SOLAR TAX CREDITS
James F. Duffy, Esquire Nixon Peabody LLP 100 Summer Street Boston, MA 02110-2131 (617) 345-1129 jduffy@nixonpeabody.com
LEARNING THE BASICS: HOUSING TAX CREDITS “101”
IPED, INC.
Boston, Massachusetts October 16-17, 2008
GREEN IS GOOD
• As a nation, we are increasingly buying into green policies: – Greenhouse gases and global warming – National security
– Environmental stewardship
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STATE SOLAR INCENTIVES
• Many states are adopting state programs to encourage the use of solar energy generally (grants, rebates, state tax credits, sales tax exemptions, etc.) • Qualified Allocation Plans throughout the country are being revised to encourage and reward sustainable building methods, including using solar energy – and every point counts in a 9% application
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SOLAR ENERGY IN LIHTC PROPERTIES
• Solar energy can be used for common areas to reduce a property’s operating expenses or can be provided to the tenants • To the extent that using solar energy allows a reduction in tenant utility allowances, that generally allows rents to increase by an equal amount
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FEDERAL ENERGY TAX CREDITS
• 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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SECTION 48 TAX CREDITS
• As an investment tax credit, the solar ETC is based on the cost of the solar 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)
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SECTION 48 TAX CREDITS
• 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 generally claimed in full at the time the solar facility is placed in service
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SECTION 48 TAX CREDITS
• ETCs are generally claimed by the owner of the solar facility • ETCs follow “profits” – Unlike LIHTCs which generally follow depreciation losses (be careful with any incentive fees) • Recapture possible for 5 years (credit vests 20% per year)
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• The use of tax-exempt bonds or “subsidized energy financing” can reduce the ETCs pro rata based on the percentage of the solar facility financed by these sources • ETCs can now reduce Alternative Minimum Tax liability (for tax years beginning after October 3, 2008)
• There is a basis reduction of 50% of ETCs claimed, which reduces depreciation losses (so, you depreciate 85% of the otherwise depreciable basis)
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• Solar 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
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• The recent “Bailout Legislation” extended the solar ETCs for 8 years, so that a qualifying facility must be placed in service prior to January 1, 2017, or ETCs are reduced from 30% to 10% – The relevant expiration date had been January 1, 2009 until the extension earlier this month
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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 solar facility to be “commercial property” and excluded from LIHTC basis • When combining LIHTCs and ETCs, make sure the ultimate investor (which may be the syndicator’s investor) is in the deal before the solar property is placed in service
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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 9% Housing Credit Solar Panel Cost Solar Credit at 30% LIHTC Basis
(reduced by ½ of solar credit)
4% Housing Credit $1,000,000 $150,000
assumes 50% tax-exempt debt
$1,000,000 $300,000 $850,000 9% x 10 = 90% $765,000
$925,000 3.37% x 10 = 33.7% $311,725
LIHTC Percentage
(assumed)
LIHTC Amount
Total Credits
$1,065,000
$461,725
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• At LIHTC pricing of 75 cents/credit dollar and ETC pricing of 90 cents/credit dollar, this would translate to $843,750 ($573,750 + $270,000) of additional equity for the 9% deal, which would increase to $1,015,875 ($745,875 + $270,000) of additional equity if the property qualified for a 130% increase by being located in a DDA or a QCT
• The above calculations do not take into account state solar subsidies or savings on electricity
• The $1,000,000 installation cost includes an assumed increase in the development fee
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• Keep in mind that some LIHTC investors and syndicators are more receptive than others to also investing in ETCs, so pricing of ETCs should be addressed early on • Run the numbers early on to compute the total benefit of adding solar to a new property
• If you’re considering solar, keep solar capacity in mind when designing roofs
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