This is part of a series of articles about “lessons learned” as a CFO/COO of a national solar developer.
The “lessons learned” are built into the Industry Specific Solar ERP software my company recently launched. www.devholderp.com.
This article is a primer (mostly in layman’s terms) on Tax Equity Financing.
You may want to read this article first: Financing a Large-Scale Solar Project.
For most of my friends in the Large-Scale Solar industry, Tax Equity Financing continues to be a mystery.
It was for me until I had to go through the “Gauntlet” a couple of years ago and actually figure it out.
A Quick Overview - The concept is relatively simple.
The Federal Government provides a Solar Investment Tax Credit (ITC) (better than a tax deduction) based on the Fair Market Value (FMV) of the project.
The credit can be anywhere from 30% to 50% depending on the project.
A $10MM project would result in a tax offset of $3MM to $5MM.
With a 21% Federal tax rate, a company would need $14MM to $25MM of Net Income just to offset one project.
Multiply that by ten projects and you can see the problem.
To solve the problem, the Solar industry enlisted the support of large profitable businesses (usually large banks) and together with the IRS developed a technique to be able to “transfer” the ITC to a company that can use it.
This technique is called Tax Equity Financing.
The Journey - Thankfully the industry figured this out, if they had not, the conversion to renewables would not be expected to triple over the next five years, it would be moving at a snail's pace!
As you can imagine, having been developed by large banking institutions, the IRS, law firms, accounting firms and tax firms it is extremely complex and technical.
If you are preparing to embark on the Tax Equity Financing journey, here are some tips from the front line:
Financing Strategy - Tax Equity financing is one portion of a financing strategy. See Financing a Large-Scale Solar Project for more information.
How do you start? - You cannot do it alone.
Find a solid general advisor. CohnReznick Capital is very capable.
Tax Advisors - Like any other tax strategy, this one is not intuitive and is very complex. The complexities range from guidelines on the Fair Market Value Step-up to how long each entity should hold the cash. Deloitte Tax has this very well worked out.
Tax Equity Lawyers - Tax Equity Financing requires a complex legal structure of partnerships and disregarded entities to allow the ITC to be passed to the Tax Equity investor in a legitimate manner.
Projects are developed by one entity, constructed by another, Stepped-up income to another and finally a Partnership is owned by the sponsor and the Tax Equity Partner.
Stoel Rives LLP are the go to Law Firm for the industry
Accounting Advisors - Now that the legal structure is set up, it's time to figure out how to properly account for it. This is something most internal accounting departments have never had to deal with.
Riveron (Now part of Kohlberg & Company) specializes in Tax Equity/Large Scale Solar accounting.
If this sounds expensive…it is!
Not doing it correctly, will leave your projects open to an IRS reversal of the ITC and then everyone loses.
This article is intended to give you a high-level framework on how Tax Equity Financing is used. If you need help finding an expert or just want to discuss the concepts, we are here to help.
Sincerely
Jeff