The “One, Big, Beautiful Bill” and the implications for corporate taxpayers and the clean energy industry

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To Market, To Market: Tax Credit Transfers Start Rolling Along

Reprinted with permission from Tax Notes - Volume 181 | October 30, 2023

By Marie Sapirie

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The Inflation Reduction Act opened the market for buying and selling energy tax credits by creating a new asset class. One result of that innovation was the launch of new marketplaces in which buyers and sellers can transact. A novelty in the federal tax area, tax credit marketplaces are working to establish themselves as a key aspect of the implementation of both the new and the dramatically revised energy credits.

The objective of the marketplaces is to facilitate credit transfer transactions by bringing buyers and sellers together and helping them complete their deals efficiently. The early deals appear to be mostly dominated by established participants in the traditional tax equity market, but the founders of the new marketplaces see a chance to both assist in those transactions and turn the untapped potential of smaller projects and new credit purchasers into completed deals.

New market, new marketplaces

As the recent spate of announcements has heralded, the market for credit transfers is taking off. “There are very few tax planning strategies that can have as large an impact as this can have for a single transaction, but it’s all based on scale,” Gabe Rubio of BDO USA LLP said. Where marketplaces fit within the credit transfer market is still being determined, but there are indications that they’ll play an important role.

“There has been an awesome amount of demand from clean energy project developers,” said Andy Moon of Reunion, an energy tax credit marketplace that launched this year. His company currently has $3 billion in credits from hundreds of developers on its platform from leading solar, wind, and other project developers. Moon said that because of the shortage of available tax equity and the complexity involved in tax equity partnership structures, there is a growing realization that transfers will be an important part of the financing toolkit for all developers.

One of the challenges is that the population of sellers is reasonably well defined, but the population of potential buyers is not. “People are interested and are feeling out the market but are trying to figure out how the process works and figuring out what they need in order to be able to transact,” said Seth Feuerstein of Atheva, another credit marketplace. For the sellers’ part, they’re often learning what buyers want, he said. That learning process will continue as the market matures.

By educating buyers and sellers and making transactions significantly less onerous than tax equity deals, the marketplaces hope to help the market mature faster. Moon said Reunion is focused on educating market participants and ensuring that transactions are done properly and are good experiences for buyers and sellers. “Part of why we’re interested in providing our knowledge to the market, including to our competitors, is that if there is fraud or recapture, that’s bad for us too,” he said.

The transactions facilitated by the marketplaces still involve outside counsel for each party to the deal. Moon said that Reunion helps lower expenses for buyers and sellers by guiding the due diligence process and providing a starting point with standardized documents that the parties and their counsel can customize through negotiations. There are additional benefits to having a nonparty facilitator whose role is to efficiently move the transaction to closing, he noted. For example, he explained that while developers may seek higher-than-market sales prices initially, Reunion has been able to bring its market expertise to the table to help buyers and sellers achieve a price that makes sense. “The go-between role is important,” he said.

Moon said that the long-term vision for Reunion’s role in the market is to be a place where many buyers and sellers can transact regularly in an auction style and to offer buyers the ability to purchase a portfolio of many projects. “Right now, buyers want projects with scale, but by the time we get to the later part of 2024, one thing that we anticipate is more, smaller projects with larger discounts,” he said. The key to those deals will be risk mitigation.

The marketplaces might also carve out a niche as matchmakers between buyers and sellers who don’t already know each other by helping them to find the right deal partners. Rubio said that the marketplaces could provide a valuable service to clients that have very specific parameters.

Transfers on the rise

Both on and off of the marketplaces’ platforms, credit transfers have taken off. Rubio said his firm closed transfer agreements of just under $300 million in credits in September. “VPs of tax are starting to wake up to this, as are developers, and it is becoming a very relevant tax and cash planning strategy,” he said. That growing awareness is why the credit transfer market is on an upward trajectory.

Moon predicted that the rest of 2023 and early 2024 will continue to see bilateral transactions, as the process becomes more familiar to purchasers. “Once a company and their finance team get comfortable with the process, there’s no reason not to continue to transact at equal or larger volumes in future years,” he said.

The market is currently heavy on solar projects, probably because that technology is among the most prevalent and there are many small solar projects that drive up the numbers, said Feuerstein. He added that developers have shown a preference for selling investment tax credits because they generate more income for the seller, but production tax credits are actually easier to sell because of the lack of recapture risk. So far, there doesn’t appear to be much of a difference in sales price between ITCs and production tax credits.

