Crux Connects: John Eliason and Alejandra Garcia Earley of Orrick on residential solar tax credits

Welcome to Crux Connects, Crux’s interview series with energy finance experts. In the world of energy tax credits, residential solar deals are unique. No one has more experience advising on these types of deals than Orrick. In this episode, Crux Policy & Research Strategist Katie Bays is joined by two partners from Orrick: John Eliason, a premier tax partner who advises investors and developers, and Alejandra Garcia Earley, an accomplished tax equity finance and tax credit purchase lawyer.

They discuss the primary factors that tax credit buyers need to think about when looking to participate in residential solar tax credit deals, from the structure of these portfolio deals, to the diligence process, to strategies that buyers use to mitigate recapture risk. John and Alejandra also share what they see as the state of the tax credit market in the approach to 2025.

Get in touch to learn more about how Crux can support your activity in the tax credit market.

Transcript

Lightly edited for clarity

Katie Bays: Before we get into the nitty gritty of talking about residential solar deals as a subset of the larger transferable tax credit market, can you share your impressions of the state of the tax credit market as we approach the end of 2024? Has this market evolved in line with your expectations, or what kinds of surprises have you noticed?

Alejandra Garcia Earley: That's a great question, Katie. Thank you so much and thank you for having us. I think from my perspective, the market has evolved as quickly as we were hoping it and expecting it to evolve. Tax credit transfer is such an exciting opportunity, not just for the sponsors and the growth of renewable energy projects, but it's also a fantastic tool for corporates of any size, from small companies to large corporate conglomerates. And what we've seen in the market across the 2024 calendar year is a sophistication by all parties. So the more transactions we've done, the more people have been able to narrow down on exactly what each party is genuinely concerned about as well as other players in the market. We've seen insurance companies narrow down the terms that they are willing to include in the tax loss insurance policies.

But mostly parties have been able to drill down on exactly where the concerns are and get more sophisticated and more developed in the agreements. John, not sure what you think.

John Eliason: I think that's a really great thought process there. And Katie, yes, thanks for having us today. I think that these transactions end up — the market is maturing. And certainly when we were first doing the original transactions, there was a focus that was probably more of a focus similar to a tax equity investor that's taking an ownership interest indirectly through a partnership and the underlying assets. And now, I think that the focus is probably changing a little bit more where there's an acceptance that this is more of a purchase and sale agreement. It's that the buyers of these credits are looking at it really more that they're buying the credits themselves.

And while diligence is so important to make sure that the credits are real and they're available, and we certainly take a thoughtful approach on that, there's a little less emphasis on things like the ongoing performance of the underlying project and things like that. That might be of more interest to somebody who was an indirect owner through a partnership who's looking to get some of its return through cash flows to really more of distilling it down to just a purchase of credits.

KB: I also want to focus on the residential solar project category. Those deals are unique. Orrick is, of course, among the most experienced law firms advising on these deals. So can you describe the structure of a residential solar portfolio deal? And, particularly, what is the relationship between the taxpayer, the seller, and the underlying portfolio of projects?

AGE: The structure ultimately looks exactly the same as every other tax credit transfer. You sign a tax credit purchase agreement that has the general terms of what the parties are agreeing to, including the price, including the requirements, or, as we call them, conditions precedent, or “CPs,” that need to be satisfied before the payment date or dates and the ever-important transfer election statement, which is the document that's going to need to get filed with the IRS by both buyer and seller. What's unique to solar residential transactions, as opposed to say a utility-scale transaction, is that you don't just have one project. You aren't buying tax credits solely from one solar development in a particular state. You are buying tax credits from thousands or tens of thousands of small projects across a multitude of states, and these projects happen to be installed on the rooftops of residential customers.

What's different in the process a little bit is, number one, how you determine the projects. So it's going to vary largely on whether the seller has identified the full universe of projects that it will be selling the tax credits for, or whether you're signing up to purchase tax credits in respect of projects that will be installed and will be placed in service at a later date. So that's one of the primary distinctions — knowing the full universe of projects when you sign versus setting up the requirements to the extent that those projects are going to be identified at a later date. And it changes the diligence a little bit — John was mentioning earlier about the diligence that's done by buyers as required by the tax code. You want to make sure that the project is real, any adders that are being claimed are correct as well, and just the certainty that the project has been placed in service.

