Tax-exempt bonds may now be issued in connection with WIFIA loans. See FAST Act signed into law on December 4, 2015 (Sec. 1445, page 331).
A total rate of return swap (TRORS), sometimes called a Total Return Swap or TRS, is a financial contract that transfers both the credit risk and market risk of an underlying asset. One party makes payments based on a set rate (either fixed or variable) and the other party makes payments based on the return of the underlying asset (which includes income it generates and any capital gains). The underlying asset is usually a bond or loans or an equity index. TRORSs allow the party receiving the total return (the TRORS recipient or investor) to gain exposure and benefit from a reference asset without actually having to own it.
The key reason receivers of the total rate of return enter into this transaction is to take advantage of leverage. […] The payer in a TRS creates a hedge for both price risk and default risk of the reference asset, although the payer in the TRS is a legal owner of the reference asset. Investors who cannot short securities may be able to hedge a long position by paying the total rate of return in a TRS.
See Janet Tavakoli, Introduction to Total Return Swaps (available at http://www.tavakolistructuredfinance.com/trs/) for a good overview of TRORSs. See this video for a basic overview of Total Rate of Return Swaps.
TRORSs can be combined with tender option bond programs. For notes concerning tender option bond programs, see this posting.
See PLR 201502008 (May 21, 2014): Extension of the TRS is not an abusive arbitrage device and the TRS will not be integrated with the bonds under the authority of 1.148-10(e). The issuer/borrower agree to file a “cautionary” IRS Form 8038 just in case the IRS might mistake the bonds for having been reissued.
See “IRS Issues Favorable But Limited Ruling on Total Return Swaps” article in the January 27, 2015 edition of The Bond Buyer.
A TOB program is typically initiated by an institutional investor, such as a mutual fund, and is implemented by a bank. The bank provides credit enhancement and remarketing services for the short maturity variable rate securities that represent the initiating investor’s leverage. The initiating investor uses this borrowed capital to purchase a longer maturing, fixed-rate bond, which is placed in a TOB trust. The short-term variable rate debt, also known as a floater, is sold to money market mutual funds with daily or weekly interest rate resets. The residual amount of income (interest earned on the longer bond less interest and fees due on the shorter floater) is available to the institutional investor. The longer maturity security held by the investor is known as the inverse floater.
“Inverse floaters: Attractive yield but beware of the risks,” Columbia Management Investment Advisers, LLC, May 2013, available at https://www.columbiamanagement.com/market-insights/white-papers/InverseFloaters
A TOB program is a financing mechanism that allows investors to make a leveraged carry trade, borrowing at short-term rates and investing in higher-yielding long-term bonds, and then pocketing the spread.
Document Drafting Matters
- Ensure that the reimbursement agreement or letter of credit describes how the letter of credit may be cancelled, and what the process is when an optional redemption pursuant to the terms of the reimbursement agreement coincides with the date on which the letter of credit is cancelled. Should an optional redemption notice be provided or should the optional redemption be waived?
Payment of letter of credit fees might be considered capital expenditures, especially if paid during the project period. If the letter of credit fee is amortized beyond the project period, however, portions of the fee could be treated as working capital expenditures. Therefore, it may make sense to assume that the fee won’t be counted as a capital expenditure to test whether the 95/5 test is met.
Question 1: “I’m curious: What are your current business priorities?”
Question 2: “I’m interested in knowing: Where is the pain in your business? What keeps you up at night?”
Question 3: “I would be interested in knowing where the areas of growth are in your business. Where are the opportunities for gain?”
Last Question: “How can my firm and I support you?”
See David King Keller, 100 Ways to Grow a Thriving Law Practice.
A. Non-Substitution Clauses in Leases
The following is an excerpt from “Common Questions about Tax-Exempt Leases” published online by Municipal Funding of Zephyrhills, Florida, available at http://municipal-funding.com/tax-exempt_leasing_faq.htm:
A non-substitution clause is a provision in a 103 lease that prevents the government from non-appropriating and then acquiring equipment to perform the same function as the previously leased equipment.
