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Michael J. Goldman, Esq.
Donald Nimey, CFA, FRM
Daniel J. Smith, CPA
Energy Credit
• Section 48 of the Internal Revenue Code
• Energy property using solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, but not to generate energy for the purposes of heating a swimming pool
• Must be new property
Solar Energy Credit
• 30% of the facility’s basis, if placed in service prior to January 1, 2017
• 10% of the facility’s basis, if placed in service after December 31, 2016
Solar Energy Credit
• Credit is claimed in the year the facility is placed in service
– (although it could be claimed based on “progress expenditures” over more than one year)
• Recapture possible for 5 years
– (credit vests 20% per year)
Who Claims The Credit?
• The owner of the solar facility
– If there are multiple owners, it is shared in accordance with profits sharing
• The lessee
What is the credit basis?
• Cost of the facility
– Not all items includible
– Cost Certification
• Fair market value of the facility
– Lease passthroughs
– Appraisal
When are the tax benefits claimed?
• Placement in service
– Credits
– 50% bonus depreciation
– Depreciation
Who participates, and who cannot participate?
• Corporate investors
• Individuals
– Issues with respect to at-risk and passive activity rules
• Tax-exempt entities
– Qualified allocations
Exit strategies
• Flip
• Put/Call
Special considerations
• Profit motive
• AMT
• Timing
• Rebates
• Utility subsidies
• Transfers of Interests
Structures
• Self-owned
• Partnership
• Lease Passthrough / Inverted Lease
• Sale-Leaseback
Sample ITC Single Tier Structure – Flip
Renewable Energy
Project Owner, LLC
Tax Credit Investor, Corp.
Renewable Energy Project
Developer
Utility/Grid/Dedicated End-
User
Retains 0.01% of Project Ownership, Depreciation and Residual Cash Flow; receives fees to strip out some cash flow; buys out Investor after flip in partnership interests
10+ year fixed PPA; Utility makes base year payment of $0.XX/kWh with X% annual escalations
Investor contributes equity equal to $1.XX per ITC at completion of project; receives 99.99% of Project Ownership, Depreciation, Residual Cash Flow (after fees) and ITCs. A yield-based or timing-triggered flip of partnership interests typically precludes a put or call of Investor’s interest in Project.
The Captive Energy Company
Equity Investor99%
Equity Investor99%
FundManager
1%
FundManager
1%
Investment Fund99%
Investment Fund99%
General Partner1%
General Partner1%
Systems Integrator/InstallerSystems Integrator/Installer
Energy Credit Investor99%
Energy Credit Investor99%
DeveloperDeveloper
PropertyOperating Partnership
PropertyOperating Partnership
Developer Energy Company, LLC
Developer Energy Company, LLC
$
$
Installation Agreement
$
30% ETC
$ Managing Member 1%
PPA/LeaseAgreement
PPA/Lease Revenue
Dev. Fee
Sample ITC Master Lease Structure
Tax Credit Investor, Corp.
Renewable Energy Project
Developer
Utility/Grid/Dedicated End-
User
Master Tenant, LLC
ITCs passed via Master Lease; Master Tenant operates equipment and makes lease payments to Owner
Retains 51% of Project Ownership and Depreciation; receives fees to strip out most cash flow; buys out Investor after 5 years
10+ year fixed PPA; Utility makes base year payment of $0.XX/kWh with X% annual escalations
Contributes Investor’s equity into Owner; receives 49% of Project Ownership and Depreciation for 5 years
Investor contributes equity $1.XX per ITC at completion of project; receives pass-thru ITCs and depreciation plus X% cash priority for 5 years and XX% put proceeds at end of 5th year (both %s based on contributed equity)
Renewable Energy
Project Owner, LLC
Lessor is owner of SEF, Investment Tax Credits, Tax Losses (Depreciation Deductions), Rebates, RECs, Recipient of lease payments, Potential residual buyout
Solar Installation
Host #1
Solar Installation
Host #1
Solar Installation
Host #2
Solar Installation
Host #2
Solar Installation
Host #3
Solar Installation
Host #3
Solar 1, LLC
Solar 1, LLC
Solar 2, LLC
Solar 2, LLC
Solar 3, LLC
Solar 3, LLC
Solar Developer, LLCLessee
Solar Developer, LLCLessee
PPA/Lease Agreements
Corporate InvestorLessor
Corporate InvestorLessor
Engineering, Procurement and Construction Agreement (“EPC”)
Solar Developer may provide certain guarantees to Corporate Investor and funds would be held in escrow accordingly. Yield guarantees, O&M, Insurance etc. Funds released to Solar Developer as guarantees burn off.
Lease Agreement
Sales Proceeds
Sale of SEFs and Lease Payments
Purchase Agreement
Systems Integrator/InstallerSystems Integrator/Installer
Solar DeveloperSolar Developer
Sale Leaseback Structure
Investment Tax Credits for Solar—The Basics
Tax Credit Investor Tax Benefits
StructureTax
Credits
Tax Deprec
.
Basis Adjust
.
Book Deprec.
Flip Yes Prob. Prob. Prob.Sale/Leaseback Yes Yes Yes YesLease Pass-Through Yes No No No
Investment Tax Credits for Solar—The Basics
Tax Credit Investor Cash Benefits
StructureCash
InflowCash
Outflow
Flip PPA
LPA Distributi
on
Sale/Leaseback LeaseNote
Payments
Lease Pass-Through PPALease
Payments
ARRA Grant Program
• Placement in service in 2009 or 2010
– Or placed in service before 2017 if construction commenced prior to 2011
• Application deadline is September 30, 2011
• Guidance forthcoming
Contacts
Michael J. GoldmanNixon Peabody LLP401 Ninth St., NW
Suite 900Washington, DC 20004
Donald NimeyReznick Group, P.C.
7700 Old Georgetown RoadSuite 400
Bethesda, MD 20814-6224 301-280-1846
Daniel J. SmithNovogradac & Company LLP
303 West Third StreetDover, Ohio 44622