And so what's unique to solar residential is that because you're buying the tax credits from tens of thousands of projects, it really makes diligencing the documentation for tens of thousands of homes impractical. From a legal perspective, we welcome the legal spend, but it's not the most efficient use of anyone's time or money. And so usually what the buyers will do is they will randomly select a group of completed projects, and they'll receive all of the documentation related to those projects to sort of spotcheck compliance. But otherwise you're looking to the form of customer agreement that the seller will have, and you're looking to the representations and warranties in the document, and you're looking to the coverage and the insurance policy for confirmation of satisfaction of those requirements across the full portfolio.

JE: One of the really nice things about residential solar as an asset class is that it, I feel like when you're kind of making an investment there, purchasing credits on there is you're getting yourself a little bit more certainty with respect to the tax year when those credits are going to arrive as opposed to a big utility-scale project that might slip into a second tax year. Residential solar, the buildout is three or four weeks to construct it and install this, so what you end up seeing is just a lot of certainty in the portfolio itself. Maybe you don't know exactly which houses are going to be in your portfolio at the time you sign your purchase-and-sale agreement, but certainly you know that a certain number of houses or a certain portfolio size becomes pretty predictable on a residential solar investment, which really allows a buyer to enter into a purchase-and-sale agreement early in the year knowing that it's going to get pretty close to the amount of credits that it’s expecting by the end of the year.

That's just a little bit different than a utility-scale transaction. Granted, some buyers, they get nervous. They're like, “Gosh, we're buying credits from 40,000 solar projects across the United States.” But as they really start thinking about the fact that in a lot of ways it de-risks the transaction. So one of the things we worry about in any of these transactions is that we're going to trigger what's known as recapture during the five-year period after in-service. For a residential portfolio, maybe one house, two houses, suffer recapture. It's not really material, as opposed to some casualty event on a utility-scale system that would create just much more of a negative impact to a credit buyer.

AGE: That's a great point, John, and that is a different factor, an additional factor that you want to look at when you're diligencing these projects. Most buyers will want a diversification of the location of the projects, so they'll want to see these projects across multiple states. Now what's really helpful about solar residential developers, is that they will, by and large, have tax equity associated with the projects that they are selling. It's one of the best ways to monetize all of the available tax credits and tax benefits that solar developers can avail themselves of.

And so, as a buyer, you have the additional comfort that the tax equity investor has already put in some guardrails around the diversification of the states and the diversification of the technology that's used in the different projects, the panel manufacturers, the inverter manufacturers. And so it also allows the buyer not to need to be an expert on modules and not to need to be an expert on inverters and the installation process because you have someone with an interest that is aligned to yours taking care of that review process beforehand. Not to say that you don't want to be informed and not to say that you don't want to make sure that you're comfortable with the allocation of states that they're selling you, but it does help to have a tax equity investor also involved in the transaction.

KB: One of my next questions really does get into that topic of diligence, so maybe we could drill into that in a bit more detail. So you mentioned, Alejandra, that a buyer will typically diligence a selection of projects in the portfolio. Can you talk a little bit about the kinds of items that the buyer should be looking for when they are doing that project-level due diligence? And then as a secondary matter, I’d be very interested in how credit risk layers in as a factor when conducting diligence on the portfolio.

AGE: The primary types of customer agreements that you'll see are going to be either lease agreements or power purchase agreements. One of the core tenets of investment tax credits is that the seller of the tax credit needs to remain the owner of the project. So you will see that throughout these lease agreements or these power purchase agreements, ownership of the modules and the system stays with the solar developer; it's not owned by the customer. If the customer buys it, then the customer gets the tax credit. The documents tend to be very clear about that.

So as a buyer, you would directly (or through your council, shameless plug) review the form of lease agreement or the form of power purchase agreement that that solar developer has implemented across their portfolio to get comfortable and understand broadly if they have any guarantees or where any potential pitfalls could be. Additionally, you would then ask them to see a sampling of maybe 5 or 10 projects across a multitude of states with different technologies, different system sizes. And you would get to look at the very specific agreement that was signed, the specific placed-in-service documentation that they would have for that project, for that customer agreement. Those are probably the two primary factors that you're going to be looking at: the executed customer agreement and the placed-in-service letter.

