SOLAR TAX CREDITS

SOLAR TAX CREDITS LEARNING THE BASICS: HOUSING TAX CREDITS “101” IPED, INC. Boston, Massachusetts October 16-17, 2008 James F. Duffy, Esquire Nixon Peabody LLP 100 Summer Street Boston, MA 02110-2131 (617) 345-1129 jduffy@nixonpeabody.com

GREEN IS GOOD • As a nation, we are increasingly buying into green policies: • Greenhouse gases and global warming • National security • Environmental stewardship

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

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

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

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

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)

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

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)

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)

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

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

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

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

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

Example: Combining ETC and LIHTC

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

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 11180217.1

SOLAR TAX CREDITS