Although non-substitution clauses still appear in 103 leases, the majority view (with which the author agrees) seems to be that having a non-substitution clause in a 103 lease actually damages the lessor’s interest. Here is the rationale: If the non-substitution clause prohibits the government from performing an essential government function, such a clause may be used to show that the lessor, while purporting to recognize the unrestricted right of the government to non-appropriate, nevertheless imposed coercive sanctions on the government in the event that the government exercised such right. The right to non-appropriate becomes illusory.
The non-substitution clause becomes the basis for an argument that the 103 lease creates debt. The government still has to perform the essential government function being served by the equipment. If it is unable to acquire new equipment to perform that function subsequent to a non-appropriation, non-appropriation is not a real option and the lease is essentially a multiyear hell or high-water obligation.
Courts in several states, including Texas, Oregon, Colorado, and Florida, have already found that including a non-substitution clause turns the 103 lease into debt. In each of these cases, because the procedures for incurring debt were not complied with, the 103 lease was void.
In light of this and because experience shows the clause is rarely if ever enforced, it offers no real benefit to lessors. Limiting its reach by the phrase “to the extent permitted by law” may mitigate some of the negative consequences, but it does little to make the provision more helpful.
B. Lessor Entities
For purposes of IRS Form SS-4, Application for Employer Identification Number (EIN), does the lessor entity check the “Corporation” box or the “State/local government” box on line 9a? Does the lessor entity need to file an income tax return?
Generally, if an entity is separate from (not an “integral part” of) the government, its income will be subject to tax unless an exclusion or exemption applies. If the income is subject to income tax, the entity may need to file a return. An exclusion in I.R.C. 115, however, excludes from gross income, income (1) derived from any public utility or the exercise of any essential governmental function, and (2) accruing to a state or political subdivision (including the District of Columbia).
The IRS Exempt Organizations training material provides the following discussion:
What activities involve exercise of an “essential governmental function” is generally decided on a case-by-case basis. Factors considered include whether the activity is one traditionally considered “governmental” (as opposed to private or proprietary), whether it involves the exercise of governmental (sovereign) powers, the extent of government control over the activity, and the extent of government financial interest in the activity. Qualifying activities may include public education; investment of public funds, Rev. Rul. 77-261, 1977-2 C.B. 45; operating a municipal insurance pool; operating a public hospital or other public health facilities; or providing public recreation facilities.
Income must be derived from a qualifying activity; it is not enough that it be paid over to or benefit a qualifying activity. For example, that a university uses income derived from operating a commercial television station to conduct educational programs does not render the income excludable; the income must have been derived from educational activities. See Iowa State University of Science & Technology v. United States, 500 F.2d 508 (Ct. Cl. 1974).
The second requirement under IRC 115(1) is that income “accrue to” a state or political subdivision. Income “accrues” where the state or subdivision has an unrestricted right to a proportionate share of the income. Rev. Rul. 77-261, 1977-2 C.B. 45. The “accrual requirement” may also be met by less direct means. What is required is a substantial degree of government dominance over the enterprise. While many organizations that are “instrumentalities” for employment tax purposes (discussed below) will also have income excluded under IRC 115, the two are conceptually distinct. It is therefore conceivable that an “instrumentality” may be subject to income taxation.
If the lessor entity constitutes an entity described in I.R.C. 115, bond counsel will generally identify the lessor entity as a “State/local government” entity on the SS-4 form. It is not entirely clear whether the lessor or the governmental lessee will need to file a tax return for the lessor. The IRS Exempt Organizations training material provides the following statement:
Return Requirements. Under Rev. Rul. 78-316, 1978-2 C.B. 304, states and political subdivisions (including their “integral parts”) are generally not required to file income tax returns with respect to activities they directly conduct. Separatelyorganized instrumentalities, however, are subject to the general rule requiring taxable corporations to file returns, regardless of whether they have income or owe tax. Rev. Rul. 77-261, 1977-2 C.B. 45. Specific provisions may require a return even if an entity is an “integral part” of a state or political subdivision. For example, if an entity is an “insurance company” for federal tax purposes, it must file a return even if it is not otherwise considered a taxable corporation. See Rev. Rul. 83-132, 1983-2 C.B. 270.
C. COP Matters
PLR 200314024: Bonds are issued “as certificates of participation” in an installment sale agreement with the City in which the City agrees to make payments to purchase the Center from the Corporation. Payments will equal the interest and principal due on the COPs.