If there's any adders, you want the seller to confirm in writing whether it's an energy community based on location, if they happen to have the low-income community adder, you want to make sure that you see a copy of the allocation letter or the award letter for that adder. But you're really not looking to diligence the totality of the projects. You're going to have “reps” in your tax credit purchase agreement or representations and warranties, which are assertions by the seller telling you that certain things are true and correct as of a specific date, and you'll want them to have certain covenants, as well, as to their performance throughout the next five years, or what we call the recapture period. But the diligence is primarily around the forms of agreements and then a sampling or an audit of a handful of projects.

JE: Alejandra, I agree with what you're saying. In one of these transactions, a tax credit purchase transaction, there's more of a diligence associated with qualification for the credits themselves. So I'd say kind of more of a tax-centered diligence as that may be compared to a partnership transaction with tax equity and which is probably a little bit more even between commercial and tax items. So from a tax perspective, we're looking and asking the basic questions about whether the project is going to qualify as solar energy property and looking at cost segregations and just seeing about like what percentage of the project should qualify and kind of making sure that some of the basics that can cause a project to fail to be viewed that way, that there's no red flag showing up in the portfolio.

The benefit of these portfolios is that all of these installations basically look the same. So we get the real benefit of that. The general view from us and from others is that a sampling is the right way of looking at it. So when we're doing a sampling of this, we want to kind of see what those underlying contracts look like, because if they, the ones that Alejandra has mentioned, because they can be drafted in a way that starts creating questions from a tax perspective as to whether the developer should be viewed as the owner of the asset. For tax purposes, and as Alejandra had said, is that the owner of the assets is the one who gets the credits, not the homeowner.

So if you've created a structure in a way that your homeowners are viewed as the owner, that's going to make it more difficult to be comfortable when you're transacting it. But we do get the benefit of the fact that all these look very similar, which makes sampling just a good idea from an effort perspective.

KB: Both of you have talked a little bit about recapture, and it probably would be worthwhile to briefly explain a little bit more about what recapture is in general. But in particular in the context of a residential solar deal, we've heard that some measure of recapture is inevitable within a portfolio. Would you agree with that? And then how does a buyer obtain appropriate indemnification against recapture?

JE: The residential solar project qualifies for an investment tax credit, which is a credit that is paid in the year the asset goes operational, or as we from a tax perspective call that “placed in service.” You basically have to pay it back in a proportional basis if something happens to a project over a five-year period which would cause it to no longer be viewed as solar energy property. That's what is called recapture. Recapture steps down 20% a year, so your recapture at the beginning of year two is only 80% of the credit amount, and then in year five it would be 20% of the credit amount, and year six it would be 0%.

So what we're kind of looking at during the life of that five-year recapture period is for things that may cause that solar energy property to no longer qualify. One great example, which is unfortunate to use as an example, but it would be a casualty event. Someone's house unfortunately burns down — burns to the ground. That is viewed as a disposition for tax purposes that will trigger recapture. So we don't hope that on anybody, obviously. But when you have thousands of homes in a portfolio, you could have a casualty event. Maybe it's not a fire, maybe it's a hail event. Maybe it's just something that causes you to have to replace that system. That will trigger recapture.

Other things to trigger recapture in residential projects would be if there was an early termination of a lease agreement because the homeowner sold their house in year two, and then that triggered an ability for the homeowner to terminate the underlying contract. That really depends on what those contracts say. If you're in a situation where the new buyer can assume that contract and keep it in place, it's probably not triggering recapture. But if it's terminating the lease and those panels are being removed because of that, that is likely to trigger recapture, as well.

These are things that most buyers take great comfort in. The safety in numbers is that when you have 40,000 homes in your portfolio and you run the risk that there's maybe a few of them that will have recapture events — we've been doing resi solar for a long time, and it's never really that many come up, maybe a couple a year. That gives people a lot of comfort. And then just from a contractual perspective, the sellers are usually taking the risk with respect to recapture. So if in my example there's hail damage in somebody's house, there's a casualty event and that triggers a recapture of $3,000, the seller would be required to indemnify the buyer for that. So then they're making the buyer whole by making that payment. That is typically how our transactions are structured.

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KB: Alejandra, you mentioned that there is often a tax equity investor in these deals or another investor in the portfolio. Do you typically observe that there is a step up in the basis for a residential portfolio deal or not? And then if there is, generally, how do you see that step up achieved?

