‘Unicorns,’ New Investors: Pairing OZ Incentive, RETCs Presents Challenges, Opportunities

Published by Brad Stanhope on Monday, November 4, 2019
Journal cover thumb November 2019

Combining renewable energy tax credit (RETC) incentives such as the investment tax credit (ITC) and production tax credit (PTC) with the opportunity zones (OZ) incentive is simple.

If the investor fits some criteria.

“I call them unicorns–people who have had a capital gains event and passive income,” said Matt Mills, a principal with Sixty West Funds, which operates in multiple tax incentive worlds with a focus on renewable energy. Now it offers a qualified opportunity fund (QOF).

Mills–who works with his brother Mike Mills–said the ideal candidate to invest in both the ITC and OZ incentives has significant passive income and a recent capital gains event, since the OZ investment helps offset the capital gains and the tax credits help offset the passive income.

It’s a great fit for the right person.

“Every investor I’ve found who has the right income configuration has been interested,” Matt Mills said.

His brother said the relative familiarity with renewable energy investments make the combination of OZs and the ITC more attractive for some of those investors.

“Part of it is that renewables is a well-proven product, which is further enhanced when layered with opportunity zones, which are new,” Mike Mills said.

The Mills brothers seek specific investors, but it’s not the only way to pair RETCs with the OZ incentive.

While the investors that can take advantage of both the tax credit and the OZ benefit have some advantages, Rod Eckhardt of Seminole Opportunity Zone Fund I is working another approach: finding separate OZ investors and ITC investors to help make renewable investments work. That adds a layer of complexity, but Eckhardt has plenty of investors ready to go.

The difficulty, though, is familiar.

“There are challenges,” Eckhardt said. “For example, the required hold period for each programs differs. The ITC is a minimum five-year hold in order to comply with the tax code. Sometimes tax-credit investors stay in 10 years, but most want out shortly after the compliance period has run. The [OZ] is a 10-year hold. Efficiently managing these interests is critical.”

As both Mills brothers and Eckhardt know–along with many others–RETCs and OZs are not a simple marriage.

However, it’s a pairing that can work.

Another New Incentive

The OZ incentive became part of the tax code at the end of 2017, so the scenario was familiar ground to those in renewable energy. Compared to such incentives as the low-income housing tax credit, historic tax credit and even the new markets tax credit, RETCs are new kids on the block.

Both Seminole and Sixty West were early adopters to RETCs.

“When we started in ITCs, we were one of the first to create a fund dedicated to this space,” Eckhardt said. “It took a lot of work to get it off the ground. It was roughly a year before we closed our first deal. We’re trying to do the same thing with the OZ.”

Seminole largely invests in utility-scale projects, but even with that, “It took some time to get really competitive,” Eckhardt said. “In the beginning, a lot of people didn’t trust solar panels, didn’t trust solar, generally. With all the success solar has had over the past number of years, it’s hard to imagine there was a time when some people felt that way.”

While Sixty West was in renewables early, Matt Mills said his group didn’t jump into pairing the incentives when OZs rolled out.

“Our main focus is on the renewable energy company,” Matt Mills said. “When the opportunity zones [incentive] came out, I was at an opportunity zones event and a guy asked about coupling renewable energy incentives with opportunity zones and talked to me about it. It makes complete sense.”

Eckhardt said Seminole was eager to try the pairing.

“[Renewables] has been a focus of our organization and this opportunity to twin the incentives is there,” Eckhardt said. “We have a lot of relationships in this space and there’s a comfort level, even though it’s a new program. We want to start with people we’re comfortable with and are looking for transactions that are the right fit for our fund.”

Chicken or Egg?

With the possibility of twinning incentives, it’s a question as to whether developers should proactively look for OZs in which they can develop renewable energy projects or simply review planned developments to see which are in OZs.

“We’re doing both at this point,” Eckhardt said. “We’re casting a broad net. We spend a lot of time looking for deals in opportunity zones possessing the characteristics that match our investor appetite.”

Mike Mills said his firm’s work so far has leaned in one direction.

“Many [renewable developments] happen to be in opportunity zones,” Mike Mills said. “Early on, that was the case. Most [solar developments] are going to be in rural areas or on roofs of warehouses, not in high-income areas, so they’re more likely to be in opportunity zones.”

Finally Ready to Go

Like most of the potential OZ world, Eckhardt’s investors waited for the Treasury Department to clarify some issues concerning the incentive. As additional guidance was provided over the past year, he said there is enough information to begin moving forward.

“We needed to make sure the guidance was touching on all areas of our concern,” Eckhardt said. “Lack of clarity on some issues slowed down a lot of funds. You’re going to be more conservative.”

Different Investors?

As Matt Mills said, Sixty West focuses on finding the “unicorns,” which means new efforts.

“We have a large group of CPA firms we work with and have repeat clients,” Matt Mills said. “There are large clients who receive passive income and we’re always looking for new ones.”

Matt Mills said the fact that the ITC and PTC are general business tax credits means that many individuals are unaware of them. That means many who benefit from a RETC-OZ twinning need to learn about renewables.

Eckhardt’s QOF, meanwhile, seeks new investors to make investments on the OZ sponsor equity side, while staying with many traditional clients for the tax equity investment.

“It’s an issue,” Eckhardt said. “We have typically worked with corporations [to invest in ITCs] and a lot of people on the investor side for opportunity zones are not who we typically work with. It’s a new category of investor and they have different sensitivity to tax credits. It presents a new opportunity.”

Nat Eng, a partner in Novogradac’s Walnut Creek, Calif., office, said his experience is that many individuals are resistant to RETC investments.

“You’ve got institutional sponsor equity in the market, which has expectations of a more realistic [market] return from investment than an individual,” Eng said. “There’s already some low-cost of capital in renewables, like pension funds and insurance companies that have mandates to invest in renewables. Individuals, particularly those who are more familiar with real estate, aren’t always interested [in tax credits].”


Despite uncertainty about whether legislation will extend the date by which OZ investments must be made to receive the seven-year benefit–barring a legislative change, that date is Dec. 31, 2019–Eckhardt is optimistic. OZs and RETCs can work together.

“I’m more excited now than before,” Eckhardt said “I see the demand and the deals that make sense.”

But Eckhardt was careful to caution that OZ funding isn’t a panacea for renewable transactions.

“I think there are going to be deals getting done in part because of the OZ incentive,” Eckhardt said. “Opportunity zones capital doesn’t make a bad deal a good one. It makes good ones better or pushes close ones over the edge so they can pencil out. It’s not transformative, it’s a relatively modest boost in solar.”

Matt Mills agreed.

“[Combining OZ investment and RETCs] is not going to increase renewable energy development, but you might see a change in where renewables are positioned,” Matt Mills said. “I think you’ll see more renewable development in opportunity zones.”

So while the OZ incentive can help make some renewable developments happen, it is unlikely to be a game-changer.

“It’s just a real nice carrot,” Mike Mills said.