ENERGY INVESTMENT TAX CREDITS

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ENERGY INVESTMENT TAX CREDITS

• James F. Duffy, Esquire
• Nixon Peabody LLP
• 100 Summer Street
• Boston, MA 02110-2131
• [phone]
• jduffy_at_nixonpeabody.com

LEARNING THE BASICS HOUSING TAX CREDITS 101
IPED, INC. San Francisco, California July
24-25, 2008
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CALIFORNIA SOLAR EMPHASIS

• Over the last decade, California has been the
  nations leading state in promoting solar energy
• The California Qualified Allocation Plan and tax
  credit application encourage and reward
  sustainable building methods and every point
  counts in a 9 application
• Californias solar rebate program (essentially a
  grant) encourages the use of solar energy

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CALIFORNIA SOLAR EMPHASIS

• Recently, other states have jumped on the green
  bandwagon, and others are planning to follow
  suit, so the concepts here are by no means
  limited to California
• Solar energy can be used for common areas to
  reduce property operating expenses or can be
  master metered to the tenants
• To the extent that using solar energy reduces
  tenant utility allowances, that generally allows
  rents to increase by an equal amount

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FEDERAL ENERGY TAX CREDITS

• Start with the federal tax credit for solar
• Energy Tax Credits (sometimes called ETCs)
  under Section 48 of the Internal Revenue Code are
  investment tax credits which constitute the
  principal federal incentive for developing and
  installing solar power

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SECTION 48 TAX CREDITS

• Available, generally, for energy property using
  solar energy to generate electricity, to heat or
  cool (or provide hot water for use in) a
  structure, or to provide solar process heat
  (except for swimming pools), or to produce,
  distribute or use solar energy to illuminate
  using fiber-optic distributed sunlight, or
  qualified fuel cell property, or qualified
  microturbine property
• So this is a primarily described as a solar
  energy tax credit -- Photovoltaic PV,
  Concentrated Solar Power (CSP) and fuel cells

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• As an investment tax credit, the ETC (for solar,
  etc.) is based on the cost of the energy
  facility, not on how much electricity is produced
  
• In contrast, Federal tax credits for wind,
  biomass, geothermal, etc. are under Section 45 of
  the Internal Revenue Code and are based upon
  electricity production)
• For the ETC, there is no requirement that
  electricity be sold, just that the facility
  generate electricity for heating, cooling or
  lighting

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• The ETC is generally 30 of the cost of the
  facility (which does not include ancillary
  aspects like transmission lines and substations,
  but can include a reasonable development fee)
• The ETC is claimed in full in the year the
  facility is placed in service (although in
  certain circumstances it could be claimed based
  on progress expenditures over more than one
  year)
• Recapture possible for 5 years (credit vests 20
  per year)

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• ETCs are generally claimed by the owner of the
  solar facility
• A lease can be used so that the tenant claims the
  tax credits, but most solar facilities are too
  small to justify the additional transaction costs
  of documenting a transaction as a lease, at least
  under the master lease structures used for
  historic tax credits
• ETCs follow profits Unlike LIHTCs which
  generally follow depreciation losses (be careful
  with any incentive fees)

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• The use of grants, bonds, subsidized energy
  financing and other tax credits can reduce the
  ETCs pro rata based on the percentage of the
  facility funded by these items
• ETCs (like LIHTCs) cannot reduce Alternative
  Minimum Tax liability
• There is a basis reduction of 50 of ETCs
  claimed, which reduces depreciation losses

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• Facilities are generally depreciated over 5 years
  (5-year MACRS)
• Facilities placed in service in 2008 can claim
  50 of the total depreciation in 2008
• Under current law, the facility must be placed in
  service prior to January 1, 2009, or ETCs are
  reduced from 30 to 10
• Credit extension legislation is under
  consideration now in the Congress

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ETCs ON LIHTC PROPERTIES

• The same property can take advantage of both ETCs
  and LIHTCs
• If the solar facility is being included in the
  initial construction or rehabilitation of a LIHTC
  property, then the solar property can be included
  in the basis for both tax credits
• If the solar facility is being added to an up and
  running LIHTC property, the LIHTC basis is
  already established, so only the ETCs can be
  claimed on the solar facility

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• To qualify for both LIHTCs and ETCs, the tenants
  cannot be charged for the electricity, as that
  would cause the panels to be commercial
  property and excluded from LIHTC basis
• When combining LIHTCs and ETCs, make sure the
  ultimate investor (which may be the syndicators
  investor) is in the deal before the solar
  property is placed in service (possible 3-month
  lease exception under Code Section 50(d)(4))

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• The LIHTC partnership could own the solar
  facility and the LIHTC investor could pay
  additional capital for the ETCs
• An affiliate of the developer could own the solar
  panels and (i) sell electricity to the LIHTC
  partnership or (ii) lease the panels to the LIHTC
  partnership in either case, the developer could
  syndicate the ETCs to a tax investor

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ADDING SOLAR TO AN EXISTING LIHTC PROPERTY

• The LIHTC partnership could own the solar
  facility and the LIHTC investor could pay
  additional capital for the ETCs
• An affiliate of the developer could own the solar
  panels and (i) sell electricity to the LIHTC
  partnership or (ii) lease the panels to the LIHTC
  partnership in either of these situations, the
  developer could separately syndicate the ETCs to
  a tax investor

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Example Combining ETC and LIHTC
Amount of Credits Available Amount of Credits Available
9 Housing Credit 4 Housing Credit
Solar Panel Cost 1,000,000 1,000,000
Solar Credit at 30 300,000 150,000assumes 50 tax-exempt debt
LIHTC Basis(reduced by ½ of solar credit) 850,000 925,000
LIHTC Percentage (assumed) 8.1 x 10 81 3.5 x 10 35
LIHTC Amount 689,000 324,000
Total Credits 989,000 474,000

Plus 5-year MACRS (and Plus S/L
depreciation
50 bonus depreciation if PIS in 2008)
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• Often, the ideal transaction structure depends on
  whether or not the solar facility can be included
  in LIHTC basis and on the available state
  incentives
• Also, some LIHTC investors and syndicators are
  more receptive than others to also investing in
  ETCs
• 11088199.1

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