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
Developer
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
Renewable
Energy
Project Owner,
LLC
Tax Credit
Investor, Corp.
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 yieldbased or timing-triggered flip of partnership
interests typically precludes a put or call of
Investor’s interest in Project.
10+ year fixed PPA; Utility makes base year
payment of $0.XX/kWh with X% annual escalations
Utility/Grid/
Dedicated EndUser
The Captive Energy Company
Equity Investor
99%
$
Property
Operating Partnership
Fund
Manager
1%
General Partner
1%
$
Investment
Fund
99%
Energy Credit Investor
99%
$
$
PPA/Lease
Revenue
PPA/Lease
Agreement
Developer Energy
Company, LLC
Developer
Managing
Member 1%
Dev. Fee
30% ETC
Installation Agreement
Systems Integrator/Installer
Sample ITC Master Lease Structure
Renewable
Energy
Project
Developer
Retains 51% of
Project
Ownership and
Depreciation;
receives fees to
strip out most
cash flow; buys
out Investor after
5 years
Renewable
Energy
Project Owner,
LLC
Tax Credit
Investor, Corp.
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)
Master
Tenant, LLC
ITCs passed via Master
Lease; Master Tenant
operates equipment
and makes lease
payments to Owner
Contributes Investor’s equity into Owner;
receives 49% of Project Ownership and
Depreciation for 5 years
10+ year fixed
PPA; Utility
makes base
year payment
of $0.XX/kWh
with X% annual
escalations
Utility/Grid/
Dedicated EndUser
Sale Leaseback Structure
Purchase Agreement
Solar Developer
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
Solar Developer, LLC
Lessee
Sales Proceeds
Corporate Investor
Lessor
Sale of SEFs and
Lease Payments
PPA/Lease Agreements
Solar 1,
LLC
Solar 2,
LLC
Solar 3,
LLC
Solar
Installation
Host #1
Solar
Installation
Host #2
Solar
Installation
Host #3
Lessor is owner of SEF,
Investment Tax Credits, Tax
Losses (Depreciation
Deductions), Rebates, RECs,
Recipient of lease payments,
Potential residual buyout
Engineering, Procurement and Construction
Agreement (“EPC”)
Systems Integrator/Installer
Investment Tax Credits for Solar—The Basics
Tax Credit Investor Tax Benefits
Tax
Credits
Tax
Deprec.
Basis
Adjust.
Book
Deprec.
Flip
Yes
Prob.
Prob.
Prob.
Sale/Leaseback
Yes
Yes
Yes
Yes
Lease Pass-Through
Yes
No
No
No
Structure
Investment Tax Credits for Solar—The Basics
Tax Credit Investor Cash
Benefits
Structure
Cash
Inflow
Cash
Outflow
Flip
PPA
Sale/Leaseback
Lease
LPA
Distribution
Note
Payments
PPA
Lease
Payments
Lease Pass-Through
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. Goldman
Donald Nimey
Daniel J. Smith
Nixon Peabody LLP
401 Ninth St., NW
Suite 900
Washington, DC 20004
202-585-8289
Reznick Group, P.C.
7700 Old Georgetown Road
Suite 400
Bethesda, MD 20814-6224
301-280-1846
Novogradac & Company LLP
303 West Third Street
Dover, Ohio 44622
330-602-4600
mjgoldman@nixonpeabody.com
don.nimey@reznickgroup.com
dan.smith@novoco.com