21 – Solar Tax CreditsSolar credit is an investment tax credit (or ITC)Based on cost of facilityUsually taken all in one yearGenerally only available for new property (there’s an 80% test)Mostly: depreciation over 5 years
32 – Overview of ETCsEnergy Tax Credits are generally 30% of “facility” cost (e.g., transmission lines and substations are not eligible for the ITC)Includes Photovoltaic (PV) Concentrated Solar Power (CSP) & fuel cellsMust generate electricity, heating, cooling, hot water, or fiber-optic lighting. Sale of elec. is not required
42 – Overview of ETCs (cont’d) Usually taken in the year the facility is “placed in service”, but can sometimes use “progress expenditures” over more than one yearPossible recapture for 5 years (100% in first year, 80% in second year, etc.)Called “Energy Tax Credits” in Section 48 of Tax CodeApplies to property placed in service before December 31, 2016
53 – Need for an OwnerNo “sales” of credits. They are generally claimed by the owner of the facility which makes an “investment” in a partnership or LLC, or, if the developer wants “out”, the facility could be soldNo government ownershipSometimes, a lease is used, and the tenant claims the credits (note: “anti-depreciation” for tenant). A lot like HTC.
63 – Need for an Owner (cont’d) Lengthy documents detail the relationship – addresses investment timing, allocating credits, distributing cash, and withdrawal of the investorUsually: 5+ year relationship with investor
74 – Allocations Developer Investor IRS has elaborate rules for allocating the credits among the partiesITCs follow the “profits” of the ownerThis is NOT the same as LIHTC (they follow depreciation)Wide range of ratios possible, not just 99-11%99%PartnershipSolar Facility
85 – Sharing Cash and Credits They don’t have to be shared in the same wayIRS might treat cash distributions as a share of profits or gross sales and re-allocate the creditsMust track capital accountsMight be able to use debt, management or development fees to get cash to developer
96 – Need for a ForecastShows how credits and cash go to the investor and the GPMust be done by someone who knows syndication (otherwise, there may be very unwieldy projections)Remember that Allocations are different from LIHTCPricing is often based on IRR, not cents per dollar of credit
107 – Placed In Service (“PIS”) When to start claiming credits – it’s not based on when the investor comes in.If investor gets in late, ETC may be lost (possible 3-month lease exception)ETC may be able to use “progress expenditures” to get credits earlier, and higher rate
117– More on Placed in Service (cont’d) When is a facility placed in service?Usually when completed, with licenses and after pre-operational testing“Daily operation” can matterAcquired property must be delivered and ready to use; mere purchase is not enough
128 – Other SubsidiesBonds and “subsidized energy financing” generally reduce federal credits on a pro rata basisState programs usually don’t reduce solar credit, but may be taxable, e.g., state grantsIRS keeps attacking state tax credits
139 -Technical RulesAlmost all investors are corporations because of “At Risk” and “Passive Loss” RulesBasis reduction of 50% of ITC, meaning less depreciationProfit motive – But compare Rev. Proc (for wind) with Reg (for LIHTC)AMT is eliminated, effective for years beginning after October 3, 2008.
1410 – Flips, Puts, and CallsOnce you’ve gotten the investor IN, you need a way to get it OUT.Flip – reduce the investor’s percentage to make it cheaper to buy him outPut – The investor can get out for a small amount. Less used in energy dealsCall – The developer can buy out the investor for fair market value
1511 -Puerto Rico Solar Tax Credit Puerto Rico enacted legislation in August 2008 to provide a corporate or individual taxpayer with a credit for acquiring and installing "solar electric equipment."The credit is allowed against the taxpayer's Puerto Rico income tax.Through fiscal years , the credit amount is 75% of the cost of the equipment and installation.During fiscal years and , the credit is 50% of the cost of the equipment and installation.During fiscal year and beyond, the tax credit is limited to 25% of the cost of equipment and installation.
