Combining Solar
and Housing Tax Credits
Stephen Tracy, CPA
Novogradac & Company LLP
(415) 356-8010
stephen.tracy@novoco.com
Thomas Giblin
Nixon Peabody LLP
(617) 345-1102
tgiblin@nixonpeabody.com
Stacie Altman
RBC Capital Markets
saltman@rbc.com
Albert Luu
Solar City
(650) 963-5833
aluu@solarcity.com
Agenda
– Solar Investment Tax Credit Basics
– Solar Credits and the LIHTC
– Investor Perspectives
– Transaction Structures
– Numerical Example
Solar PV Technologies
• Sizing the system is important
– Usually use solar to only cover electricity needs of
common areas
– Tenant load usually not covered
– Solar vendor will usually have tools to determine costeffective size
• Choice of system mainly based on
– Cost per kWh (not just upfront cost per watt)
– Hardware/Installer warranty
– Aesthetics/Other
Technical Considerations for Multi-Unit Housing
•
•
•
•
Common Loads or Unit loads
Multiple Meters
Roof or Carport
Monitoring and Maintenance
System Size
97 kW
Installed
August 2008
Type
Flat Roof
Location
San Jose, CA
Industry
Multifamily Housing
Curtner Gardens
SolarCity CONFIDENTIAL
Solar Tax Credits – Basic Rules
– 30% Investment Tax Credit
– In place until 12/31/16
– Tax credits generated 100% on the PIS date
– Carry back 1 year – Carry forward 20 years
– Reduces AMT beginning in 2009
– 5-year recapture period
Stimulus Bill (ARRA) - New Rules
– Section 1603 Treasury Grant program
• Expired 12/31/11
• Safe Harbor transactions
• Will get extended?
– Subsidized Energy Financing taint removed
• No longer causes a reduction in energy tax credit basis
– 5 Year NOL Carryback (Small businesses only)
Eligible Energy Tax Credit Basis
– What costs ARE eligible?
• Solar panels, mounts, wiring, inverters etc.
• Direct and indirect costs of installation
– Design, interest expense, developer fee, other soft costs
– Portion of roofing repair? Reasonable allocation
Non-Eligible Energy Tax Credit Basis
– What costs ARE NOT eligible for the credit?
• Permanent loan fees, syndication costs, etc.
• Costs allocated to the building
– Solar property or roof repair?
– Carport installations – solar property or carport?
Solar Tax Credits – Placed in Service
– When is a facility placed in service?
• “Ready and available for its intended use” – IRC definition
• Public Utility signoff – PTO Letter
– PTO: Permission to Operate
• Facility completed, licenses obtained, pre-operational testing
complete
•IRC Section 48, 168 and 42 – Dates could be different
Solar Tax Credits – Depreciation
– Energy property depreciated using 5 year MACRS
• Bonus depreciation rules extended - Property PIS in 2009
• Extension for 2010 in the cards? TBD
– Basis Reduction
• Equal to 50% of solar tax credits claimed
• Basis reduction of 15%
• 85% of energy property basis depreciable over 5 years
Tax Exempt Use Issues
• Solar Credits are not available to the extent there is “taxexempt use” property
• Can apply where:
– The owner is tax-exempt
– The lessee is tax-exempt
– Complex rules where there is a part owner/lessee that is
tax-exempt (“qualified allocations”)
• The Treasury Grant is not available where a pass-through
owner has any tax-exempts or governmental entities (more
below) – Affects LIHTC partnerships
Tax-Exempt Use
• LIHTC Partnership w/ a Non-profit general partner
• Property owned by a partnership that has a tax-exempt
partner is deemed owned by the tax-exempt partner to the
extent of their maximum share of a partnership item
• Tax-exempt use property not
investment tax credits (e.g. solar)
eligible
for
tax
• Rule does not apply if allocations are “qualified
allocations”
• Allocations to the to tax-exempt partner are straightup and unchanging
Public Utility Subsidies – Section 136
• Gross income shall not include the value of any subsidy
provided (directly or indirectly) by a public utility to a
customer for the purchase or installation of any energy
conservation measure. (IRC Section 136)
– The term “energy conservation measure” means any installation or
modification primarily designed to reduce consumption of electricity
or natural gas or to improve the management of energy demand with
respect to a dwelling unit.