Risk mitigation is one of the major focuses of the credit marketplaces. Treasury and the IRS stated in the proposed regulations that the risk of recapture should be on the buyer, with a few exceptions in the case of partnerships and S corporations, but they allowed transferors to indemnify transferees. The focus in deals is now on mitigating the recapture risk through insurance and guarantees that let buyers feel more secure about their purchases. “All of our agreements put the burden of recapture on the seller,” Feuerstein said.

No portal

The IRS says it expects to open a registration portal for credit transfers by the end of the year, the main missing link in the transfer process. Credits sold today still have to be registered. Uncertainty about what exactly that prerequisite will entail is causing some additional friction in the market, but it’s “more of a hurdle than a barrier,” Feuerstein said.

Pricing

The price range for credits is still fairly wide, but it’s starting to crystallize, and it will probably narrow over time. “The highest we’ve seen is 94 cents [on the dollar],” Feuerstein said. But sales in the low-80-cents range are also happening, and some sellers may even go into the 70s. “The pricing depends on the size of the credit and the creditworthiness and reputation of the seller, among other things,” he said.

Moon said that for the 2023 tax year, current production tax credits sell in the mid-90s, and ITCs from established solar, wind, and battery storage developers are in the low 90s. Technologies that now have a smaller pool of buyers, such as biogas, are trading around 90 cents or in the high 80s, he said. “Smaller projects, projects from newer developers, or projects with more risk or complexity may have a discount in the mid-80s,” Moon said. Looking forward to 2024, the options will increase with additional technologies, such as carbon capture, and new structures. For example, buyers could lock in a larger discount by committing to purchase tax credits for projects that will be placed into service at least 12 months in the future.

The proposed regulations established that the discount at which credits sell isn’t taxable income to purchasers, which has caused sales prices to rise. Moon noted that from the standpoint of the internal rate of return, the returns on purchases are quite healthy because the credits can be used to offset quarterly estimated payments.

The successful completion of the initial credit sales is likely to serve as a proving ground for the process. Buyers and sellers of smaller credits in particular may be the beneficiaries of the collective knowledge and eventually more standardized processes that follow on the heels of the initial transactions. “It’s harder to justify the transactional expense necessary for a smaller transaction,” Rubio said. He said that he hasn’t seen a completed sale of a credit under $5 million so far, but that is likely to change as the market develops.

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At Reunion, we believe that setting a strong company culture from the start is a critical part of building a high-performing company. Our founding team worked together to define company values that influence our everyday work; from how we screen and hire new employees, to how we collaborate and develop our product offering.

Our mission has remained constant. Our team members are motivated by our mission to make a meaningful difference in the fight against climate change. We believe that our team is uniquely positioned to increase deployment of renewable energy through our deep experience in financing.

We have five core company values. Every quarter, we re-visit our company values and ask whether these values remain relevant to how we work. This always spurs insightful and honest reflections on where we are succeeding and where we can improve. Sometimes, it leads us to adjust our company values to better reflect what is truly important.

Our mission

Reunion’s mission is to accelerate investment into renewable energy projects by simplifying the project financing process.

Our values

Communicate empathetically and directly

• We communicate openly and directly, even in disagreement
• We are kind and assume our teammates, customers, and partners have the best intentions

How can we go faster?

• We make firm and fast decisions, particularly on decisions that can be reversed
• We ship fast and adjust course based on data and feedback

How can we do it better?

• We run experiments that we can measure and are open to changing our minds when presented with data
• We keep an “enterprise-level” bar for excellence

Everybody is a leader and an owner

• Anybody can own an initiative and make it a reality
• If we commit to a project, we aim to follow through to finish

Continuous growth

• We strive to keep learning and improving, both as a company and as individuals
• Feedback is a gift; we embrace opportunities to grow

Come join us

Defining and refining our company values has helped us clarify who we want to be as a company. We have developed a high-performance culture, and we have surprised ourselves at times with our pace of execution despite having a small (but mighty) team. I should also emphasize that, although it’s not an official company value, we also have fun! 🙂

We believe that hiring and motivating the best people will be core to achieving our climate mission. If our mission and values resonate with you, we are always looking for talented people to join us – check out our open roles.

