Tax Equity Structures: North Carolina Edition

Transcription

1 Tax Equity Structures: North Carolina Edition May 21, 2015 John Marciano

2 Tax Equity The federal government currently pays a significant portion of a renewables project s cost, in the form of tax subsidies. The main federal subsidies for solar projects are: 30% investment tax credits 5-year accelerated depreciation North Carolina currently offers a similar tax credit. 35% of project costs claimed over 5 years (20% per year) Projects not completed by Dec. 31, 2015 must achieve a certain level of completion by that date and be placed in service by Dec. 31, 2016.

3 Tax Equity: s There are at least 20 active federal tax equity investors with a number of additional smaller players doing one-off deals. Competition for North Carolina tax equity investors is fierce.

4 Tax Equity: Basic Structures There are three main federal tax-equity structures Partnership Flip Sale-Leaseback Lease Pass-through If the NC tax equity investor has federal tax appetite, then one of these structures accomplishes the goal of monetizing both state and federal credits. Otherwise, some tweaks must be made to split the two.

5 Partnership Flip Sponsor 1% of tax attributes (net income/loss and credits) until investor s target yield reached, then 95%. The sponsor typically would take the majority of the cash flows, but once its share of tax attributes increases to 95%, so will its cash share. When the investor reaches its target yield, the sponsor has an option to buy out the investor for FMV. Hold Co Project Co 99% of tax attributes until target yield reached, then 5%. These tax benefits include 99% of depreciation and the 30% investment credit. The investor receives sufficient cash to ensure its investment will be treated as having economic substance. That usually means a 2% pre-tax return on its investment.

6 Advantages and Disadvantages of a Partnership Flip? Advantages Developers like partnership flips because they automatically get most of the project back without having to repurchase it. More certainty for investors because of the safe harbor issued by the IRS (Rev. Proc ) Preferred structure for developers that only want to pay TE rates to monetize tax benefits (Sizing off of the tax benefits not the FMV of the project) Disadvantages Can only monetize 99% of the tax benefits and complicated partnership accounting may make it difficult to get even 99% of the tax benefits to the investor The structure raises only part of the cost of the project.

7 Sale-Leaseback (ITC) Sponsor builds the projects. Just after COD, the sponsor sells the project to an investor and leases it back. claims 100% of depreciation and investment credit. Investment Lessor (Owner) Equity Return Sale Purchase Price Lease Rents Sponsor (Lessee) Sponsor has an option to buy the project after 5 years or at the end of the lease at FMV. Project

8 Advantages and Disadvantages of a Sale-Leaseback? Advantages Step up of the tax basis from cost to FMV. (Typically 10-15% mark-up) A sale-leaseback offers 100% financing. The tax equity has no trouble taking 100% of the tax benefits. Timing - In a sale-leaseback, the tax equity investor can wait up to three months after a project is put in service to buy and lease back the project. Mitigates construction risk for investors. Disadvantages Developer is giving up ownership of the project and it is more expensive for the Developer to get the project back at the end of the lease.

9 Lease Pass-Through (ITC) Basic Walk the Dog Variation Sponsor $ Rents Leases Systems $ Rents or $ for Power Customer Leases System or Buys Power Customer

10 Advantages and Disadvantages of a Lease Pass-Through Advantages Step up of the tax basis from cost to FMV. Developers like the structure because they automatically get the project back when the lease ends. Some s prefer this structure because they only want to monetize tax credits without paying for depreciation. Disadvantages Developers are not monetizing depreciation.

11 North Carolina Variations There are three popular variations on the typical federal tax-equity structures to split North Carolina tax credits from federal tax credits. Capital Lease Lease Pass-through 8-Times Rent (State Lessee) Walk the Dog (Federal Lessee)

12 North Carolina Variations Capital Lease State Sponsor Federal Immediately before COD, project is owned by ProjectCo, which enables State to claim 99% of NC ITC. State HoldCo Project Co Project Federal HoldCo Project Project is leased to Federal Holdco under a capital lease (an installment sale for federal tax purposes) immediately before COD. Federal Holdco is the owner upon COD and Federal claims 99% of federal ITC.

13 North Carolina Variations Walk the Dog State investor claims 99% of 35% NC ITC, based on project fair market value. State HoldCo is set up as a typical partnership flip. State Sponsor State HoldCo $ Rents leases systems and claims federal ITC equal to 30% of project fair market value. Federal $ for Power Customer Buys Power Customer

14 North Carolina Variations 8-times Rent Federal investor claims 99% of federal ITC. Federal HoldCo is set up as a typical partnership flip. Federal Sponsor Federal HoldCo $ Rents State leases systems and claims NC ITC equal to 35% of 8 times year one rents. State $ for Power Customer Buys Power Customer

15 Tax Equity Structures: North Carolina Edition May 21, 2015 John Marciano