– The term “dwelling unit” includes a house, apartment, condominium,
mobile home, boat, or similar property, and all structures or other
property appurtenant to such dwelling unit.
Transaction Structures
PPA w/ 3rd Party Solar Developer
Traditional LIHTC Partnership
Captive Energy Company
PPA w/ 3rd Party Solar Developer
-Easiest
-Solar developer provides financing
-Passes on benefit of subsidies
Traditional LIHTC Partnership
with Solar - New Construction
Combine Solar and LIHTC
Fund
General Partner
1%
Investment Fund
Tax
Credits
(ITC and LIHTC)
- ITC
and LIHTC
Deductions
-Depreciation
Tax Losses (depreciation)
- Cash flow
Cash Flow
Tax Credit
Equity
Tax Credit
Equity Investor
99%
99%
ITC & LIHTC Credits/
Tax Losses
Tax Credit
Equity
Systems Integrator/
Installer
Engineering
Construction and
Procurement
Contract (EPC)
LIHTC
Operating
Partnership
(with Solar
Installation)
Operating
Partnership
General Partner
1%
Developer
Developer
Fee
Traditional LIHTC Partnership
• Owner of real estate and solar installation
• Earns BOTH 30% solar energy credits and LIHTCs
• Solar credits generated 100% in year 1 – IRR additive
• 5 year MACRS depreciation deductions for energy property
• State subsidies (www.dsireusa.org for state by state database)
– Rebates
– Solar Renewable Energy Certificates (SRECs)
Solar Tax Credits combined with LIHTC – Issues
– How will the electricity generated by the solar panels be
used by the Project?
– Cannot sell electricity to tenants or back into the grid!!!!!
Or………..
• Solar property is “tainted” as commercial property
Commercial property is not eligible for LIHTCs!
Methods to avoid commercial taint for LIHTC
• Master Meter structure
– One inverter versus one for each unit
– Electronically monitored sub-metering
• Electricity used for heating/cooling systems only
– Common areas (cost of solar panels not eligible for ITC if
electricity generated by solar panels is used to heat a
swimming pool)
– Electricity cannot be sold to tenants
• Utility allowance effect
– Project requests lower tenant utility allowance
– Results in increased Section 42 rents
– Electricity effectively given to tenants
– Risk that tenants abuse the privilege
Solar Tax Credits with LIHTC – Issues
– Beware of tax-exempt entity participation (i.e. non-profit
general partners)
• Tax-exempt use property not eligible for solar tax credits
• Should structure around tax-exempt use property rules to avoid
losing solar tax credits – Just like LIHTC
• Tax-exempt use % ownership based on entity’s highest share of
partnership items of income or gain
– i.e. profit/loss/ residual % etc. (IRC Sec. 168(h)(6))
Investor Perspectives
Benefits of Including PV in Your Project
•
•
•
•
•
Use tax credits and state rebates to buy down costs
Lower operating costs and energy hedge for 25 years
Advantage in competition for LIHTC?
Environmental Benefits
May lower the project’s utility allowance
– IRS Notice 2009-44
How Investors Evaluate Hybrid LIHTC/ Solar Deals
• Primary motive is the LIHTC investment; Solar system is a minor
addition
• Worth about 25 basis points in IRR (give or take)
• Energy credit delivery is fast (adds small first-year boost)
• No opposition from the OCC, OTS, FDIC, Federal Reserve - as long
as the underlying project follows all federal and state affordability
regulations
• Support exists for solar as environmental enhancement and source of
operating savings
How Investors Evaluate Hybrid LIHTC/ Solar Deals
(continued)
• Depreciation is favorably fast (though not all Investors value that)
• Cash flow to Partnership is improved, due to utility savings (valued as
increase in DSCR)
• Residual value is marginally increased by existence of solar
installation
• Possible goodwill value of “going green”
The Captive Energy Company
Existing Multi-Family and other Assets
A way to green your existing portfolio
Developer
(Managing Member)
1%
Developer
Fee
Investor Member
99%
- Institutions?
- Individuals?
- Developer?
