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.”
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…
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…
Today, the House voted 227 to 303 in favor of the tax reform bill agreed to by the conference committee. No Democrats voted for the House bill, and 12 Republicans from high tax states voted against it. The Senate is expected to vote later this evening to approve it; it is possible that the president could sign the bill as early as tomorrow.
The enacted legislation is expected to be identical to the bill approved by the conference committee. Our analysis of the conference committee’s bill’s impact on the renewable energy market is below, which is followed by a chart that summarizes the relevant provisions in each of the three bills.…
Continue Reading House Passes Tax Reform & the Impact of Tax Reform on the Renewable Energy Market
The Stratton Report has published an interview with me that discusses the pending tax reform legislation: http://strattonreport.com/longforms/davidburtonmayerbrown/.
The US tax reform bill that the Senate passed on December 2, 2017—along partisan lines in a 51 to 49 vote—is a mixed bag for the tax equity market. The bill is now headed to the conference committee, consisting of House of Representative and Senate leaders, to be reconciled with the tax reform bill passed by the House on November 16.
Below we describe the five differences from the House bill that are of greatest significance to the renewable energy tax equity market. (See also our prior analysis of the ramifications for the tax equity market of the House bill.)
Amounts of and Eligibility for Tax Credits
First, the amount of renewable energy tax credits available and the rules for qualifying for those credits are unchanged from current law under the Senate bill. Specifically, the inflation adjustment that applies to production tax credits is left in place and the “start of construction” rules are unchanged. The fact that the Senate bill left these provision alone is positive for wind and solar, which are in the midst of a phase-out, for wind, and a phase-down, for solar.
However, the Senate bill also left alone the lapsed tax credits for the “orphaned” renewable energy technologies that were inadvertently omitted from the 2015 extension that benefited wind and solar. The orphaned renewable energy technologies are fuel cells, geothermal, biomass, combined heat and power, landfill gas, small wind, solar illumination, tidal power and incremental hydroelectric.
Proponents of those technologies may have more negative views of the Senate bill. There is still discussion of the tax credits for the orphaned technologies being included in an “extenders bill” to possibly be taken up after the tax reform process is over.…
Continue Reading Senate’s Tax Bill’s Impact on the Tax Equity Market: Five Differences from the House Bill