How Tax Equity Works

Above is a summary for how a partnership flip works when it comes to Tax Equity investments.

Investment:

Most tax equity investments start with a minimal investment at NTP (usually 1% of the total tax equity amount, then another 19% at Mechanical completion and the rest before PTO).

Tax equity invested amount is highly negotiable and could range from 1.05x to 1.25x the ITC amount.

Terms:

The investment terms usually have a preferred dividend, an allocation of net losses/income, and a call option for the sponsor.

The terms of Tax Equity investments are highly negotiable, however, as there is only a limited number of investors, the sponsor/developer would logically be in the less favorable negotiating position.

Diligence:

Tax Equity investors are usually sophesticated investors (or hire sophesticed advisors) who will conduct a through due dilligence and underwritting requesting all documents, collateral, forecasts, etc. that a bank would ask for when conducting their loan due dilligence.

For this reason, Tax Equity investments have significantly high transaction costs making smaller tickets uninvestable.

Tax Considerations:

Finally, there are various tax considerations that needs to be accounted for in the financial model such as DROs, suspended losses, outside and inside basis, along others.

eDGe Renewable Partners?specializes in providing complex and structured capital solutions to renewable energy developers and EPCs.

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