Captive Energy
Company, LLC
- ITC (solar) / grant
- Tax Losses (depreciation)
- PPA Revenues (cash flow)
- State subsidies
$
Multi-Family
Solar 1, LLC
(disregarded)
100%
Multi-Family
Solar 2, LLC
(disregarded)
Multi-Family
Solar 3, LLC
(disregarded)
Multi-Family
Solar 4, LLC
(disregarded)
Power Purchase/Lease
Agreements
Systems Integrator/
Installer
Engineering
Procurement and
Construction Contract
(EPC)
Multi-Family
Housing
Project
Host #1
Multi-Family
Housing
Project
Multi-Family
Housing
Project
Multi-Family
Housing
Project
Host #2
Host #3
Host #4
Captive Energy Company
– Owns the solar installation
– 30% ITC or Treasury Grant
– Tax losses (depreciation)
– State subsidies (e.g. CSI/MASH)
– Earns a developer fee
– Monetizes the tax benefits
– Added benefit to tenants
Numerical – 9% Deals
Example – No Subsidies
Combining Section 42 (LIHTC) with Section 48 (Solar Energy Credits)
Investment Tax Credit Calculation - Solar Installation (Sec. 48)
Solar installation price per watt
$
Watts (95 kilowatts)
5.50
95,000
Solar installation costs
522,500
Additional installation costs
22,500 (1)
Solar installation costs before developer fee - Solar Installation
545,000
Developer fee - Solar Installation
81,750 (2)
Total installation costs including developer fee - Solar Installation
626,750
Less: costs ineligible for 30% solar ITC
(6,750) (3)
Total costs eligible for 30% solar ITC
$
620,000
Total costs eligible for 30% solar ITC
$
620,000
Investment tax credit %
30%
Solar ITCs
$
186,000
Total costs eligible for 30% solar ITC
$
620,000
50% basis reduction (50% of solar ITCs)
Depreciable basis - 5 year MACRS
(1) Soft costs
(93,000)
$
(2) 15% of cost (3) Org. costs, syndication, etc.
527,000
Combining Section 42 (LIHTC) with Section 48 (Solar Energy Credits)
Low-Income Housing Tax Credit Eligible Basis (Sec. 42)
Solar installation costs before developer fee - Solar Installation
$
Less: costs ineligible for tax credit basis
Total solar installation costs eligible for LIHTC
545,000
(6,750)
$
538,250
Combining Section 42 (LIHTC) with Section 48 (Solar Energy Credits)
9% not in
DDA
Equity proceeds from the solar ITC
Total costs eligible for 30% solar ITC
$
9% in DDA
620,000
620,000
% of costs financed with Tax-Exempt Bonds
N/A
N/A
Adjusted costs eligible for the 30% solar ITC
620,000
620,000
30%
30%
ITC percentage
Energy tax credits
Energy tax credit price
Tax credit investor equity proceeds from 30% solar ITC
$
186,000
186,000
0.75
0.75
139,500
$
139,500
Equity proceeds from LIHTCs
Total solar installation costs eligible for LIHTC
50% basis reduction per Section 50(c)
Eligible basis from solar installation for LIHTC
Additional developer fee relating to LIHTC (15%)
Total eligible basis from solar installation for LIHTC
Not In DDA = 100%; In DDA = 130%
Adj. eligible basis from solar installation for LIHTC
LIHTC applicable %
LIHTCs - annual
10 year credit period
Total LIHTCs
LIHTC credit price
9% not in DDA
9% in DDA
$
538,250
(93,000) (4)
445,250
66,787 (5)
512,037
100%
512,037
9.00%
46,083
10
460,830
0.72
$
538,250
(93,000)
445,250
66,787
512,037
130%
665,648
9.00%
59,908
10
599,080
0.72
Tax credit investor equity proceeds from LIHTC
$
331,798
$
431,338
(4) 50% of solar ITC
(5) Subject to state LIHTC allocating agency’s QAP limit for developer fees
Net cost of solar installation excluding PBI
9% not in DDA
Total installation costs
$
626,750
9% in DDA
$
626,750
Tax credit investor equity proceeds from 30% energy ITC
(139,500)
(139,500)
Tax credit investor equity proceeds from LIHTC
(331,798)
(431,338)
California Solar Initiative rebate
(0) (6)
(0)
Potential rebate income tax liability
(0) (7)
(0)
Estimated net cost of solar installation
$
155,452
$
55,912
(6) Assumes no California Solar Initiative incentive.
