Issue 3. 2022 13 investment management firms like KeyState provide support to community banks hoping to make solar tax credit (i.e., “solar tax equity”) investments by syndicating the investments across small groups of community banks. Without support, community banks may struggle to consistently identify suitable solar project investment opportunities built by qualified solar development partners. Not all solar projects are created equally, and it is critical for a community bank to properly evaluate all aspects of a solar tax equity investment. Investment in particular types of solar projects, including utility, C&I, municipal, and community solar projects, can provide stable and predictable returns. However, a community bank investor should perform considerable due diligence or partner with a firm to assist with the diligence. There are typically three stages of diligence: • The bank should review the return profile and GAAP model with their tax and audit firms to validate the benefits illustrated by the solar developer and the anticipated impact of the investment on the bank’s earnings profile and capital. • The bank should work with regulatory counsel to identify the path to approval for the investment. Solar tax equity investments are permissible for national banks under an April 1, 2021, OCC Rule (12 CFR 7.1025). Banks have been making solar tax equity investments based on OCC published guidance for over a decade. In 2021, this new OCC rule codified that guidance. It provides a straightforward roadmap and goes so far as to encourage community banks to consider solar tax equity investments. Alternatively, under Section 4(c)(6) of the Bank Holding Company Act, holding companies under $10 billion in assets may also invest in a properly structured solar tax equity fund managed by a professional asset manager. • The bank must underwrite the solar developer and each solar project. Community banks should partner with a firm experienced in evaluating and underwriting solar projects. The bank’s diligence should ensure structural mitigants are in place to fully address the unique risks associated with solar tax equity financings. Beyond the compelling return profile and stable and predictable cash f lows offered by conservative, investment-grade solar projects, achieving energy independence and reducing carbon emissions are critical goals in and of themselves. Solar tax credit investments can be a key component of a bank’s broader ESG strategy. The bank can monitor and report the amount of clean energy generated by the projects it has financed and include this information in an annual renewable energy finance impact report or a broader annual sustainability report. n Josh Miller is CEO of The KeyState Companies, which manages tax-advantaged investment and insurance structures for over 130 community banks across the country. KeyState Renewables launched its solar tax equity fund platform, SOLCAP, in 2019. To date, SOLCAP has financed over $120 million across 35 mid-size U.S. solar projects in seven states. SOLCAP expects to double this amount in 2023, providing another $130 million in capital for new solar project development. MEET YOUR UTAH RELATIONSHIP MANAGERS Bankers’ Bank of the West bBWEST.COM 800-873-4722 WHERE COMMUNITY BANKS BANK Member FDIC Scan to call now As a bankers’ bank we strive to help with every level of service and expertise, covering anything from loan participations, merchant services, ATM/Debit and much more, because we aim to answer your questions with, “…yes, we can do that too!” Lance Ni les, lniles@bbwest.com David Phi l ippi , dphilippi@bbwest.com
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