Introduction

In Episode 3, our CEO, Andy Moon, gleans expert insights and unique market observations from Hilary Lefko, a partner at Norton Rose Fulbright. According to Hilary, "It's amazing how much the market has grown since the regulations came out in June."

Listen on Spotify or Apple

10 Questions with Reunion is now available as a podcast on Spotify and Apple.

Takeaways

Transferability market activity has experienced incredible growth since regulations came out in June

• First movers were traditional tax equity investors purchasing credits. Now, we are seeing tax credit transfers across various sizes and technologies
• Every traditional tax equity deal that Hilary is working on has a transferability component

The bridge lending market is rapidly developing. Transfer deals with committed buyers are seeing advance rates similar to traditional tax equity bridge loans in the mid-90s

• If there's no tax credit purchasers signed up, we're seeing much lower advance rates – 75% and below

Technology and tax year is driving pricing, with higher pricing for 2023 tax year and established technologies

• 2023 tax credits are being priced much higher than later years
• Wind, solar, and storage are trading a little bit higher than technologies like biogas, where people are less familiar with the risks. PTCs are trading a little bit higher than ITCs

Key negotiation points include audit rights and scope of diligence

• Negotiations around audit are ending up similar to where tax equity is. Generally, each party controls an audit at their own level, meaning an audit of the tax credit buyer will be controlled by the buyer. If the seller has an indemnity obligation, they'll likely have notice, participation, and maybe consent over an audit that's going to result in an actual indemnity obligation
• Surprisingly, some developers are trying to limit the amount of due diligence buyers can do. They tends to be smaller developers who have insurance in place and don’t see the need for additional diligence; this will likely result in a lower price for the seller
• Limit of liability is also a negotiation point (e.g., is indemnity sized at the full tax credit amount, or the discounted amount that the buyer paid). Market is gravitating towards the purchase price of the credits plus some amount such as 20%. Important to remember that it’s rare to have a wholesale disallowance of credits

Basis step-ups continue to be important to developers, and structures are emerging to enable step-ups

• “Cash equity” structures with third party investors are emerging to help developers take advantage of step-ups. The third party investor must take true risk on their investment in order for the transaction to be respected by the IRS; however, this structure is markedly simpler than tax equity
• Not seeing many step-ups above the 20% range; traditional tax equity is capping the basis step-ups at 15% to maybe 20%. Some newer entrants with less sophisticated tax counsel are trying to go higher, though insurance will play an important role (and insurance markets may or may not be willing to insure larger step-ups)

Structures are also emerging to mitigate risk to buyers from recapture

• An internal partnership can be structured to own a project company, with one partner pledging their interest to the lender to mimic the collateral structure in back-leveraged tax equity. This can mitigate recapture risk for the buyer

Credit adders have varying levels of maturity. Energy community is the most common

• Energy community deals are appearing frequently. Projects that qualify on statistical area or on a closed coal fire and generating plant or closed mine are straightforward. Brownfield sites, which are more challenging to diligence, are beginning to emerge
• LMI bonus should appear soon. The application portal for the LMI bonus credit, which is allocated by the IRS, opened in late October
• For now, use of the domestic content bonus is limited. The market is waiting on further guidance and manufacturers are reluctant to disclose costs. Hilary has seen domestic content on two solar deals

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Chapters

• 0:00 - Introductions
• 0:59 - Question 1: What sort of transferable tax credit deals are you seeing? What have been the smallest and largest transactions you’ve worked on?
• 2:14 - Question 2: What interesting structures are emerging with transferability?
• 3:12 - Question 3: What terms are you seeing on bridge loans?
• 4:17 - Question 4: How does tax credit pricing differ between standalone deals and hybrid tax equity deals?
• 5:28 - Question 5: When negotiating tax credit transfer agreements between buyers and sellers, what negotiating point has surprised you the most?
• 6:30 - Question 6: What type of sellers have the leverage to limit a buyer’s diligence?
• 7:24 - Question 7: What specific limits are sellers putting on due diligence?
• 9:34 - Question 8: What are you seeing with respect to audit rights during transfer negotiations?
• 10:44 - Question 9: What is the 50th percentile in terms of negotiating audit rates?
• 11:33 - Question 10: Are you seeing structures emerge for developers to take advantage of a basis step-up?
• 13:20 - Question 11: What level of ownership is required to make buyers comfortable that it's a true third-party owner?
• 14:58 - Question 12: Are you still seeing tax credit transfers with step-ups above 20% to 30%?
• 15:38 - Question 13: Are you seeing any structures emerge to mitigate risks to the buyers?
• 16:50 - Question 14: What types of limits of liability are you seeing in tax credit transfer agreements?
• 19:06 - Question 15: Are you seeing buyers get comfortable with sellers not providing a guarantee when there's insurance?
• 21:09 - Question 16: Are you seeing deals with the energy community and domestic content bonuses?
• 22:39 - Question 17: What types of deals are using domestic content?
• 23:31 - Question 18: Are you seeing deals with the LMI bonus?
• 24:33 - Question 19: Are you seeing deals outside of solar, wind, and battery storage? Are you getting calls from people ready to transact on newer technologies?
• 26:28 - Question 20: Will a flood of new credits from different technologies drive pricing down over time?