PLR 9123058: In a COP financing, the underlying lease as well as the COPs were approved under 147(f), not just the COPs.
Electronic Signatures in Colorado:
Colorado has enacted the Uniform Electronic Transactions Act in Article 71.3 of Title 24, Colorado Revised Statutes, as amended. The Act provides for the enforceability electronic signatures in certain instances.
Sample contract language might be:
(Electronic Signatures and Electronic Records) Party A consents to the use of electronic signatures by Party B. This Agreement and any other documents requiring a signature hereunder, may be signed electronically by Party B in the manner specified by Party B. Party A and Party B agree not to deny the legal effect or enforceability of this Agreement solely because it is in electronic form or because an electronic record was used in its formation. Party A and Party B agree not to object to the admissibility of this Agreement in the form of an electronic record, or a paper copy of an electronic document, or a paper copy of a document bearing an electronic signature, on the grounds that it is an electronic record or electroni signature or that it is not in its original form or is not an original.
Or the following:
The parties agree that the electronic signature of a party to this Indenture shall be as valid as an original signature of such party and shall be effective to bind such party to this Indenture. The parties agree that any electronically signed document (including this Indenture) shall be deemed (a) to be “written” or “in writing,” (b) to have been signed and (c) to constitute a record established and maintained in the ordinary course of business and an original written record when printed from electronic files. Such paper copies or “printouts,” if introduced as evidence in any judicial, arbitral, mediation or administrative proceeding, will be admissible as between the parties to the same extent and under the same conditions as other original business records created and maintained in documentary form. Neither party shall contest the admissibility of true and accurate copies of electronically signed documents on the basis of the best evidence rule or as not satisfying the business records exception to the hearsay rule. For purposes hereof, “electronic signature” means a manually signed original signature that is then transmitted by electronic means; “transmitted by electronic means” means sent in the form of a facsimile or sent via the internet as a “pdf” (portable document format) or other replicating image attached to an e mail message; and, “electronically signed document” means a document transmitted by electronic means and containing, or to which there is affixed, an electronic signature.
A review of the Act and its application to particular contracts and transactions should be completed before relying on the provisions of the Act. The author of this posting has not done this research for documents relating to tax-exempt bond transactions in Colorado or elsewhere. This is particularly signficant if an attorney or law firm is to opine on the enforceability of the agreement in which the provision is included.
Colorado Statutory Rules:
For purposes of Article 1, Title 32 of the C.R.S.:
“Net effective interest rate” = “Net interest cost” of the bonds / SUM[(principal amount of bonds maturing on maturity date 1 * number of years from their date to that maturity date) + (principal amount of bonds maturing on maturity date 2 * number of years from their date to that maturity date) + (etc.)]
Net effective interest rate must be calculated without regard to any option of redemption price to the designated maturity dates of the bonds.
“Net interest cost” = Total amount of interest to accrue on the bonds from their date to their respective maturities, less the amount of any premium or plus the amount of any discount. Net interest cost must be calculated without regard to any option of redemption prior to the designated maturity dates of the securities. In other words, net interest cost is the total interest less the amount of premium or plus the amount of discount.
For purposes of Article 90, Title 24 of the C.R.S.:
“Net effective interest rate” means the net interest cost of securities divided by the sum of the products derived by multiplying the principal amount of the securities maturing on each maturity date by the number of years from their date to their respective maturities. In all cases, the net effective interest rate shall be computed without regard to any option of redemption prior to the designated maturity dates of the securities.
The “net interest cost” concept is applicable in the following state law circumstances:
- Refundings under the Public Securities Refunding Act (see 11-56-104, -105, -106, -107, C.R.S.)
- Colorado Recovery and Reinvestment Finance Act of 2009 (see 11-59.7-105, C.R.S.)
- Refunding bonds for schools (see 22-43-103, -105, C.R.S.)
- Refunding bonds for postsecondary education/junior colleges (see 23-71-603, -605, C.R.S.)
- Refunding bonds for counties (see 30-35-703, C.R.S.)
- Refunding bonds for municipalities (see 31-21-203, C.R.S.)
