We were pleased to participate in Power Finance & Risk’s (PFR) Tax Equity Roundtable. We were joined in the roundtable discussion by Rich Dovere of C2 Energy Capital, Marshal Salant of Citi, Kathyrn Rasmussen of Capital Dynamics Clean Energy and Infrastructure, Pedro Almeida of EDP Renewables North America and as moderator PFR’s editor, Richard Metcalf. The topics covered included tax equity structuring, tax reform, tax equity syndication and the challenges and opportunities associated with distributed generation solar. We are pleased to be able to make available to our readers PFR’s report: PFR Tax Equity.
Mayer Brown’s David K. Burton and Jeffrey G. Davis both Tax Transactions & Consulting partners and part of the firm’s Renewable Energy group co-hosted a heavily attended webinar on how tax reform is impacting the tax equity market and certain renewable energy structures with Vadim Ovchinnikov, CFA, CPA and Gintaras Sadauskas of Alfa Energy Advisors. Topics addressed, included: The latest industry trends such as, the feds raising interest rates; the increase in project M&A activity for both development and operating assets; plans for large offshore wind projects in several east coast states; changes in PPA’s and revenue models; compressed margins and why developers and investors are moving towards commercial and industrial (C&I) solar projects. Additional topics, included:
- New bonus depreciation rules and impact on tax equity transactions and modeling;
- Compressed financing margins for wind and solar;
- Strategies for “starting construction” to qualify for the maximum investment tax credit and rules for transferring safe harbored equipment between wind projects; and,
- An overview of HLBV GAAP accounting for tax equity investments as a challenge for public companies.
Over 480 clients and contacts registered for the co-hosted webinar. Due to the volume of interest and post-presentation questions, we would like to share the slides from the presentation: webinar presentation.
We are reviewing and preparing responses to all of the questions that were submitted electronically during the webinar. We will be sharing those questions with our answers in a subsequent blog post.
Please join Mayer Brown and Alfa Energy Advisors for a webinar. The webinar will address how tax reform is impacting the tax equity market and certain structures in particular. Additional topics include:
- The latest industry trends
- New bonus depreciation rules and their impact on tax equity transactions and modeling
- Compressed financing margins for wind and solar
- Strategies for “starting construction” to qualify for the maximum investment tax credit and rules for transferring safe harbored equipment between wind projects
- An overview of HLBV GAAP accounting for tax equity investments as a challenge for public companies
CLE credit is available.
Tuesday, October 23, 2018
1:30 p.m. – 3:30 p.m. EDT
12:30 p.m. – 2:30 p.m. CDT
11:30 a.m. – 1:30 p.m. MDT
10:30 a.m. – 12:30 p.m. PDT
8:30 p.m. – 10:30 p.m. CEST
7:30 p.m. – 9:30 p.m. BST
We have published our whitepaper: Gain Deferral Using Qualified Opportunity Zone Investment Strategies Legal Update. “Qualified Opportunity Zones” are not specific to renewable energy and do not involve tax credits but provide a powerful new tax benefits as a result of their enactment last year as part of the “Tax Cuts and Jobs Act.”
The whitepaper discusses Qualified Opportunity Zones generally. Two aspects of them are of note to the renewable energy industry. First, the statutory language appears to apply to ordinary and capital gains (the IRS may take a different view in its guidance). The applicability to ordinary gains means that the Qualified Opportunity Zone rules could be used by developers to defer the tax gain they recognized on sales of projects to tax equity partnerships or lessors.
Second, the intersection of the Qualified Opportunity Zone rules and the partnership capital account rules requires clarification that we expect the IRS to provide in its guidance. So the purchase by partnerships of solar projects in Qualified Opportunity Zones is a strategy that requires further guidance before the tax results can be certain.
Below are soundbites from panelists at Infocast’s Solar Power Finance & Investment Summit from March 19th to 22nd in Carlsbad, CA. It was an extremely well-attended event and the mood of the participants was generally upbeat. Many people observed that there was more capital for projects under development or to buy operating portfolios than there was such supply of projects available to meet that demand.
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.
