Overview of the different tax equity structures available for renewable infrastructure projects.

1. RENEWABLE ENERGY
US TAX EQUITY
STRUCTURES

2. Renewable energy projects in the
US benefit from a variety of tax
credits and accelerated
tax depreciation.
Tax equity structures enable tax
losses generated in the early years
of projects as a result of tax credits
and tax depreciation to be utilised
by investors who may have taxable
income from other sources.

3. There are three main structures and one subsidiary structure.
Variables of these structures are possible.
Each structure involves:
project developer
or sponsor
tax equity investors

4. PARTNERSHIP FLIP
When entering a partnership,
investors provide most of the capital.
The partnership agreement will allocate a
percentage of taxable income and losses over
the life of the tax credits to the investors.
Over the period of the agreement, investors receive
cash distributions and tax depreciation.

5. Power Purchase Agreement (PPA) with Utility
Sponsor/Developer
Pre Flip:
Investors allocated 99% of tax
credits and depreciation.
Post Flip:
Investors allocated 5% of tax
credits and depreciation.
Provides 40% of project capital.
Pre Flip: Sponsor allocated 1%
of tax credits and depreciation.
Post Flip: Sponsor allocated 95%
of tax credits and depreciation.
Provides 60% of project capital.
Tax Equity Investors

6. PARTNERSHIP FLIP YIELD BASED FLIPS
Once investors’ target return is achieved,
deht eveloper has the possibility to buy-out
the investors.
Afterwards, most of the remaining tax credits
and depreciation along with cash distributions
are allocated to the developer.
Such a situation typically has a success fee
of 3-20% for the developer.

7. PARTNERSHIP FLIP FIXED FLIP
Using this method provides the
investors with a fixed return of 2 to 3%
on their investment before the remaining
income is split betwee ehtn parties based
tno he partnership agreement.
The flip occurs even if the target
return is not achieved.
This structure is more prominent
with a stable fiscal regime.
Less prominent if tax rates
are likely to change.
2 to 3%

8. The developer buys or obtains long
term lease rights to property
and installs a facility.
E.g. a wind farm or solar park.
The investors then buy the installed
facility from the developer and lease
it back to the developer.
The investors typically finance 100%
of project costs in this structure.
SALE AND LEASEBACK
Lessor – Investor owned
Lessee – Developer owned
PPA with Utility

9. Structure can be established
up to 90 days after the assets
are placed into service.
A fair market value is required if the
developer agrees to buy the assets
at the end of lease.
Investors can buy assets from
the developer at a price above
cost thereby claiming more
tax credits and depreciation.
Fixed rental payments are
payable even if the project
underperforms.
ADVANTAGES DISADVANTAGES
OF THE ORIGINAL VALUE≥20%

10. The ability to receive a cash grant
in lieu of Investment Tax Credit (ITC)
was introduced in the American Recovery
and Reinvestment Act of 2009.
This provided for wind projects
to be able to take ITC in lieu of
Production Tax Credit (PTC).
Cash grants therefore started
to be available for both solar
and wind projects.
INVERTED LEASE

11. Tax Equity Investors
Master Tenant/Operator/Lessee
PPA with Utility
Developer/Sponsor
Owner/Lessor
99%
1%
49%
51%
Lessor and operator are set up as
partnerships with the investors
allocated 99% of taxable income in
the operator and 1% allocated to
the developer.
Taxable income/losses of
the owner typically split
51% to the developer and
49% to the operator.

12. Although the owner is legally entitled to the tax credits
and depreciation, it can elect to pass tax credits to
the operator with th ie nvestors entitled to 99% of
the operator’s losses. This election cannot be made
for tax depreciation.
The operator/developer builds the asset and sells
it to the owner. Then, the owner leases the asset
back to the operator with cashflows under the lease
being equal to 100% of project cash inflows less
the operating costs of the operator.
INVERTED LEASE

13. Flexibility of the stru erutc
becaus ehte parties
either claim tax credit
or convert tax credit
into cash grant.
There is higher tax risk as the Internal Revenue
Service is not as comfortable with this structure
Flexibility is now less of an advantage
without the availability of the cash grant.
The owner can buy
the asset from the
developer at a price
above cost.
Upon election, there is no need to reduce the MACRS
tax depreciation, meaning that 50% of the cash grant
is included in the lessee’s income over 5 years but the
capital account and basis are increased by the
amount recognised. On disposal eht, lessee’s gain is
lower or its loss higher.
ADVANTAGES DISADVANTAGES

14. To qualify for the cash grant,
construction must have begun
by 30 September 2012.
The abolishment of the cash grant and
greater tax risk mean that this
structure is now not used as much
as it once was.

15. Partnership
Flip
Sale &
Leaseback
Inverted
Lease
100% Allocation of tax credits &
depreciation to Investor
Risk of challenge from IRS
Ability to claim tax credits and
depreciation on amount > costs
Flexibility to establish structure after
asset placed into service
Flexibility to allocate tax credits,
depreciation and cash grant
(when available) to different parties
Liquidity/Number of Potential Investors
Ease of Investor buyout by Developer
Level of initial Developer Investment
Fixed Flip
Yield-basedFlip
Flexibility if Project
underperforms
Structure
Factor

16. Under this structure, construction
financing is provided by the tax equity
investors and a power purchaser
(utility) prepays for some power.
In return, the utility benefits from
a reduced power price once power
starts to be produced.
POWER PREPAYMENT STRUCTURE

17. If you have any questions regarding U tS a ex quity
ts ructures or would like to speak to someone at
Operis about potential tax issues arising in US P3
projects, please don’t hesitate to get in touch.
+44 207 562 0400
+1 647 846 7382
info@operis.com
WE ARE HERE TO HELP