How tax equity works
In energy finance, tax equity refers to investment from parties who can use federal tax credits and depreciation that a project developer cannot use efficiently itself. Common structures include partnership flips, where the investor takes most of the tax benefits until a target return is reached, and sale-leasebacks or lease pass-through arrangements. Federal law has also allowed many credits to be transferred for cash to unrelated buyers, which has changed how some deals are financed. The documents are lengthy, and the allocation of tax risk between developer and investor is negotiated in detail. Lenders, sponsors, and investors each review the structure from their own perspective.
Rules that are moving
Federal energy credits have been narrowed and reshaped by recent legislation, with deadlines tied to when construction begins or when a project is placed in service and with new restrictions related to certain foreign entities. Guidance continues to be issued, and the status of particular credits should be checked for each project rather than assumed. Investment-type credits can be recaptured if a project is disposed of or stops qualifying during a set period, and investors usually seek indemnities for that risk. Prevailing wage and apprenticeship rules can also affect the size of the credit. Insurance products for tax credit risk have become a common part of transactions.
What we review in a first meeting
Bring the project's development documents, the term sheet or letter of intent from the investor or credit buyer, and any tax opinion or analysis already prepared. We look at how the proposed structure allocates risks, what representations the developer is being asked to make, and whether the credit eligibility assumptions are documented. We also identify issues for owners who are not U.S. persons or who have foreign investors. You leave knowing which points in the documents deserve the most negotiation attention.