Other Related Matters:
The interest payment to investors and the underwriter’s profit together comprise Net Interest Costs, which is the usual measure of bond financing costs. For example, if an underwriter purchases a bond issue at an interest rte of 9.4 percent, and resells (“reoffers”) it to the final investor for 9.1 percent, the NIC is composed of an interest cost of 9.1 percent and an underwriter’s profit or spread of 0.3 percent.
“True interest cost” (TIC) = Par value + accrued interest + premium – discount – underwriter’s discount (but not costs of issuance and not other amounts) = target value for present value calculation. Figure the yield at which the present values of the payments made on the bonds equal this target value.
“All-in true interest cost” (All-In TIC) = Par value + accrued interest + premium – discount – underwriter’s discount – costs of issuance – other amounts = target value for present value calculations.
“Arbitrage yield” (Arb Yield) = Par value + accrued interest + premium – discount = target value for present value calculations. Because none of the expenses are deducted for purposes of coming up with the arbitrage yield, the arbitrage yield necessarily is lower than the TIC or All-In TIC.
Topics addressed in this posting:
- New Clean Renewable Energy Bonds
- Qualified Energy Conservation Bonds
- Renewable Energy Production Tax Credits (PTC)
- Energy Investment Tax Credits (ITC)
- Renewable Energy Grants
- Common Ownership Structures and Tax Issues
- Claiming Investment Credits
- Other Matters
1. New Clean Renewable Energy Bonds:
2. Qualified Energy Conservation Bonds:
Issuers must be states, political subdivisions and entities empowered to issue bonds on behalf of any such entity. Issuer also include conduit issuers. QECBs must be used for one or more “qualified conservation purpose,” including the following:
- Capital expenditures for (i) reducing energy consumption in publicly owned buildings by at least 20 percent, (ii) implementing green community programs, (iii) rural development involving the production of electricity from renewable energy sources, or (iv) facilities eligible to be funded by NCREBs (except for Indian coal and refined coal production facilities);
- Expenditures (not limited to capital expenditures) with respect to research facilities, and research grants, to support research in (i) development of cellulosic ethanol or other nonfossil fuels, (ii) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels, (iii) increasing the efficiency of existing technologies for producing nonfossil fuels, (iv) automobile battery technologies and other techologies to reduce fossil fuel consumption in transportation or (v) technologies to reduce energy use in buildings; and
- Certain mass commuting facilities, demonstration projects and public education campaigns to promote energy efficiency.
3. Renewable Energy [Electricity] Production Tax Credit (PTC):
Section 38 of the Code (setting forth permissible business tax credits) currently expressly permits the inclusion in total tax credits the “renewable electricity production credit” (PTC) under Section 45(a) of the Code. Here is a summary of the PTC:
Under present law, an income tax credit of 2.1 cents/kilowatt-hour is allowed for the production of electricity from utility-scale wind turbines, geothermal, solar [* See note below], hydropower, biomass and marine and hydrokinetic renewable energy plants. This incentive, the renewable energy Production Tax Credit (PTC), was created under the Energy Policy Act of 1992 (at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation)
The PTC was originally introduced in 1992 pursuant to the Energy Policy Act of 1992, referenced above. The American Jobs Creation Act of 2004 (H.R. 4520) expanded the PTC to include additional resources, including solar energy, in addition to then existing resources permitted under the PTC. The Energy Policy Act of 2005 (EPAct 2005), however, removed solar energy resources from the PTC’s scope. The Wikipedia description incorrectly states that the PTC is still available for solar projects. See Section 45(d)(4) of the Code. An election may be made to take the Energy ITC (see below) instead of the PTC.
Also note that the Energy ITC and PTC is not available with respect to property in which a Section 1603 “Renewable Energy Grant.” See Section 48(d). See also, generally:
- 26 U.S.C. 45 (Electricity produced from certain renewable resources, etc.)
- DSIRE: http://dsireusa.org/incentives/incentive.cfm?Incentive_Code=US13F
Refined Coal: PLR 201430008, 201430009 and 201430010
4. Renewable Energy/Federal Business Energy Investment Tax Credit (ITC):
Section 38 of the Code (setting forth permissible business tax credits) currently expressly permits the inclusion in total tax credits the “investment tax credits” (ITC) under Section 46 of the Code. ITCs include five types of credits. The Energy credit ITC is summarized below and is more fully described in Section 48 of the Code:
This investment tax credit varies depending on the type of renewable energy project; solar, fuel cells ($1500/0.5 kW) and small wind (< 100 kW) are eligible for credit of 30% of the cost of development, with no maximum credit limit; there is a 10% credit for geothermal, microturbines (< 2 MW) and combined heat and power plants (< 50 MW). The ITC is generated at the time the qualifying facility is placed in service. Benefits are derived from the ITC, accelerated depreciation, and cash flow over a 6-8 year period.
