Q&A: Attracting Renewable Energy Tax Credit Investors

Published by Daniel J. Smith on Tuesday, January 1, 2013
Journal thumb January 2013

Question: How do I make my renewable energy project more attractive to a potential tax credit equity investor?

Answer: The keys to attracting a tax credit equity investor are the investor’s understanding of your technology, the economics of your energy project, your support team in place, and the experience and proven track record of your past projects.

As we move in to 2013, many projects using the Section 1603 cash grant program are wrapping up. This shifts the focus back to the renewable energy tax credit equity market. If you are a developer of a renewable energy project, you are most likely looking for ways for your project to stand out to tax credit equity investors. Following are a few examples of factors that renewable energy tax credit equity investors will consider when determining whether to move forward on a project.

Investor’s Understanding of Technology
Most tax credit equity investors prefer to work with technologies that they understand. For many, the majority of their renewable energy investments consists of wind and solar projects. However, don’t let this discourage you if your renewable energy project is not a wind or solar deal. Investors may be looking to diversify their renewable energy portfolios and looking to the other issues discussed below to evaluate the strength of projects that are outside of their core investments.

To be attractive to a tax credit equity investor, a project should have projections that are considered reasonable and realistic. Investors like to see projects that are already under a power purchase agreement (PPA) or a long term lease. This will help the investor to determine what their rate of return will be and a signed agreement may help eliminate the risk of meeting those returns.

Tax credit investors are also typically looking to increase their yield by receiving tax benefits related to depreciation of the renewable energy assets. Effective Jan. 1, 2013, and as of the date this article went to press, bonus depreciation had expired. This will lower the yield to investors, but they will still be looking to take Modified Accelerated Cost-Recovery System (MACRS) depreciation during the five (solar, geothermal, or wind) or seven (biomass) year life of the renewable energy assets. However, it is worth noting that bonus depreciation has been included as part of the President’s proposed stimulus plan and may be extended by the lame duck congressional session or early in 2013 as the new Congressional members are sworn in.

Tax credit equity investors also like developers with other sources of financing in addition to the tax equity that is required of the investor. This could be debt or additional non-tax equity or it could be other federal, state or local incentives that the project qualifies for. These other sources of funds reduce considerable risk for the tax credit equity investor while also increasing their rate of return.

Good Support Team
A project is more attractive to a tax credit equity investor if the investor knows that they are working with an experienced team of professionals. Investors expect, and possibly require, the accountants, attorneys and consultants to be versed in the various technologies, financing methods, ownership structures and tax aspects of the transaction. One way they do this is by requiring that the developer engage a team to assist in the design and evaluation of the financial structure that considers tax credit recapture, tax loss reallocations and true debt issues. The investor may also require that a law firm that they have used on other renewable enegy transactions review this structure.

Experienced Developer with Proven Track Record
Perhaps the best way to attract tax credit equity investors is for the developer to prove that they truly understand the technologies of their renewable energy project and that they have experience in closing and operating similar projects. Having a proven record of success with renewable energy projects will give the tax credit equity investor the comfort they need to show that there is minimal risk related to their expected return. The developer should be able to demonstrate that they have been through the process before, have experience in dealing with project obstacles, and know how to complete projects and operate them going forward, without the investor’s direct involvement.

Each renewable energy project has varying obstacles to overcome, but being aware of the items presented here can help a developer make its project more attractive to a tax credit equity investor. While this list is not exhaustive, it may help you get over the last hurdle you need to get your project financed and successfully completed.