1612 - Combining LIHTC and Solar Project can qualify for both2008 Act requires States to take account of energy efficiency in the QAPRemember that bonds can be a problemRemember that LIHTC and Solar are allocated among partners differently (so watch out for contingent fees)
17Combining LIHTC and Solar (cont.) Solar credits reduce LIHTC basis (illustration follows)Solar also offers rapid depreciation to investor -- 5-yr MACRS (Only 5-yr S/L if bond-financed). Also, unlike the real estate, solar is eligible for 50% “bonus” depreciation in 1st year (must be PIS in 2008).Crucial to track capital accounts and “minimum gain” – the accelerated depreciation may drive investors negative very early; debt structure will be important
18Example: Solar and Housing Credits Amount of Credits Available9% Housing Credit4% Housing CreditSolar Panel Cost$1,000,000Solar Credit at 30%$300,000*$150,000** assumes 50% tax-exempt debtHousing Credit Basis (reduced by ½ solar credit)$850,000$925,000Credit Percentage (assumed)9% x 10 = 90%3.5% x 10 = 35%Housing Credit$765,000$324,000Total Credits$1,065,000$474,000*Plus 5-year MACRS (and **Plus S/L depreciation % bonus depreciation if PIS in 2008)
1913 - Pricing Solar Credits Solar is often priced based on IRR, not cents per credit dollar, because (i) all credits in one year, plus (ii) rapid depreciation mean (iii) a different pricing model than applies to LIHTC.The Most likely purchaser is the owner of the LIHTC project, so there may not be competitive bidding for the credits
2014 - Technical RulesBonds reduce the ETC. So, pay attention to LIHTC projects that are 51%+ bond-financed (May be able to “trace” the bond proceeds and allocate them away from the solar, so as to maximize the ETC. See PLR )Placed-in-service date can be different for panels than for housing units. You can’t “warehouse” the ETC, so it’s important to have the investor ready (or already in)If solar qualifies for LIHTC, it can qualify for the 130% boost too (if project is in DDA or QCT)
21More Technical RulesTax Exempt Use Rules – If there’s a tax-exempt partner, make sure that its share of the deal is a “qualified allocation” or use a Section 168(h)(6) electing entity.Profit motive should not be necessary because of Section of the regulations that applies to LIHTC deals (But consider “lease pass-through” structures in which the panels are leased to a different investor which only takes the credits)
2215 - Things to Remember -- Solar and LIHTC ETC IssuesLIHTC and Solar are allocated among partners differently (so watch out for contingent fees and other proxies for profits that can screw up the ETC)May be able to delay incentive fees to year 6 to avoid risk that fees will be treated as profits during recapture period
23Things to Remember – Solar and LIHTC (cont) LIHTC IssuesIf residents are charged, then solar is “commercial” and not eligible for the LIHTCUtility Allowance rules ( ) hadn’t required that cost savings from solar-provided electricity be taken into account. So: permitted tenant rents are lower than they “should” be. (Illustration follows). But: recent changes allow a building owner to hire a qualified professional to calculate utility allowances taking into account “systems” and “appliances”.
2416 - Utility Allowance Illustration Assume total permitted rent is $1000, and utility allowance is $75. So, tenants can only be charged $925 by the landlordSuppose solar panels would reduce utility cost by $25. So, instead of $75, we expect the actual utility cost to be $50/mo.Using $1000 permitted rent, landlord should be able to charge $950 (because utility allowance should be reduced from $75 to $50), but doesn’t require the utility allowance to take renewables into account. Instead, it may be “stuck” at $75So landlord doesn’t get the benefit of the $25 savings; instead, he still charges $925, the tenants only pay $50 for utilities, and their total expenses go down from $1000 to $975
2517 - Solar for Housing without the LIHTC Solar panels can be added later by an LIHTC partnership (without getting low income credits for the solar), orThe panels could be owned by an unaffiliated owner and either:(i) this owner could lease the panels to the LIHTC partnership,or(ii) this owner could sell power to the partnership or its tenantsBut consider the loss of the LIHTC (generally 80+% of costs). It is much larger than the ETC (30% of costs)Having a separate owner typically avoids bond tracing rules (if applicable) and may avoid contingent fee issues