The construction, reconstruction or erection of the property must be done by the taxpayer, or the original use must be with the taxpayer if the taxpayer acquires the property. Property qualifies only if depreciation (or amortization) is allowable. The credit does not apply to the portion of the basis of any property that is attributable to qualified rehabilitation expenditures (another type of ITC set forth in Section 47 of the Code). There are a number of coordination rules with the PTC in Section 45 that need to be adhered to.
Also note that the basis of the property (upon which the credit is calculated) is reduced if the property is financed in whole or in part by (a) subsidized energy financing or (b) tax-exempt private activity bond proceeds (within the meaning of Section 141). The reduction equals = basis of the property * (basis of the property allocable to such financing or proceeds / total basis of the property). “Subsidized energy financing” means financing provided by federal, state or local program that aims to provide subsidized financing for projects designed to conserve or produce energy. But see subparagraph (D) which states that this limit is not applicable to periods after December 31, 2008.
Also note that the Energy ITC and PTC is not available with respect to property in which a Section 1603 “Renewable Energy Grant.” See Section 48(d). See also, generally:
- 26 U.S.C. 48 (Energy credit.)
- DSIRE: http://www.dsireusa.org/library/includes/incentive2.cfm?Incentive_Code=US02F&State=federal%C2%A4tpageid=1=1=1
Currently (July 2014), I.R.C. 48(a) provides for an energy credit equal to 30% of the cost basis of qualifying energy property placed in service before January 1, 2017.
See IRS Notice 2013-29 regarding when construction begins for purposes of the limitations contained in Section 48 that construction begin by December 31, 2013. The notice includes discussion of the 5% safe harbor for determining the begin of construction.
PLR 201426013 (Mar. 19, 2014): Relates to a partnership in Puerto Rico and the restriction contained in I.R.C. 50(b)(1)(A). Partnership operates solar energy facilities in Puerto Rico. The facilities are not eligible for the PTC under I.R.C. 45. Ruling requested that, (1) assuming that Partnership is regarded as a valid partnership for federal tax purposes and that each partner will be regarded as a valid partner, each partner will be regarded as an owner and user of the facilities to the extent of its respective share of the basis of each facility for purposes of I.R.C. 50(b)(1)(B) and, therefore, will be entitled to share of the energy credit in accordance with Treas. Reg. 1.46-3(f), and (2) to the extent each partner is so regarded, the facilities will not be ineligible for the energy credit by I.R.C. 50(b)(1)(A).
5. Renewable Energy Grants (Section 1603 Grants):
Preliminary Caution: The Renewable Energy Grant (Section 1603 Grant) is available only to tax-paying entities. Federal, state and local government bodies, non-profits, qualified tax energy credit bond lenders and cooperative electric companies are not eligible to receive this grant. Partnerships and pass-through entities for the organizations described above are also not eligible to receive this grant, except in cases where the ineligible party only owns an indirect interest in the applicant through a taxable C corporation.
The Section 1603 Grant arises from the American Recovery and Reinvestment Act of 2009, and was extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853). The grant is available to taxpayers who qualify for the Energy ITC or the PTC (each described above), and may be received in lieu of the Energy ITC or PTC (See Section 48(d) of the Code). The grant is not included in the gross income of the taxpayer. Certain recapture provisions apply with respect to credits taken prior to election of the grant.
For solar-related property, the grant is equal to 30% of the basis of the property. Solar-related property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Passive solar systems and solar pool heating systems are not eligible. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are also eligible.
In order to qualify for the grant with respect to particular qualifying property, construction must begin before January 1, 2012. Construction begins as soon as the applicant has incurred or paid at least 5% of the total cost of the property, excluding land and certain preliminary planning activities.
Grant applications must be submitted by October 1, 2012. The U.S. Treasury Department is to make determinations of grants within 60 days of the grant application date or the date the property is placed in service, whichever is later.
