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Going green has become more commonplace in the United States. According to Deloitte’s renewable energy industry analysis, the cost of renewable energy continues to decrease. Thanks to lower costs, more businesses across the nation can begin the transition to renewable energy use.
One important factor to understand before starting any clean energy project is renewable energy finance structures. Finding the best renewable energy finance option will depend on the details of your project. Some finance structures are built for solar projects, while others are more commonly used for wind energy projects.
Keep reading to learn about various clean energy finance structures, what projects they benefit, and more.
One option that some companies in need of capital might consider is the sale-leaseback.
A business that owns an asset will sell that asset. Typically, the asset being sold is a high-cost fixed asset, such as renewable energy equipment for utility-scale projects. After the sale, the new owner will lease the asset back to the seller for a certain time. The duration of a sale-leaseback can vary depending on the agreed-upon lease terms.
There are several reasons why a business would want to use this structure. Mainly, the sale-leaseback structure allows a business to quickly generate capital by selling an asset without losing total access to that asset. Through the lease agreement, a business can continue to use an asset without the risks of owning the asset. Additionally, some sale-leaseback agreements allow the seller to buy back the asset after the lease ends.
The partnership flip is a beneficial renewable energy finance structure for projects that receive production tax credits. This structure is common for various solar energy projects.
A major benefit that a partnership flip offers a business is flexibility. Usually, the owner of a project is the one who claims tax benefits. However, that owner could find an investor and form a partnership, which allows both parties to own the project. This partnership allows flexibility by allowing project partners to share the project’s economic returns.
The owner or the developer is a managing member in a partnership flip structure. During the pre-flip period, the managing member owns 1-5% of the project, while the tax equity partner owns 95-99%. These percentages change during the post-flip period, as the managing member buys out the tax equity partner, resulting in 100% ownership.
The length of a partnership flip structure can vary. A time-based flip tends to have a term length of around 5.5-6 years. Conversely, a return-based flip’s term length is based on when the tax equity investor has turned their predetermined ROI. Usually, a returned-based flip’s term length is around 5.5-7 years.
The inverted lease structure is a renewable energy finance method used to raise tax equity for a project. Solar and wind projects can benefit from using this structure. An inverted lease structure is appealing because it allows expense flexibility.
A business uses this structure to break up the tax credit and depreciation expense. As a result, the business could deal with each individually rather than taking them all on at once. The developer retains depreciation and passes through the investment tax credit to the tax equity investor.
The general length for an inverted lease renewable energy finance structure is roughly 5.5-7 years. During that time, a tax equity investor pays rent for assets, typically solar panel systems, to the developer.
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