Transcript

Introductions

Andy Moon: Welcome to another episode of 10 Questions with Reunion. My name is Andy Moon, and I'm the co-founder and CEO of Reunion, the leading marketplace for clean energy tax credits. We work closely with corporate finance teams to purchase high-quality tax credits from solar, wind, and other clean energy projects.

Today's guest is Hilary Lefko, who needs no introduction to practitioners of renewable energy finance. Hilary is a partner at Norton Rose Fulbright in Washington, DC and has significant transactional experience with Section 45 production tax credits, Section 48 investment tax credits, and is now spending a lot of time advising clients on tax credit transfers via the Inflation Reduction Act.

Hilary, great to have you here today.

Hilary Lefko: Nice to be here. Thanks for having me.

Question 1: What sort of transferable tax credit deals are you seeing? What have been the smallest and largest transactions you’ve worked on?

Andy Moon: Specific to Section 6418 tax credit transfers, what deals are you seeing? What's the smallest transaction you've worked on and what's the largest?

Hilary Lefko: We're seeing all kinds of transactions. What I think is interesting relates to Congress's whole reason behind transferability: to open financing to much smaller projects than would traditionally be financed by tax equity. The first projects we saw were projects that would be financed by tax equity, and it was tax equity investors buying the credit.

But now the market is exploding. We're seeing small projects getting financed. We're seeing portfolios getting financed. We're seeing portfolios of wind and solar. We're seeing solar plus storage, small commercial and industrial solar (C&I), biogas, very large wind farms, and solar. We're even seeing nuclear and renewable natural gas (RNG).

It's incredible how much the market has grown since the regulations came out in June.

Question 2: What interesting structures are emerging with transferability?

Andy Moon: What are you seeing in terms of other interesting structures that are coming to light with transferability?

Hilary Lefko: The first deals we saw were existing wind tax equity, selling off some credits from the last few years of the PTC period. Then, we started to see portfolio deals with people bundling up existing wind farms and selling the tax credits from them.

Then, we started to see the market move into greenfield projects. We're seeing new builds for solar, new builds for wind, storage, biogas. I think everything is bespoke right now. We're seeing the plain vanilla standalone deal, but I would say every traditional tax equity deal I'm doing right now has a transferability component to it.

Transferability has become such an important part of the market. It's a feature of every transaction I'm working on right now.

Question 3: What terms are you seeing on bridge loans?

Andy Moon: You mentioned working on bridge loans against commitments of tax credit transfers. What terms are you seeing on bridge loans?

Hilary Lefko: We've seen lenders that traditionally offered tax equity bridge loans step into the transferability bridge market. I'm seeing relatively similar terms and similar advance rates: if there's a purchaser that's already signed a tax credit transfer agreement, [we're] seeing advance rates in the low to mid 90s. If there's no tax credit purchasers signed up, we're seeing much lower advance rates – 75 and below.

For the most part, the lenders that have been doing tax equity bridges have been willing to jump into the transfer bridge market.

It was, however, a steep learning curve for them. They had to get used to the fact that money was coming in later than it does with tax equity, that payment structures look different, that there are different risks, and that different structures may be necessary. But we're seeing the debt market pick up.

Question 4: How does tax credit pricing differ between standalone deals and hybrid tax equity deals?

Andy Moon: As tax equity partnerships sell credits out of the partnership, how does pricing differ on those deals versus a standalone deal? Is it a smaller discount?

