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Tax Equity - What Project Developers Need to Know in 2019
"A Complex Tax Environment"
Project “Sponsors” have long enjoyed stretching their upfront capital for renewable projects by
partnering with tax equity investors, a small group of investors who were greatly motivated by the federal and state tax benefits they would receive. With the passing of recent legislation, that market of investors may be less motivated to dish out their cash as we enter into 2019.
Prior to the Tax Cut and Jobs Act (TCJA) signed into effect December 22nd of 2017, tax equity
investors with high corporate liability found tax relief by lending to viable renewable projects in
exchange for Production Tax Credits (PTCs) and depreciation bonuses. Production Tax Credits
offered investors a dollar amount per MWh being generated by the project. These tax credits
were then utilized by the equity investor to reduce their tax liability come tax time. This type of
arrangement would typically last ten years allowing enough time for the equity investor to earn
back its investment and fully exercise its tax benefits. Particularly in a partnership flip, the
sponsor would regain majority ownership of its project after the equity investor collected and
could buyout the remaining stake at fair market value.
However, recent legislation is making it harder on project “sponsors” to find equity investors that
are motivated by the tax incentives. The TCJA essentially gave corporations the tax break they
have been looking for. Corporate tax rates fell from 35% to a flat 21%. Although, equity
investors can still get Investment Tax Credits (ITCs) on specific renewable technologies, the
PTCs’ market value has been on a steady decline making it less attractive for investors in an
already complex tax environment.
But that’s not the only reason tax equity investors aren’t jumping for joy…
PTCs are being phased out at the end of 2019. The Consolidation Appropriation Act of 2016
extended the eligibility for credits for wind projects until the end of 2019. Other technologies had
to begin construction prior to December 31st, 2017 to qualify for PTCs.
With legislative changes taking place, project “sponsors” should strongly consider how they
enter into financing. Debt vs Equity... Equity vs Debt...Tax Equity Investors vs Debt Lenders.
Below are just a few important considerations you should factor in as you look to finance your
renewable project in 2019.
- Do you have a strong Financial Model?
- Is there a positive IRR/NPV?
- Do you have existing financed debt for the project?
- Do you have an existing tax equity investment?
- What is the rate of depreciation for the system being implemented?
- How will assets, profits, losses, cash flow, credits be divided within any partnerships to
ensure positive return? - Do you have sufficient capital to cover proper due diligence, attorney’s fees, and SPV setup?
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