AGE: So I would say the overwhelming majority of solar residential transactions have a tax equity investor component or, more recently, a pref equity investor component for the step up. And now I'm going to turn it over to John because step up is a tax concept that he is fantastic at explaining.

JE: I appreciate that, Alejandra. To really understand what a step up is, we’ve got to start thinking about how the investment tax credit is calculated. So it's calculated on the sellers’ basis in the asset. And when I say basis, it's basically its cost to that seller. If a project costs $50,000, that is the basis for the seller, and the tax credit is calculated as a percentage of that. If it’s a 30% ITC, then 30% of $50,000, or $15,000. It may be some higher amount, depending if there's additional credit adders that are available.

The reason that developers are really keen about creating these, what are known as “step-up” transactions is that their cost to construct that asset may not really reflect its fair market value as an operating asset. Just using the $50,000 example, if it costs the developer $50,000 to build the asset, but then a third-party appraiser is telling them that the asset upon completion is worth $60,000, the developer will want to sell that project into a tax equity partnership or into a pref equity partnership for $60,000 and then let that tax equity partnership be the seller. Because once again, the seller's basis then is $60,000 because that was the cost of acquisition.

That's a transaction that's not without risk. There's a concern that requires a buyer to diligence or be comfortable that that sale transaction will be respected for tax purposes. Because if the IRS comes in and says, “Hey, we're not respecting that transaction as a sale,” you start creating a question as to whether the right number for your basis calculation should be the $50,000 number, the $60,000 number, or something in between. And if it's less than $60,000 and you've calculated credits off of that, you're going to trigger some loss-of-credit amount. Similar to the casualty recapture view, that is something that the seller is taking the risk on. So once again, a buyer is protected contractually for any questions as opposed to the basis. But people aren't doing these transactions expecting that they're going to be having to deal with indemnities. They want the deal and to be comfortable that the deal is done correctly. So that's why it's important to look at these things.

KB: We've run through some of the top-line risks that we would think about — how to diligence, the recapture risk and indemnification, how a step up in basis could be viewed by the buyer. Are there any other risks that a buyer of a residential solar portfolio tax credit package ought to be mindful of or looking for, either as they evaluate tax credits to purchase or during the diligence process?

JE: Well, from my perspective, it's a non-tax one, so, Alejandra, I'm going to hand it back to you, but it's really the identity of your seller. We've had at least one high-profile bankruptcy in residential solar. One of the things that a buyer will want to make sure or will need to be comfortable with is that that seller entity remains in place as a regarded entity for tax purposes. So if there's a foreclosure which causes that portfolio of assets to go from the seller to a bank, that might be viewed as a transfer that may trigger recapture. It may not trigger recapture — there's some questions about that. But that is something that you'd want to be mindful of.

AGE: As John is saying there, as you're viewing your risks as a buyer, we can put them into two different buckets. We'll call them the tax risks and then the non-tax risks. So the tax risks are all of the things that John just mentioned: that the seller is the appropriate seller, that it is a regarded entity, if there is a tax equity investor or a pref equity investor, that it will be respected as a partnership. So those are all of the tax risks. By and large, how buyers get comfortable addressing that risk is through tax credit insurance policies, also called tax loss insurance policies.

The pricing on that tends to be at least 100% of the face value of the tax credits that you purchase, sometimes more. I haven't seen anything less, but I've seen anywhere from 100% to 150%. I'll get into the why of that in just a second. But what you're looking to the insurance company for coverage there is all of those tax positions. So really you're taking, to say it in a colloquial sense, IRS risk — risk that the IRS comes and says, “Hey, any of these tax criteria that needed to be correct to be able to sell the credits are not correct.” And that's where the insurance company will themselves have done this research and will have gotten comfortable that all of these tax risks that they are covering through your insurance policy are proper and correct.

It is very important that you have counsel review your tax credit insurance policy for the whole of the document. Unless you are an expert, you should really look to experts because this will be one of the primary sources of recovery in the event of a recapture for a tax reason. But you really want to be looking at the “covered tax positions,” if you will, in colloquial insurance speak, the coverage. In home ownership, it's flood or fire or hurricane or earthquake or the types of risks, and that's your “covered tax positions.” And then the “exclusion events, which are the things that the insurance company will not pay you for if they occur, regardless of the fact that you have a recapture. So that's how buyers cover off the risk for tax issues.