Hilary Lefko: It depends. The trends I'm seeing are 2023 credits are trading much higher than 2025 or 2026 credits. 2024 credits are a little bit higher than those future credits as well.

I don't know that the structure is driving the pricing so much as the timing of the credits. I also think the technology [is a factor] – wind, solar, and storage are going to trade a little bit higher than technologies like biogas, where people are not familiar with the risks. I think wind is trading a little bit higher, too. PTC is trading a little bit higher than ITC.

It'll be interesting to see once we get into the beginning of next year when 2023 tax liability has firmed up for many companies. I think we're going to see prices go up.

Question 5: When negotiating tax credit transfer agreements between buyers and sellers, what negotiating point has surprised you the most?

Andy Moon: That's very interesting. As you're negotiating tax credit transfer agreements between buyer and seller, what's come up in negotiations that surprised you the most?

Hilary Lefko: The thing that surprised me the most was a lot of sellers are trying to limit the amount of due diligence that buyers can do. Sellers are saying, "You're either getting a guarantee or you're getting a tax credit insurance policy, and you need to take our word for it – we're giving you representation."

The initial entrants into the market were traditional tax equity investors, and they were looking to do the same level of diligence that they would do on a tax equity transaction to confirm qualification for the credit.

Some of the newer entrants – corporates who haven't done tax equity before – are relying more on counsel, doing a little bit less diligence, but still wanting to kick the tires and make sure that the project qualifies. They're looking for tax credits, not an insurance payout.

Question 6: What type of sellers have the leverage to limit a buyer’s diligence?

Andy Moon: What type of sellers have the leverage to say there's limits on what due diligence you can do? Is that mainly the tax equity partnerships or the large banks who are putting those limits in place?

Hilary Lefko: I see it more from the smaller developers that want to sell their tax credits and think that they bought this insurance policy and that's going to make everything okay.

I think it has an impact on pricing. If you're not getting to kick the tires as much, you're not going to pay as much. There's a supply and demand aspect to it: if what you're offering doesn't have the same protections as what some other developer is offering, a buyer is not going to pay as much.

I think the market's going to take care of those sellers who don't want diligence being done, and they're going to get less for their tax credits than the sellers who are allowing buyers to do full diligence.

Question 7: What specific limits are sellers putting on due diligence?

Andy Moon: What specific limits are they putting on the diligence? Are they saying you can't dig into the cost segregation analysis, or are there specific areas that they want to curb diligence in?

Hilary Lefko: They’re saying, "Here's a cost segregation report, [and] you have an insurance policy. You have to trust us that we started construction. You have to trust us that the project is up and running. We've told you it's in service. You don't need to look at an independent engineer (IE) report."

"Why do you care if it's on a superfund site?" "If it is, then we get an energy community bonus." “But you can't look at environmental reports."

It's really limiting all those third-party deliverables the tax equity is used to viewing. We're seeing sophisticated tax counsel saying, "Well, you still have issues of tax ownership. We want to look at your O&M agreement, your off takes, [and] any revenue contracts to make sure that ownership of the project isn't shifting to someone else." And sellers are coming back and saying, "You don't need to look at an O&M agreement. It's an ITC. Why do you care if the project operates?" You do care during the recapture period, so there are considerations as well.

In the ITC context, we’ve seen sellers try and say, "Well, you can look at it up to placed-in-service, but you don't need to be concerned after that. We got you a recapture policy." That's just not been acceptable to a lot of buyers.

Andy Moon: That's been our experience, too. We've counseled buyers that it's important to do a comprehensive due diligence process and understand what you're buying.

There is some art, however, in making sure that this doesn't become another tax equity transaction where there is belt-and-suspenders diligence on every item. But proper diligence is important.

Hilary Lefko: Absolutely. I'm seeing some sellers try and limit the ability to get a tax opinion or what that tax opinion can cover. But, generally, more sophisticated buyers are looking for an opinion or a memo of counsel confirming that the project qualifies for tax credits in the full amount.

Question 8: What are you seeing with respect to audit rights during transfer negotiations?

Andy Moon: One other interesting point that you made is that audit rights and control of audit was one of the biggest negotiation points on the tax credit transfer agreement. Can you say more about what you're seeing there?

Hilary Lefko: Audit rights has become a big sticking point on a lot of these deals. The issue being that the regulations make clear that the audit can and will occur at the buyer.

