Many developers of renewable energy projects have experienced higher than expected transaction costs. There can be a wide range of reasons for such overages. One all-too-common reason is project documents that cause tax tensions. These tax tensions lead to more lawyer time, which leads to higher transactions costs. Thus, developers concerned about transaction costs should negotiate “tax-friendly” project documents to streamline the tax equity investor’s diligence process.
Project documents are typically presented by the developer to the tax equity investor’s counsel in executed form. Counsel then reviews these to ensure consistency with the tax analysis of the transaction and for other issues. When counsel identifies an apparent glitch, she typically tries to rationalize or mitigate it without requesting an amendment to the project document in question. That analysis can take some time. If she cannot find another solution, she will propose an amendment. It takes time to prepare the amendment and often more time to persuade the applicable counter-party to sign it. That request can then lead the counter-party to propose alternative language and a time-consuming (i.e., expensive) back and forth process.
Below is a list of tax issues for developers to keep in mind as they negotiate project documents. The list is intended to provide trail markers for the most direct path for developers who would like to streamline the tax diligence process (and the associated costs) for their project documents. The list is not intended to be all-inclusive. Further, the list is not to suggest that missing one or more of these is necessarily fatal to the tax analysis because (i) there are often multiple paths to reach the desired tax outcome and (ii) some of these are best practices, rather than fatal flaws. Below is generally intended for wind or ground mounted solar projects, as roof-mounted solar is a somewhat different animal.
There are typically five “project documents” (i) the power purchase agreement (“PPA”) or other revenue contract; (ii) the site lease or other right (which is sometimes combined with the power purchase agreement) to use the ground or roof on which the project is constructed; (iii) the interconnecting agreement that enables the project to transmit its power to the grid; (iv) the operations and maintenance agreement; and (v) the construction contract.