes to the existing statute governing the State’s commercial property assessed clean energy (or “C-PACE”) program.[1]  All of the changes are favorable.

Specifically, the Revised C-PACE Statute: (1) expands the program to include C-PACE financing for energy efficient new construction; (2) adds leases and power purchase agreements as permitted financing methods for third-party capital providers; (3) establishes the name “benefit assessment liens” for liens arising under the C-PACE program (referred to here as “Program Liens”) and specific provisions governing the operation of Program Liens (described below).  The bill repeals and replaces Section 16a-40g of the general statutes (the “Existing Statute”) effective as of October 1, 2017.

The most important change to the Existing Statute appears to be some minor wording changes to a section of the Existing Statute describing certain types of “energy improvements” permitted to be financed under the C-PACE program.   This category of qualifying “energy improvements” is described as including any renovation or retrofitting of qualifying property to reduce energy consumption.  The Revised C-Pace Statute adds the words “improvement” and “energy efficiency” such that the this category of financeable energy property is now described as “any improvement, renovation, or retrofitting to reduce energy consumption or improve energy efficiency. [2]

Under the Program Lien rules, there is a lien on the property for all amounts due and payable.  Noteworthy for creditors is that a property foreclosure to satisfy past payment obligations extinguishes the Property Lien only with respect to the payment obligations assessed through the foreclosure date.  The Program Lien continues to apply to the property with respect to any payments due to paid in the future.  Continue Reading Connecticut Makes Favorable Changes to its Commercial PACE Financing Program

Our article AZ Companies Win Preferential Tax Treatment for Solar Panels was recently published in State Tax Notes.  The article analyzes a favorable opinion by the Arizona Supreme Court in a case brought by SolarCity and SunRun.  The Arizona Supreme Court that held that an Arizona law allowing taxpayers to attribute no value for property tax purposes to solar panels leased to customers did not violate the Arizona Constitution.

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

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

Continue Reading SEIA’s Finance & Tax Seminar Soundbites

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

“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?