See also the following sources of information:
- DSIRE: http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US53F
- ARRA: http://thomas.loc.gov/home/h1/Recovery_Bill_Div_B.pdf
- Tax Relief Act: http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853eas2/pdf/BILLS-111hr4853eas2.pdf
6. Common Ownership Structures and Tax Issues
Certain of the matters discussed under this heading are based on the helpful publication by Novogradac & Company available online.
The three most common structures for renewable energy financings are:
- Partnership Flip Structure
- Master-Tenant/Lease Pass-Through Structure (Inverted Lease)
Partnership Flip Structure. In this structure, the developer is the GP (general partner) and the investor (e.g., a bank) is the LP (limited partner) of the property owner partnership. The property owner owns and operates the renewable energy facility. This structure originated with wind energy facility financings and has been used successfully in connection with other types of financings.
Master-Tenant/Lease Pass-Through Structure. In this structure, the developer is the GP of the developer/property owner partnership. The property owner/partnership, as lessor, leases the facility to a master-tenant lessee, which is a partnership with the investor as the LP. Pursuant to election by the lessor, the tax credits flow through to the lessee entity. The lessee entity is a partnership in the lessor entity and contributes capital to the lessor to be used to construct the project. This structure is said to have originated in historic tax credit transactions.
Sale/Leaseback. In this structure, the developer constructs the facility and sells it to the investor. The investor immediately leases it back to the developer for operation. The developer makes lease payments to the investor. The investor, as owner, taxes the tax credits and all other benefits. The structure might not be applicable for production tax credits, but apparently can be used for investment tax credits and the Section 1603 Grant.
Tax Issue: Rev. Proc. 2007-65. This Revenue Procedure establishes the requirements (the Safe Harbor) under which the IRS will respect the allocation of sec. 45 wind energy production tax credits by partnerships in accordance with sec. 704(b). Novogradac suggests that this Revenue Procedure applies in connection with other renewable energy financings, too, absent other guidance. The Safe Harbor is intended to simplify the application of sec. 45 to partners and partnerships that own and produce electricity from qualified wind energy facilities.
Sec. 704(b) states that, while a partner’s distributive share of tax items may be determined by the partnership agreement under subsection (a), if either the partnership agreement does not discuss distributive shares or the distribution set forth in the agreement does not have “substantial economic effect,” the allocation must be determined in accordance with the partner’s interest in the partnership.
The Safe Harbor only applies if the Developer, Investor and Project Company satisfy each and every requirement in section 4 of the revenue procedure, addressing the following matters:
- Partners’ Minimum Partnership Interest: Developer must have a minimum of 1% interest in each material item of partnership income, gain, loss, deduction and credit.
- Investor’s Minimum Unconditional Investment: The Investor must make a minimum unconditional investment in the Project Company and maintain the investment during the duration of its ownership of its partnership interest in the Project Company. The Investor may not be protected against loss of any portion of the investment.
- Contingent Consideration
- Purchase Rights: Neither Developer nor Investor may have a contractual right to purchase the wind farm at any time at a price less than its FMV, and the Developer may not have a right to purchase the wind farm or an interest in the Project Company earlier than 5 years after the qualified facility is first placed in service.
- Sale Rights: The Investor cannot have a right to cause any party to purchase its partnership interest in the Project Company
- Guarantees and Loans
- Allocation of Sec. 45 PTC
- Separate Activities for Purposes of Sec. 469
7. Claiming the Credit:
Use Form 3468 to claim the investment credit. The investment credit consists of not only the renewable energy investment credit but also the rehabilitation, qualifying advanced coal project, qualifying gasification project, qualifying advanced energy project and qualifying therapeutic discovery project credits.
If you lease the property to someone else, you may elect to treat all or part of your investment in new property as if it were made by the person who is leasing it from you. Once the election is made, the lessee will be entitled to an investment credit for that property for the tax year in which the property is placed in service and the lessor will generally not be entitled to such a credit.