Impact of Tax Reform on the Tax Equity Market
Impact of the Corporate Tax Rate Reduction on the Supply of Tax Equity, Yields and the Capital Stack
“This year we can do $9 million in tax credits; before we could do $15 million.” [The implication is that a 21 percent federal corporate tax rate is 40 percent less than a 35 percent corporate tax rate, so the tax appetite has declined by 40 percent.] Vice President, Industrial Bank
“The [supply side of the] tax equity market has declined by 40 percent; some tax equity investors are taking a pause.” Vice President, Regional Bank
“Our bank this year is slightly below the billion dollars of tax equity it originated last year for its own book.” Vice President, Midwestern Bank
Some “mainstream tax equity investors have taken a pause [from investing] to figure out what the 21 percent corporate tax rate means for them. It is an investors’ market, but we nervously see a sponsors’ market ahead.” Managing Director, Financial Advisory Firm
Traditionally, rates for tax equity have been a function of supply and demand, but now we are seeing real pressure on rates.” Managing Director, Money Center Bank
[It is difficult to jibe this banker’s quote regarding pressure on tax equity rates with the quotes above regarding the supply of the tax equity market being smaller due to tax reform. Possibly, tax equity investors are agreeing to share some of the yield detriment of the depreciation being less valuable and that has resulted in reduced after-tax yields.]
“Some utilities that had tax appetite no longer have tax appetite and need to raise tax equity for their projects.” Director, Money Center Bank
“We are trying to get back to the same all-in return where we were before tax reform.” [As the depreciation is less valuable at a 21 percent tax rate than it was at a 35 percent tax rate, this means either (i) contributing less for the same 99 percent allocation of the investment tax credit or (ii) contributing the same amount and requiring a distribution of a larger share of the cash.] Vice President, Midwestern Bank
“Tax reform helped us because it means tax equity contributes less to the project, so it makes our loan product more necessary.” General Manager Renewable Energy Finance, Small Business Bank
“The debt market has come in and is filling the decline in tax equity.” Executive Director, Manufacturing Corporation
“The buyouts of [tax equity investors’ post-flip interests] are more valuable because of the lower tax rate.” Partner, Big 4 Firm
“We see sponsors’ financial returns over a 35-year project life increase due to the tax rate reduction.” ” Managing Director, Structuring Advisory Firm Continue Reading Infocast’s 2018 Solar Power Finance & Investment Summit Soundbites
In its Finance Quarterly, A Word About Wind has published a brief Q&A between David Burton and its editor Richard Heap. The Q&A touches on a variety of issues related to wind in the US, including tax reform, the state of the tax equity market and repowering. We are pleased to be able to make PDF version of the interview available
Pratt’s Energy Law Report has published our article 2018 and Onward: The Impact of Tax Reform on the Renewable Energy Market. We are pleased to be able to make a PDF version of the article available. (The article starts on page 6 of the PDF).
The Equipment Leasing and Finance Association has published our article The Impact of Tax Reform: What Leasing Companies Need to Know (subscription required). We are also pleased to be able to make the article available in PDF format. The article addresses equipment leasing generally, rather than being renewables or tax credit focused.
A Word About Wind has published our article What Is the Impact of Tax Reform on US Wind Tax Equity Deals? in its blog (subscription required) and newsletter. If you are unable to open the blog post, the text of the article is available below:
On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some of the ramifications of the reforms on wind tax equity transactions.
Corporate Tax Rate Reduced to 21%
In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.
Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.
100% Bonus Depreciation
A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation. Continue Reading What Is the Impact of Tax Reform on US Wind Tax Equity Deals?
On December 22, 2017, the president signed the tax reform bill. It is generally identical to the conference committee bill discussed in our blog post of December 19, and specifically there were no changes with respect to renewable energy, corporate income taxes, partnerships or expensing. Therefore, our analysis of the conference committee bill holds true for the enacted bill.
The changes that were made to the bill were minor and were required by the Senate’s parliamentarian to comply with the “Byrd rule” in order for the bill to be passed with only a simple majority of the votes in the Senate. First, the parliamentarian objected to the “short title” of the bill being “Tax Cuts and Jobs Act.” The enacted bill does not have a “short title”, so it is being colloquially referred to as the act formerly known as the Tax Cuts and Jobs Act. The parliamentarian’s other two objections related to aspects of the new tax on large endowments of colleges and universities and changes to the section 529 tuition reimbursement account program.
I suspect that as the act is studied by tax professionals that traps for the unwary, unexpected planning opportunities and technical glitches will be identified. To the extent they relate to the renewable energy industry, they will be covered in this blog.