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Tax-Equity

Green Final

TermDefinition
Potential Tax Benefits Renewable Energy PTC, ITC, Depreciation, Tax Credit Phase-outs
Tax Equity financing structures partnership flip structure, sale leaseback, inverted lease pass-through structure
Depreciation incentives 5-year MACRS, bonus depreciation
When is ITC claimed one time when project put into service
Recapture risk if there is a change in control with respect to interests held by party claiming ITC, recapture rate falls from 100% to 0% through 4 years
When is ITC more valuable projects with huge capital costs (such as offshore wind) or projects with low expected generation
Why tax equity important Special purpose entities may have no taxable income for years
Partnership flip structure Investor gets 99% of tax items until a certain IRR is reached then flips to 5%/95% with sponsor holding more now, cash is somewhat close to reverse but investor gets 100% in phase 2
partnership flip structure positive and negatives explicit safe-harbor, mitigates tax risks, developers like it because inexpensive buyout and after flip date they are back to getting benefits, but it is not 100% efficient
back-leverage recovery can only foreclose upon sponsor's equity in the project, not the project itself
Sale/leaseback structure Once project is operational, developer sells to tax equity who then leases back to developer, which lets TE investor get 100% depreciation and tax credits while lessee manages project, then at end of life it goes back to investor unless buyout
sale/leaseback good and bad offers 100% financing for developer, 100% tax benefits gotten, but developer loses some control and tax equity more invested
advantages of tax credit system private investors more control in deciding which projects deserve subsidies, keeps subsidies domestic
disadvantages of tax credit system uncertainty due to constant changing of expiration dates, structures are complex and thus expensive, audit risks difficult to quantify, limited number of tax equity investor base
Created by: zkogut7
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