NOTE: Here we are going to discuss situations involving only “for profit” companies. Municipality and non-profit project scenarios are not covered in this article.
If a property improvement project has tax credits and benefits for a property owner who cannot use them, then there are essentially 2 options. But each has its own challenges. If you are a developer, pick your projects accordingly.
- Transferability
As of this writing date there is growing liquidity in the transferability market, but it remains limited to projects offering $1,000,000 or more in tax value. This is because of the IRS “claw-back” risk that buyers incur if something goes wrong in the first 5 years. The revenue value of larger projects affords the time, legal and engineering investments into risk-avoiding due diligence. With time we will see the evolution of a market for sub $1,000,000 tax equity opportunities, as insurance policies create standards for normalizing the risk on these smaller projects so that they can be lumped together into bundles. We are not there yet. For projects over $1,000,000 with fairly standard profiles there seems to be robust seller’s market.
Outliers, such as new technologies, expensive installations, and aggressive performance projections generally end-up as wallflowers at the transferability dance, or have to settle for a highly discounted selling price.
To recap: tax-credit eligible projects valued at $3 million or more and with competitive construction costs using proven technology should be able to secure tax credits within a relatively quick period of time, say 6-weeks to 3 months. The CleanFi team can help with that. (see additional article: Transferability – who, how, when, etc..)
But most projects will not fit this profile, because they will be too small. For them, there is…
CleanFi cheat!
When uploading a project that has tax benefits and you are planning on using Transferability, make the project amount the you expect to need to finance after you sell the tax credits. When you get to the last section of the onboarding process, and it assumes you will be getting tax benefits on that smaller amount, just ignore the calculations and select the last option in the last question. That way you’ll get financing offers for the post-transferability amount, and you can “Edit” that later.
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- Third Party Owned solutions (TPO’s), like PPA’s, EaaS, Capacity Sales Agreeements, etc.
The common availability of early buyout options in the modern version of these instruments make them an ideal solution for smaller projects with no tax benefit appetite. A 20-year PPA, for example, used to mean a 20-year relationship, like it or not. Now, it is common to be able to get a “fair market value” buyout option as soon as the tax investor’s obligation is over. In most cases, that’s year six. That should make everyone happy.
Here is the big challenge, however:
If you were going to invest in an installation, you’d want to contract with an off-taker entity that is profitable and stable. If an applicant cannot take advantage of the abundant tax credits and benefits of today’s energy related investments, then are they making money? True: there are lots of companies that already have a backlog of tax write-offs and tax credits that they need to absorb, and thus need to partner-up to indirectly get the tax benefits value from their energy initiative. But many other companies may not be “solid” enough or too leveraged to take advantage of those tax benefits. It makes them risky for TPO investors so the contract offers will be minimal and high in cost.
Pre-Paid structures
For entities with shaky financials, it might be better to opt for a prepaid structure. In that scenario, the tax investor limits their exposure by paying 20 to 25% of the project cost (66 to 75 cents on the Tax Equity dollar) while asking the off-taker to pay the entire value of a TPO contract up front. This value is, not coincidentally, the balance of the project cost. This is called “prepaid” or “deposit” operating leases or PPA’s.
They are handy because ownership automatically gets turned over to the off taker after the required holding period of the tax investor is over (for renewable energy, five years). CleanFi has structured many of these transactions.
They come with one specific challenge of their own. If the off-taker does not have cash on hand, they need to borrow the pre-payment or deposit amount. This becomes tricky when both the lender and the tax investor want to use the same lien method on the installation, called a UCC-1(see this article on lien methods: How Different Financing Mechanisms Secure Their Risk). For that reason financing the deposit or prepayment of a TPO agreement is most facilitated by using C-PACE , because it uses a completely different lean method (real esteate) which will not conflict with the tax investors UC1 filing. Also, it provides 20 and 30-year Terms, which make the project cash flow beautifully when combined with the tax investor’s contribution. Those structures are commonly known as “PACE-PPA’s”, and are quoted on CleanFi when you put-up a qualifying project. But read this C-PACE post to understand the mechanism; it requires ownership and available equity in real estate. Also, when you put up your project on CleanFi, make sure you receive a PACE option in your financing proposals, so you know the project pre-qualifies.
Fortunately, CleanFi instantly quotes all of the different options for financing a project and our team is there to walk you through the best strategies and options at that point.
CleanFi cheat!
When uploading a project that has tax benefits (like solar, or storage), the last section of the process points out tax benefits and gives you options to finance those cumulative benefits ( “Please select your preferred proposal scenario?”).
Whether you are looking for PACE PPA’s, or to get access to CleanFi’s PPA BidDesk, where investors bid for your project, select: “Offer long term financing options for the entire project”
CleanFi is your virtual project financing department. Create a free account, and input your first project.