8. Other Matters:
Depreciation and Power Purchase Agreements: “Value of Power Purchase Agreements May Significantly Increase Tax Benefits of a Renewable Energy Facility,” May 7, 2012, available online at http://www.bna.com/value-power-purchase-n12884909228/ (reporting on PLR 201203003). “In the Letter Ruling, the IRS concluded that a taxpayer, who purchased a wind energy facility subject to a facility-specific PPA, was not required to treat the PPA as a separate asset. Accordingly, the portion of the purchase price attributable to the value of the PPA would be taken into account in determining the basis of the wind energy facility for purposes of calculating depreciation. Thus, the cost of acquiring the facility, including the PPA, could be recovered over the class lives of the facility’s depreciable property and no costs would be allocated to the PPA.”
Tolling Agreements: A tolling agreement is an agreement whereby a “toller” agrees with an owner of raw materials to process the raw materials for a specified fee (a “toll”) into a product with the raw material and product remaining the property of the provider of the raw material. (Tolling agreement may also be an agreement that has the effect of tolling or suspending the course of a fixed period of time.)
EP&C Agreements: This is an acronym for “Engineering, Procurement and Construction” agreements.
Megawatt: A watt is a unit of power. It is defined as 1 joule per second, and measures the rate of energy conversion or transfer. A megawatt is equal to one million watts. A large residential or commercial building may consume several megawatts in electric power and heat. The productive capacity of electrical generators if often measured in megawatts. A typical wind turbine has a power capacity of 1-3 MW. U.S. nuclear power plans have net summer capacities between 500 and 1300 MW. A gigawatt is equal to one billion watts (or 1,000 megawatts). The installed capacity of wind power in Germany was 25.8 GW. If a light bulb has a power rating of 100 watt-hours, this means it consumes 100 watt in one hour. The watt second is a unit of energy, equal to one joule.
BTU: British Thermal Unit: This is a traditional unit of energy equal to about 1,055 joules. It is approximately the amount of energy needed to heat 1 pound of water. The unit is used most often in power, steam generation, heating and air conditioning industries. In scientific contexts, the BTU has largely been replaced by the joule, but is still used as a measure of agricultural energy production.
Notices and other IRS Publications:
IRS Notice 2006-88: Electricity Produced from Open-Loop Biomass. Addresses what a biomass facility is and what biomass is. Also discusses sale requirement to unrelated parties and sale where steamboat commingled with non-biomass facilities, and how to distinguish between the biomass produced electricity and the non-biomass electricity.
Section 48(d) prior to the 1990 tax act: Click here.
AM2011-004: Memorandum of the Office of Chief Counsel relating to excessive payments under the Section 1603 Grant.
Selected 1603 Grant Materials by Chadbourne: Click here.
Pennsylvania: Guaranteed Energy Savings Act
- 73 P.S. 1646.1 through 1646.7
- Applies, among others, to Commonwealth Agencies
- GESA pays for all associated project costs over the life of the contract
- ESCO means Energy Services Company
- Department of General Services is the centralized coordinating agency
- There are currently around eleven participating Commonwealth agencies
- May finance with purchase or installment purchase or lease purchase, or bonds or traditional loans
- Once ESCO is selected, agency and ESCO enter into Technical Energy Audit (TEA) agreement
- Based on TEA result, parties may enter into GESA, which covers the costs of conducting the TEA – if no GESA is entered into, the agency is responsible for paying the TEA before engagement ends
B. Legal Issues to Review:
- Contract term may not exceed 15 years
- Non-energy improvements may be financed that are not causally connected to an ECM if: (a) the total value of the improvement does not exceed 15% of the total contract; and (b) the improvement is necessary to conform to a law, rule, ordinance or an analysis of the contract demonstrates there is an economic advantage to implementing the improvement and such improvement can be demonstrated.
- Ensure contracts involves “allowable costs” for “energy conservation measures” (ECMs)
- Ensure provider is a “qualified provider” and is selected based on proper request for proposal process
- Savings in any year must be guaranteed to extent necessary to make payments under the contract
- Must include the written guarantee that savings will meet or exceed the costs of the project
- Must permit for termination of contract by agency in the event of a nonappropriation
- Savings guarantee must be made by the performance contractor
- Commonwealth must obtain bonds from contractors in connection with the project
- If guaranteed savings do not occur, ESCO must be contractually required to reimburse the agency for the difference between actual savings and the guaranteed savings
- Commonwealth executive agencies are required to use a certain form of Installment Purchase Agreement
Colorado: Energy Performance Contracts