Understanding the economics of Solar Tax Credit investments Presented by: Tony grappone , cpa
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Transcript of Understanding the economics of Solar Tax Credit investments Presented by: Tony grappone , cpa
Understanding the Economics and Running the Numbers
Why is it important to prepare a financial model?
Who are the users of the financial model?
When does the financial model get prepared?
Who prepares the model?
Understanding (balancing) the sources and uses How much debt can the project afford and at what terms/rates? How much is available in state & local incentives? How much PPA revenue is available? How much equity can the project attract/afford?
What’s the maximum fee the developer can charge? When will developer collect their fee? Projecting future cash obligations Investor issues addressed proactively
• Yield requirements
• Book / GAAP issues
• Structuring / Exit issues
Running the Numbers: Developer Perspective
Understanding the flow and timing of benefits When and how much capital do I contribute? How much, and when will I receive my tax credits? What, when and how much will my other tax benefits
be? How much and when will I receive cash distributions? What other benefits can I expect? Who do I share the benefits with? What is my risk? When will the investment end? What is the projected IRR?
Evaluate structuring options Problematic issues can be addressed timely
Running the Numbers: Investor Perspective
Key Assumptions: Entity type, allocations, life term
– Partnership Flip- Investor exits after 5-year recapture period ends, ownership interests flip from 1% / 99% to 80% / 20%
– GP (Developer) exercises call option to buy out Investor in Year 6
– GP (Developer) owns system until year 20
– In year 20, Developer sells system to third party
Running the Numbers
Key Assumptions – System Size, Cost and Electricity Production
Project Size - kW DC 862
Project Size - kW AC 724
Installation Cost per kW DC $ 6,000
Developer Fee (% of Installation Costs) 10.00%
kWh per kW AC 1,800
Annual Degradation % 0.50%
Running the Numbers
Key Assumptions – Operations
Power Purchase Agreement ("PPA") - $/kWh - Year 1 Price $ 0.185
Annual Escalator for PPA Price 3.00%
Length of PPA 20 years
State Incentive - $/kWh (60 months) $ 0.22
Operating Expenses (Year 1), 4% escalator 30,160
Bonus Depreciation, 5 year MACRs for balance Yes
Running the Numbers
Key Assumptions – Sources and UsesSources
Tax Credit Equity From Investor $ 3,200,000
Deferred Developer Fee378,200
Permanent Loan(15 year term, 6.5%) 2,300,000
Total Sources $ 5,878,200
Uses
Hard Costs $ 5,172,000
Developer Fee 517,200
Syndication Costs (approximately 1% of equity) 25,000
Permanent Loan Fee (2% of loan) 46,000
Cost Certification Fee 3,000
Reserves 100,000
Organization Costs (approximately .5% of equity) 15,000
Total Uses $ 5,878,200
Running the Numbers
Running the Numbers: Tax Credit Calculation
Investment Tax Credit % 30.00%
Estimated Energy Tax Credits $ 1,707,660
Limited Partner Share – 99% $ 1,690,583
General Partner Share – 1% $ 17,077
Installed kW, DC 862
Installation Cost per kW $ 6,000
Project Costs $ 5,172,000
Total Development Fee 517,200
Cost certification 3,000
Eligible Energy Tax Credit Basis $ 5,692,200
Net Operating Income – Partnership Flip
Partial Year
1 2 3 4 5 62009 2010 2011 2012 2013 2014