Generally, these tend to be relatively buyer-friendly agreements, in which the seller has a lot of indemnities to the buyer. When the seller has an indemnity, they're going to want some level of control or participation in an audit. But you have corporates that aren't used to doing tax equity, and the thought of someone meddling in their audit is foreign to them.

Further, tax equity investors are buying these credits through their bank entities, and they can't have somebody else participating in an audit at the bank entity level.

So, [we've seen] a lot of negotiation on what kinds of rights sellers get where they do have an indemnity, where the buyer is clearly being protective of their audit process and should be.

Question 9: What is the 50^th percentile in terms of negotiating audit rates?

Andy Moon: Where would you say the 50th percentile is netting out in terms of audit rights?

Hilary Lefko: I think similar to where tax equity is. If the seller has an indemnity obligation, they have notice and participation rights [in the audit]. Ultimately, though, the buyer is going to control any audit at the buyer level. With respect to seller audits, we've seen a little bit more give – some sellers are willing to give buyers a bit more participation rights.

Generally, where the market is settled is you control an audit at your own level. If there are indemnity rights, we'll let you be involved, we'll let you have notice, participation, and maybe consent over an audit that's going to result in an actual indemnity obligation.

Question 10: Are you seeing structures emerge for developers to take advantage of a basis step-up?

Andy Moon: Flipping over to other structures that you've seen, we've heard a lot of talk of structures within transfers to enable a basis step up in the case of an investment tax credit - for example, an affiliate sale of a project company to a joint venture (JV). Have you seen this happening in practice?

Hilary Lefko: In terms of the step-up partnerships, I think this is going to be the key to unlocking the market. I think that everyone doing ITC deals is looking for a way to do a step-up partnership to get more value from the tax credit.

Initially, people were referring to these as accommodation parties, but I think to me it's more of a cash equity transaction. It's not tax equity. The investor is putting money in and getting a return on cash back. They're looking for credit card-like returns.

Initially, people were looking at these step-up partnerships as if they needed to look like tax equity and needed to satisfy the revenue procedure. “We need to have a pre-tax profit.”

To me, it's different. This is more like a cash equity transaction, where you have someone putting cash in and wanting a cash return.

Yes, a large portion of that return is coming early in the partnership because the partnership is selling tax credits. However, I think there needs to be some variability, and investors need to have some skin in the partnership game, some entrepreneurial risk – upside and downside. They're getting some of their return from the actual operations of the partnership – not just selling tax credits.

There was handwringing over making these interests look like tax equity when they're not tax equity. They're more like cash equity, which no one ever had these concerns about structuring cash equity.

Question 11: What level of ownership is required to make buyers comfortable that it's a true third-party owner?

Andy Moon: Do you have any sense of what level of ownership is required to make buyers comfortable that it's a true third-party owner?

Hilary Lefko: I think in terms of what percentage do these cash equity accommodation parties, whatever we're calling them, need to have. I think initially people said 20% because that's what we think of as a meaningful stake in the partnership. I think we'll start there. No one wants to be the guinea pig. I think the first deals are going to get done at 20% or higher.

The issue is if you're stepping up the basis of a tax credit, there needs to be a robust appraisal supporting that fair market value. The partner interest to me is a little bit more of a red herring.

While they do need to be respected as a partner – and I'm not writing that off or being flippant about not making sure that they're a true partner in the partnership – I think we're losing sight of the bigger issue, which is, can we support the step up? Is the step up too much? Is there an appraisal behind it?

I'm not saying that we don't need to make sure the partner is a real partner; I'm absolutely saying that. I think we're losing sight of the bigger issue, and that's we still need to be able to support the step up.

Andy Moon: For sure. We have two separate issues. One is to ensure that the IRS respects the partnership as a true third-party transaction. And the second is the level of step up. The latter is an ongoing question. The IRS didn't provide clear guidance or a clear line on what's acceptable in terms of step-up level. I think that'll be very interesting to see.

Question 12: Are you still seeing tax credit transfers with step-ups above 20% to 30%?

Andy Moon: Are you still seeing tax credit transfers with step-ups above 20% to 30%?

Hilary Lefko: Not really. We're seeing the traditional tax equity want to cap it at 15%, maybe 20%. Newer entrants into the market, if they're not represented by sophisticated tax counsel, can be convinced to go higher.

