Segue Sustainable Investments compares and contrasts the new transfer payment financing technique with the industry standard tax equity structure.
In the composition of the newly appointed Law on reducing inflationThe Investment Tax Credit (ITC) includes a nuanced change that allows the tax credit to be sold for cash to parties unrelated to the solar project in any way.
This is a significant departure from the previous ITC structure, which initially required a complex, often expensive tax filing process to meet IRS standards. These standards required parties involved in a project for the tax benefit to prove that they assumed real risk and responsibility.
Article published by Segue Sustainable Infrastructurea major investment company that provides capital for the development of renewable energy projects compares this new tool – transfer payments – to equity taxation in a technical finance article.
The author, who provides tax equity services for solar projects, credits US Bank as the American company that has “done the most to support clean energy” over the past 15 years through its tax equity work.
Seg describes the factors that favor each type of project finance when using a the tax is inefficient partner (one who cannot take advantage of depreciation) to buy credits to pay for the transfer:
The author sees an opportunity for large solar farms to take advantage of a less complex transfer payment structure, but industry nuances still complicate this decision. Factors such as depreciation, as well as the price paid for the tax benefits compared to the expected transfer payments, and basis step-up opportunities can result in tax equity within 40-60 basis points of the weighted average cash value of the transfer payment project.
The author believes this is a price chasm that a hungry tax professional can navigate if they really want a bargain.
One important question is how much should we sell our tax credit for? What is fair market price?
LIHTC prices over time:
The author compares transfer payment to the Low Income Housing Tax Credit (LIHT) market as it is “the largest and longest running credit transfer market”. Seg notes that none of the many experts they spoke to on the subject offered an opinion on whether the solar transfer credit would trade at a premium or discount compared to the LIHTC.
There are some advantages to paying for the transmission of solar energy. Payment is delivered immediately and the LIHTC is spread over ten years. Also, LIHTC carries employment risk while solar does not. One of the downsides of paying for solar gear is that it’s still new. And, of course, investment in LIHTCs is motivated by a number of factors beyond tax credit revenue.
The author also put together a “control case” to look at the differences between the 100MW projects, which changes some variables so that the developer can ignore tax equity and transfer payments. One of these variables includes soft costs – specifically, lawyers’ and accountants’ fees. The estimated spread between tax equity and transfer payments was $2.7 million, suggesting that transfer payments should be easier and cheaper (although not easy/cheap, as the author points out).
The author also calculated how much more the developer could make on this 100MW “control case” project if they sold through transfer payments and found a significant increase of $0.0143/W.
Among the final thoughts is whether a solar project can change hands within the first five years. The current assumption is that the transfer charge holder will likely be completely disconnected from the solar installation and will not be affected by the transfer of title to the project. In the tax equity world, the tax credit buyer is part of the project, so he must remain an owner for five or more years.
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