RevenuePurchase Power Agreement Revenues 120,559$ 247,110$ 253,251$ 259,544$ 265,994$ 272,604$ California Production Based Incentive 143,368 285,302 283,875 282,456 281,044 279,639
Total 263,927 532,412 537,127 542,001 547,038 552,243Expenses
Operations and Maintenance (5,200) (10,400) (10,816) (11,249) (11,699) (12,167)Insurance (7,800) (15,600) (16,224) (16,873) (17,548) (18,250)Accounting (4,000) (4,160) (4,326) (4,499) (4,679) (4,867)
Total (17,000) (30,160) (31,366) (32,621) (33,926) (35,283)
Net Operating Income 246,927$ 502,252$ 505,760$ 509,379$ 513,112$ 516,960$
Annual Debt Service 120,210 240,420 240,419 240,420 240,422 240,421
Debt Service Ratio 2.054 2.089 2.104 2.119 2.134 2.150
Taxable Income – Partnership Flip
1 2 3 4 5 62009 2010 2011 2012 2013 2014
Net Operating Income 246,927$ 502,252$ 505,760$ 509,379$ 513,112$ 516,960$ Interest Expense:
Permanent Loan (74,130) (143,656) (137,175) (130,261) (122,883) (115,012) Depreciation Expense (2,540,144) (919,290) (551,574) (330,945) (264,659) (231,758) Amortization Expense (1,533) (3,067) (3,067) (3,067) (3,067) (3,067) Section 267 Depreciation Suspension/(Deduction) 188,576 40,165 3,475 (17,045) (25,829) (189,342) Organization Costs (15,000) - - - - - Total Taxable Income/(Loss) (2,194,304)$ (521,575)$ (180,521)$ 30,164$ 98,818$ (20,032)$
Energy Tax Credits 1,707,660$ -$ -$ -$ -$ -$
Tax Credit Equity Investor Partner :Taxable Income/(Loss) per P/L % (2,172,361)$ (516,359)$ (178,716)$ 29,862$ 97,830$ (4,006)$ Reallocation - - - - - - Taxable Income/(Loss) (2,172,361)$ (516,359)$ (178,716)$ 29,862$ 97,830$ (4,006)$ Energy Tax Credits 1,690,583$ -$ -$ -$ -$ -$
General Partner :Taxable Income/(Loss) per P/L % (21,943)$ (5,216)$ (1,805)$ 302$ 988$ (16,026)$ Reallocation - - - - - - Taxable Income/(Loss) (21,943)$ (5,216)$ (1,805)$ 302$ 988$ (16,026)$ Energy Tax Credits 17,077$ -$ -$ -$ -$ -$
Investor Return Summary – Partnership Flip
Tax Savings(Costs) Tax Savings
Cash Taxable Gain from (Costs) FromCapital Tax Distributions Income (Loss) Income and Gains Income (Losses) Cumulative
Yr Year Contributions Credits and Credits (Losses) Upon Exit (Losses) and Tax Credits Net Benefits
1 2009 3,200,000$ 1,690,583$ 1,787,522$ (2,172,361)$ -$ 760,326$ 2,450,910$ (652,152)$ 2 2010 - - 200,302 (516,359) - 180,726 180,726 (271,124) 3 2011 - - 202,986 (178,716) - 62,551 62,551 (5,588) 4 2012 - - 205,754 29,862 - (10,452) (10,452) 189,715 5 2013 - - 208,608 97,830 - (34,241) (34,241) 364,082 6 2014 - - 170,695 (4,006) 1,474,325 (514,612) (514,612) 20,166
3,200,000$ 1,690,583$ 2,775,867$ (2,743,750)$ 1,474,325$ 444,299$ 2,134,882$
Internal Rate of Return (IRR) 10.74%
Investor Benefits – Partnership Flip
• Total capital contributed by Investor = ($3,200,000)
• Tax credits allocated to Investor = $1,690,583
• Total cash distributions to Investor (Years 1-5) = $914,589
• Tax savings benefit = $438,808
• Buyout payment to Investor (Year 6) = $186,383
• Cumulative net benefits (35% tax rate) = $30,363
• Annual Internal Rate of Return (IRR) = 10.74%
Developer Benefits – Partnership Flip
• Total Fee paid to Developer (Years 1-6) = $517,200
• Tax Credit allocated to Developer in year 1 = $17,077
• Total cash distributions to Developer (Years 1-20) = $1,487,787
• Less: Limited Partner Buyout in year by Developer = ($186,383)
• Projected Residual value of system (Year 20) = $2,805,849
Questions and Answers
Tony Grappone
Novogradac & Company
LLP
www.energytaxcredits.com
(617) 330-1920 Extension
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