This article is based on a presentation on “Financing the Intersection of the Circular Economy and the ESG Revolution” at the Equipment Leasing and Finance Association’s 60th Annual Convention. Womble Bond Dickinson attorney Mike Dow was joined in the discussion by Cortland Brady, Aspen Field Services; Cristina Dolan, insideCHAINs; and Brett Reed, Cohealo. The following is a summary of Dow’s portion of the presentation.

Asset Classes

Most renewable technologies benefit from federal tax credits. Investment tax credit & production tax credit. Under investment tax credit, the tax owner of asset can get a certain percentage of the equipment cost directly credited to its taxable income. The basic asset classes in renewable technology are:

  • Solar
  • Wind
  • Biomass (clean methane)
  • Fuel cells, developed by NASA for the Space Station, but applied to 
  • Energy efficiency. While not a renewable, probably is the most mature set of technologies in this sector and can immediately reduce energy use.

Basic Financing Structures

There are two primary ways that tax equity transactions are done. The project developer doesn’t have taxable income, so they cannot use the tax credit. But they leverage these credits using two basic structures:

  • Partnership Flip—The project company has two investors: the developer and a tax equity investor (typically investing 35-50 percent of project costs), and the tax equity investor can access the five-year tax credit. At the end of the five-year period, the ownership flips to the developer owning 95 percent and the tax equity investor only owning 5 percent, with an option for the developer to buy out this remaining interest.
    • Less cash to developer
    • Flexible
    • Less expensive
    • Limited pool of investors
  • Sale/Leaseback—This is a tax lease in which the tax equity investor pays the fair market value of the asset, takes the tax credit, and leases the asset to the developer. It’s more applicable to smaller projects.
    • More cash to developer
    • Less flexible
    • More expensive (EBO)
    • Limited pool of investors

Participant Goals

The financing structure depends on the goals of each party. While these factors will vary from deal to deal, they can be thought about in the following general terms:

  • Borrower/Developer
    • Return of capital
    • Low cost
    • Flexibility
  • Lender
    • Low risk
    • Risk adjusted return
    • Sustainability

Energy Efficiency Financing Structures

Traditionally, energy efficiency projects have been financed with a conventional debt, capital leases and receivable financings. But in recent years, two new structures are becoming more popular:

  • Energy as a Service
    • Service agreement (versus a capital expense)
    • Flexible
    • Vendor risk—The vendor controls the project and takes responsibility for the project meeting its efficiency goals.
  • On Bill Financing
    • Utility-sponsored; separate charge on utility bill to pay for project costs over time.
    • Lower risk

Emerging Trends

  • Infrastructure Investment and Jobs Act
    • Direct Pay Investment Tax Credit—Would allow developer to make tax credit claim without working through tax equity investor.
    • Energy storage can benefit from tax credits going forward. 
  • Green Banking, in which an entity raises revenue for projects that normally wouldn’t qualify for early-stage financing.

About Womble Bond Dickinson’s Equipment Finance Team

Womble Bond Dickinson’s equipment finance team has extensive experience in complex financial transactions representing lenders and lessors in all aspects of equipment finance, with an emphasis on transportation assets and renewable energy transactions. Our lawyers manage deals across the country, working closely with financial institutions and law firms in New York, Chicago, Washington, D.C., Baltimore, Boston, San Francisco and other cities nationwide. Learn more

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