Is the landowner willing to commit to
the installation of solar technology on a
long-term basis? Solar developers and
utility companies need the technology in
place for a number of years (at least 10
years) to create a meaningful asset.
What is the electric load profile of the
property (if any)? Are there heavy power
users adjacent to the site that can buy
the power directly from the developer?
What are the other site characteristics?
Is the site unshaded and sturdy? Full access
to south- or southwest-facing sunlight is
preferred. For rooftop projects, if the roof
needs to be reinforced to support the
panels and is due to be replaced within
five years, it may be practical to combine
the solar and roofing projects.
Is the site near an interconnection point?
This is critical for utility scale projects as
interconnection is extremely expensive to
build and is fraught with regulatory
challenges and delays.
What tax credits and incentives are
available? These vary based upon the
project’s size and the state and municipality.
Tax Incentives
There is a panoply of federal, state, and
municipal incentive programs that provide grants, tax credits, and other sources
of financing or revenue for solar and other
renewable energy projects. Most notably,
the recent bailout package (Emergency
Economic Stabilization Act of 2008)
and the stimulus package (American
Recovery and Reinvestment Act of 2009)
include more than $42 billion in grants
and energy-related investments that
directly or indirectly benefit solar projects,
plus they include specific solar technology tax credits. These grants include a
program that will enable taxpayers to
redeem solar investment tax credits
that exceed their tax liability; eliminate
the tax penalties for subsidized energy
financing; and provide billions for “smart
grid” efficiency and renewable energy
research. The Business Solar Investment
Tax Credit set forth in Internal Revenue
Code Section 48 was extended through
December 31, 2016. This tax credit
allows for an offset of regular and alternative minimum tax in an amount equal
to 30% of the cost of solar equipment.
Owners of solar energy systems also can
take advantage of a 5.5-year equipment
depreciation schedule. The tax credits
can either be used directly by the land-owner/project owner or bundled and
sold to tax credit investors.
Transaction Structures
Solar power developments generally
use one of four structures:
Sole Ownership. For projects that
are one megawatt or less and will satisfy existing on-site or adjacent load,
direct ownership by the landowner is a
realistic possibility. Several commercial
installers can construct such projects, it
is easier to satisfy existing load requirements than to develop projects for off-site end users, and both conventional
debt and municipally issued tax-exempt
bonds can be used for financing. Recent
changes to California law authorize cities and counties to enter into contracts
with owners of improved property to
bond for the installation of permanent
improvements for renewable energy
and energy efficiency.
Sale-Leaseback. A sale-leaseback is
a financing that uses a lease as the
security instrument rather than a mortgage, and the landowner first conveys
the project to the financier, who then
leases it back to the landowner. The tax
implications of this structure need to
be examined carefully, particularly the
use of tax credits. This type of transaction can also be structured as a land-
banking opportunity, whereby the solar
developer acquires the property from
the real estate developer pursuant to
an option contract.
Third-Party Leases. Under this
structure, the landowner leases the
project to a third-party who builds,
owns, and operates the facility. This
structure is extremely common because the landowner’s involvement in
the project’s development is minimal.
The rent typically increases as the project meets development milestones
such as obtaining key permits, ground-breaking, commercial operation, and
specified dates.
Joint Venture. In a joint venture,
the landowner and a third-party build,
own, and operate the facility jointly.
This structure is attractive where the
landowner wants “a piece of the equity,”
is willing to take development risk, and
has found a compatible and experienced solar power developer. Tax credit
or tax equity financings typically are
structured as a form of joint venture.
Sustainable Development
The push to sustainability is not
a new concept. Implementing solar technology can lead to a win-win
situation for landowners, furthering
corporate environmental objectives
such as reducing carbon dioxide emissions and other air pollutants, and
increasing revenue and profitability.
Elliot D. Hinds is a partner in the Los
Angeles office of Goodwin Procter,
and can be reached at (310) 788-5145
or ehinds@goodwinprocter.com.
Douglas A. Praw is an associate in the
Los Angeles office of Goodwin Procter,
and can be reached at (310)788-5117
or dpraw@goodwinprocter.com.
