in the project (such as a secured lender) sells or disposes of its interest in the property (such as in a foreclosure scenario) during the five-year period after the project is placed in service, referred to as the “recapture period.”23 Thus, tax equity investors will generally oppose a lien in favor of a lender during the recapture period,24 and lenders should familiarize themselves with the workaround options: • One option is for the lender to limit its loan to a construction loan and release its lien upon completion of construction before the tax equity investor enters the project. • Alternatively, if a project requires both debt financing and tax equity investment, a lender may still have options such as executing a forbearance agreement agreeing to forbear from foreclosing on the project assets during the recapture period or providing back-leverage debt (a loan made to the sponsor which it uses to fund its capital contribution in the project company) at the sponsor-level instead of at the project-level.25 For these reasons, lenders must carefully consider the way their security interests are granted in solar projects having both tax equity investors and lender financing26 and should understand their options to work around the potential issues. Other Issues for Lenders Other than tax equity concerns, there can also be issues related to a lender’s access to the project site, solar easements, interconnection and net metering, federal and state regulations, and various other legal and business considerations involved with structuring a solar financing transaction. For example, in a transaction where the project company installs and operates a solar facility on the roof of a commercial building, the company will likely need to (i) obtain a site lease or easement in order to access the rooftop, and (ii) enter into an interconnection agreement with the local utility to sell energy to the grid, which may be in the form of a direct sale to the utility or a net metering arrangement which provides the building owner with credits to offset its electricity bills. Depending on the structure, companies could have to obtain authorization from the Federal Energy Regulatory Commission to engage in wholesale sales of power in interstate commerce or from state public utility commissions for retail and other sales of electricity.27 A lender will need to determine how these issues will impact the structure and underwriting of the financing transaction. Lenders looking to position themselves as reliable sources of financing should ensure that their personnel, and consultants and counsel they work with, are knowledgeable and up to date on the various legal, tax and business issues involved with solar financing transactions, including the various options and structures that can be utilized to address such issues. This knowledge is key to ensuring that both the underwriting and legal processes run smoothly. 1. https://www.seia.org/solar-industry-research-data 2. https://irecusa.org/programs/solar-jobs-census/ 3. https://www.seia.org/research-resources/solar-data-cheat-sheet 4. https://www.whitehouse.gov/briefing-room/legislation/2022/08/16/ bill-signed-h-r-5376/ 5. Sources of Available Project Financing: Tax Equity, Practical Law Article 3-601-6606 6. https://www.projectfinance.law/publications/2022/october/bonustax-credits-and-the-inflation-reduction-act/#:~:text=LMI%20 Credit&text=It%20is%2020%25%20for%20such,the%20area%20 median%20gross%20income. 7. https://www.cpuc.ca.gov/industries-and-topics/electrical-energy/ demand-side-management/net-energy-metering 8. https://programs.dsireusa.org/system/program/ca 9. https://programs.dsireusa.org/system/program/co 10. https://www.seia.org/solar-industry-research-data 11. https://www.solarmeansbusiness.com/ 12. https://www.seia.org/solar-industry-research-data 13. https://www.eia.gov/tools/faqs/faq.php?id=427&t=3 14. https://www.forbes.com/sites/woodmackenzie/2020/08/04/ us-commercial-solar-presents-massiveopportunity/?sh=78ec822235d8 15. Sources of Available Project Financing: Tax Equity, Practical Law Article 3-601-6606 16. https://advance.lexis.com/api/permalink/9ee8f64c-6e0a-47e8a157-86f853d8a814/?context=1000522 17. Sources of Available Project Financing: Tax Equity, Practical Law Article 3-601-6606 18. Sources of Available Project Financing: Tax Equity, Practical Law Article 3-601-6606 19. Sources of Available Project Financing: Tax Equity, Practical Law Article 3-601-6606 20. Sources of Available Project Financing: Tax Equity, Practical Law Article 3-601-6606 21. https://advance.lexis.com/api/permalink/23511aaa-4f06-4968a431-702344e99d6a/?context=1000522 22. https://advance.lexis.com/api/permalink/388d6423-c013-41cbb26c-dd4115bbd206/?context=1000522 23. https://advance.lexis.com/api/permalink/744db967-b416-4f6b8321-9dbd294c295f/?context=1000522 24. https://advance.lexis.com/api/permalink/23511aaa-4f06-4968a431-702344e99d6a/?context=1000522 25. https://advance.lexis.com/api/permalink/b89fbb4a-918d-499080e2-0ba06574d6f3/?context=1000522 26. https://advance.lexis.com/api/permalink/23511aaa-4f06-4968a431-702344e99d6a/?context=1000522 27. Solar Energy Project Development Issues: Preliminary Considerations, Practical Law Practice Note 7-522-8476 Buchalter is a full-service business law firm that has been teaming with clients for nine decades, providing legal counsel at all stages of their growth and evolution, and helping them meet the many legal challenges and decisions they face. Visit www.buchalter.com to learn more. Colorado Banker 24
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