Some of the insurance markets are more conservative than others. Some will insure step-ups over 20%, while others will not. A lot of people view that step-up over 20% like an insurance arbitrage – we're going to get our tax credits, or we're going to get our insurance.

Question 13: Are you seeing any structures emerge to mitigate risks to the buyers?

Andy Moon: Are you seeing any structures emerge to mitigate the risk to the buyers? For example, if you have a partnership own a project company, that can help mitigate the risk of recapture if there's an upstream change in control.

Hilary Lefko: Absolutely. In the ITC space, we're seeing a lot of internal partnerships. These are not being done for step-ups. Rather, they're being done to mitigate recapture risk.

It almost creates a synthetic tax equity partnership where you have your class A interest that's getting tax benefits, and your class B interest that's getting more cash. The synthetic class B member can pledge that interest to the lender to mimic the collateral structure in traditional tax equity that they would have with back leverage.

I think if you can get that in place, lenders are getting comfortable. With deals that are already placed in service, though, where they didn't have the foresight to put something like that in place, lenders are saying, "Too bad, we have asset-level security. We're not going to forbear during the recapture period unless we have access to that sponsor-level interest as collateral."

Question 14: What types of limits of liability are you seeing?

Andy Moon: And flipping back to the tax credit transfer agreement, what limits of liability are you seeing? Are buyers asking for liability coverage in excess of the credit amount?

Hilary Lefko: I literally had two calls about this today! One with a lender, and one with a purchaser about what's "market" on sizing of indemnities for tax credit transfer deals.

If you're a purchaser, you're going to argue that market is the face value of the tax credits, and it should be uncapped. If you're the seller, you're going to say, "No, why should I pay you the face value of the tax credits? I should only be out for my purchase price."

We're seeing the "true" market settle somewhere between those two positions. We're seeing purchasers get comfortable if their indemnity amount is sized to the actual value of the tax credits – that is, the dollar amount of the tax credits. Then, they're willing to accept some limit on liability, such as purchase price plus 20%.

It's rare to have a wholesale disallowance of tax credits. Usually, you're looking at the basis step up or you have a piece of property that you claimed ITC on that you shouldn't have in the cost segregation. It's rare for the IRS to say you shouldn't have gotten the ITC at all.

For that reason, we're seeing purchasers accept some cap as long as they're getting the indemnity and the amount of the credit.

It also goes to the size of your insurance policy. We didn't talk about this, but all these deals I'm seeing are done with either insurance or a strong, creditworthy parent guarantee. To a seller that has insurance, if their tax credit insurance policy is sized to the face value of the tax credits, then they're fine with their indemnity looking like that because their agreement is going to say the buyer must go against the insurance policy before they can seek recourse against the seller.

Question 15: Are you seeing buyers get comfortable with sellers not providing a guarantee when there's insurance?

Andy Moon: That's fascinating. Are you seeing buyers get comfortable with sellers not providing a guarantee when there's insurance?

Hilary Lefko: I've seen several deals done with insurance only with a very limited parent guarantee. If you have insurance, what you're really looking at is retention (the uncovered amount) and whether contest costs count towards the retention.

You can quantify what's not covered by the policy and see how comfortable you can get with or without a guarantee. But I've seen deals done insurance only, with the seller pushing back on a guarantee or pushing back on a creditworthy parent giving a guarantee.

Andy Moon: That's fascinating. It's great to talk to you, Hilary, because you see so many deals in the market. It's interesting to see what each party is willing to accept because, at the end of the day, it's a negotiation.

Hilary Lefko: I would say "no guarantee" is the exception rather than the rule, and it certainly is going to impact pricing.

All these levers are levers that you can pull economically, and if you're willing to go without a guarantee, perhaps you can get a better deal on pricing. If you're insisting on a guarantee, then maybe the seller won't be is willing to work with you on pricing and some other factors.

The scope of the indemnity – whether it's just breaches (bad act-type things) or if it's more comprehensive (any loss disallowance recapture) – factors into the deal’s economic terms. All these deals are bespoke, and everyone's negotiating what they want out of them.

Andy Moon: Right. We've seen some buyers express that they want the indemnity from the seller to prevent moral hazard – that is, to make sure that the seller doesn't do anything that might trigger a recapture. Nobody wants to deal with having to get claims from an insurance policy.

Hilary Lefko: That's consistent with what we've seen as well.

Question 16: Are you seeing deals with the energy community and domestic content bonuses?