(7) IRC Section 136 could apply to rebates and other subsidies received by the partnership.
In that case income would not be recognized for the subsidy but the basis of the system
would have to be reduced resulting in less tax credits and less equity from the sale of those tax credits.
*Incentives vary from state to state. Please visit dsireusa.org for state specific information.
Numerical – 4% Deals
Example – No Subsidies
Combining Section 42 (LIHTC) with Section 48 (Solar Energy Credits)
Investment Tax Credit Calculation - Solar Installation (Sec. 48)
Solar installation price per watt
$
Watts (95 kilowatts)
5.50
95,000
Solar installation costs
522,500
Additional installation costs
22,500 (1)
Solar installation costs before developer fee - Solar Installation
545,000
Developer fee - Solar Installation
81,750 (2)
Total installation costs including developer fee - Solar Installation
626,750
Less: costs ineligible for 30% solar ITC
(6,750) (3)
Total costs eligible for 30% solar ITC
$
620,000
Total costs eligible for 30% solar ITC
$
620,000
Investment tax credit %
30%
Solar ITCs
$
186,000
Total costs eligible for 30% solar ITC
$
620,000
50% basis reduction (50% of solar ITCs)
Depreciable basis - 5 year MACRS
(1) Soft costs
(93,000)
$
(2) 15% of cost (3) Org. costs, syndication, etc.
527,000
Combining Section 42 (LIHTC) with Section 48 (Solar Energy Credits)
Low-Income Housing Tax Credit Eligible Basis (Sec. 42)
Solar installation costs before developer fee - Solar Installation
$
Less: costs ineligible for tax credit basis
Total solar installation costs eligible for LIHTC
545,000
(6,750)
$
538,250
Combining Section 42 (LIHTC) with Section 48 (Solar Energy Credits)
4% not in
DDA
Equity proceeds from the solar ITC
Adjusted costs eligible for the 30% solar ITC
$
ITC percentage
$
30%
Energy tax credits
Energy tax credit price
Tax credit investor equity proceeds from 30% solar ITC
620,000
4% in DDA
$
620,000
30%
186,000
186,000
0.75
0.75
139,500
$
139,500
Equity proceeds from LIHTCs
Total solar installation costs eligible for LIHTC
50% basis reduction per Section 50(c)
Eligible basis from solar installation for LIHTC
Additional developer fee relating to LIHTC (15%)
Total eligible basis from solar installation for LIHTC
Not In DDA = 100%; In DDA = 130%
Adj. eligible basis from solar installation for LIHTC
LIHTC applicable %
LIHTCs - annual
10 year credit period
Total LIHTCs
LIHTC credit price
4% not in DDA
4% in DDA
$
538,250
(93,000) (4)
445,250
66,787 (5)
512,037
100%
512,037
3.28%
16,795
10
167,950
0.72
$
538,250
(93,000)
445,250
66,787
512,037
130%
665,648
3.28%
21,833
10
218,330
0.72
Tax credit investor equity proceeds from LIHTC
$
120,924
$
157,198
(4) 50% of solar ITC
(5) Subject to state LIHTC allocating agency’s QAP limit for developer fees
Net cost of solar installation excluding PBI
4% not in DDA
Total installation costs
$
626,750
4% in DDA
$
626,750
Tax credit investor equity proceeds from 30% energy ITC
(139,500)
(139,500)
Tax credit investor equity proceeds from LIHTC
(120,924)
(157,198)
California Solar Initiative rebate
(0) (6)
(0)
Potential rebate income tax liability
(0) (7)
(0)
Estimated net cost of solar installation
$
366,326
$
330,052
(6) Assumes no California Solar Initiative incentive.
(7) IRC Section 136 could apply to rebates and other subsidies received by the partnership.
In that case income would not be recognized for the subsidy but the basis of the system
would have to be reduced resulting in less tax credits and less equity from the sale of those tax credits.
*Incentives vary from state to state. Please visit dsireusa.org for state specific information.
Questions????
Stephen B. Tracy, CPA
Novogradac & Company LLP
stephen.tracy@novoco.com
(415) 356-8010
www.novoco.com
www.energytaxcredits.com