Andy Moon: Let's flip to bonus credits because there's still outstanding guidance on domestic content. What are you seeing in energy community, domestic content, and LMI?

Hilary Lefko: For the energy community bonus, I'm not seeing any issues with purchasing credits from projects that qualify on statistical area or on a closed coal fire and generating plant or closed mine.

It's been a bit more difficult to get a brownfield financed, and I think the reason for that is the determination must be made by an environmental lawyer. Environmental lawyers are not tax lawyers and are not used to writing opinions.

It's been hard to get the level of support and the documentation that tax credit investors expect when you're talking about a brownfield. I'm not saying it can't be done. There probably have been a few, but it's been difficult to get brownfield financed.

The other two, however, are easy to diligence: you look at the address and see if it's on the appendix. You must make sure the test year works in terms of whether it's placed in service, or every year during the credit period for PTC, or if you fit into the beginning-of-construction safe harbor. But I think that's probably the more difficult qualification piece than the underlying qualification itself.

Question 17: What types of deals are using domestic content?

Andy Moon: Are the deals you're seeing on domestic content win re-powers, or are they traditional solar installations?

Hilary Lefko: I have not seen a lot of domestic content financed. I know of two deals, and they have insurance. For the most part, sellers are finding that, right now, the market is not willing to finance domestic content. The reason for that being that it's just impossible to get manufacturers to disclose their direct and labor costs.

Everyone's putting this wait-and-see approach on domestic content. If we get better guidance or if we get manufacturers to disclose costs, then we're going to include the domestic content bonus. The projects that I know included the domestic content bonus in sizing were solar.

Question 18: Are you seeing deals with the LMI bonus?

Andy Moon: Fascinating. What are you seeing on LMI credits?

Hilary Lefko: The LMI portal opened last week, and everyone's scrambling to get their applications in. (Although you don't have to scramble because it's not first in, first out if you meet the [30-day] deadline. All applications [submitted within the first 30 days] get considered at the same time, based on the weighting criteria.)

If [the developer] get an allocation and other conditions are met, then we'll finance the credit.

People were hesitant until the portal opened and were worried that it wouldn't open – that we wouldn't, initially, have awards.

The DOE and the Treasury have been doing a road show of webinars, so everyone's gotten more comfortable with how you apply and how you qualify. We've been seeing more LMI elements added to these deals.

Question 19: Are you seeing deals outside of solar, wind, and battery storage? Are you getting calls from people ready to transact on newer technologies?

Andy Moon: Looking forward, we know there's a lot of demand for solar, wind, and battery storage tax credits. What are you seeing in terms of other technologies? Are buyers willing to purchase credits from other technologies?

Hilary Lefko: I am, although I am seeing lower pricing for other technologies. We are seeing a lot of sellers going to market with other tax credits. I think the next biggest category would be biogas and renewable natural gas (RNG). I think there's going to be a lot of those. There are a few projects that came online in 2023, and I think we'll see more 2024.

Anytime a potential seller comes to me with those types of credits and says, "I can get 96 cents of credit," I say, "Well, you're not selling 2023 wind [credits]. You probably can't [get that pricing]. You need to redo your economic projections assuming a much lower price per credit and make sure that this is still economically viable for you. Anything above that is going to be crazy.”

We've heard of some 45U nuclear credits coming out – maybe some other nuclear facilities selling technology-neutral credits. It'll be interesting to see what those trade at.

I think there's a lot of considerations with public perception around nuclear and whether investors will be willing to buy those credits and be associated with those technologies. It'll be interesting to see what the market will bear. It may be a great way for companies to get a bargain on tax credits.

As we start to see newer technologies flood the market with lower pricing, it'll be interesting to see if those impact the other end of the market – that is, the credits with which people are [familiar] and the technologies that investors are comfortable financing.

Andy Moon: I think that's right. There's a lot of expectation among developers that pricing will go up – that there will be a smaller discount as the market matures.

Question 20: Will a flood of new credits from different technologies drive pricing down over time?

Andy Moon: If there's a flood of new credits from many different technologies all competing for the same tax credit buyer dollars, will that provide downward pressure on pricing over time?

Hilary Lefko: I think it's going to be interesting to track.

Andy Moon: Thanks for coming on the show today, Hilary. It's been great to have you. Great to see you, as always.

Hilary Lefko: Yes, this was great. Great chatting.