For non-tax issues, the analysis then becomes really about the creditworthiness of the seller. If the seller is a newly created entity, or what we call a “special purpose vehicle,” created for the sole purpose of owning these specific projects, it's probably not going to have a lot of assets. So you're going to want to look to some sort of parent entity of that seller that does have creditworthiness or does have a more fulsome balance sheet to support the indemnity obligations that arise in the event of a non-tax recapture event. So you're talking about all of the casualty events that John was talking about. You're talking about lender foreclosure events. Those are, if you will, items that are not related to an IRS determination.

For those, you're looking to the seller or a seller guarantor to make you whole. Now, a subset of that analysis is whether you're getting what's called a no-fault indemnity or a breach-based indemnity. A no-fault indemnity says, “It doesn't matter what causes it. If you have a recapture or if you have damages, we are going to indemnify you for them. We, seller, are going to indemnify you, buyer, for them.” When that is the case, then you're really just looking at the creditworthiness of the entity that's backstopping that obligation because it doesn't really matter what caused it. You have a loss, you have a recapture, they're on the hook for paying you.

When you have a breach-based indemnity, what that means is they are only going to indemnify you if they breached any of the representations or covenants in that tax credit purchase agreement and, because of that breach, you suffered a damage or a recapture. If that is the commercial arrangement, then you want to be a little more thoughtful around those representations and warranties and around those covenants that you have in the document. Because in order to be able to have that claim, you're going to need to point to something that they did wrong. And so there you're going to not only be looking at the creditworthiness of the entity that's supposed to indemnify you, but you're going to be looking at “What are those potential causes of recapture, and how do I protect myself in the document?”

So for example, you'd be looking to make sure that they have sufficient casualty insurance coverage. You're going to want to see a report from an insurance consultant confirming that they do. And then you're going to want a covenant in the document that says that they will maintain that level of insurance coverage throughout your recapture period. Because if a casualty event occurs, it doesn't tend to be anyone's fault — it's, for example, a weather event. And so when you go and you say, “Hey, there was a weather event; I had recapture,” they're going to say, “That wasn't my fault.” But if they have insurance, then you will have provided that proceeds from those insurance claims are going to be used to pay you for your loss.

For example, if there is a sale by the lenders and that's what triggers the recapture, you're going to want to have an indemnity. For solar residential, the indebtedness is almost always above the seller — I haven't seen any project that has indebtedness at or below the seller. It's always above the seller. That's a good fact pattern for buyers. Because if the transfer, as John was saying, is above the seller, it should not trigger a recapture for the buyer. It may trigger a recapture for the seller, but the buyer is agnostic. But in those instances, you're going to be looking to maybe include a covenant that says you will comply with your financing documents. So that if your damage or your loss is a result of a breach under their financing documents, then you have that. You sort of weave it through the documents.

And so again, shameless plug, get yourself some good lawyers, because it is very nuanced what you are actively looking for protection in your documents based on a multitude of factors. But those are the primary concerns that buyers should be looking to have protection under solar resi and really any kind of tax credit transfer agreement.

KB: As a benchmark, we generally see our utility-scale solar deals that are maybe in excess of $50 million, so reasonably large, tend to trade in the neighborhood of 93 to 94 cents per dollar of tax credit value being paid. If you were to think about a comparable residential deal, say again, maybe that $50 million up kind of size, what kind of pricing would you expect to see on a transaction like that? Do you have a sense of what would be market in your view right now?

JE: It's probably not much different than what you're seeing on the utility scale. I think that on the transactions we've seen it probably ranged from like 91.5 to 94, I would think. And once again, it goes to the certainty of knowing that the credits are going to be there. You know that you're going to have some amount of this portfolio coming through, and then maybe the pricing may depend more on who the counterparty is, to Alejandra's point that there may be a seller guarantor there.

If you don't have as strong of a credit rating as a seller or maybe don't have as much experience in the residential solar space, maybe a seller in that situation is going to see more of a lower end of that range in pricing than someone who's more established.

AGE: To that I would also add, John, that the allocation of the commercial risks also plays a factor in the pricing. So if you as a buyer want to be held harmless for anything and everything — you're not willing to take on any risk whatsoever — you should expect to pay more for those tax credits because every risk in every contract has a price. Where it lies, whether with the seller or with the buyer, is going to impact the price. So if the buyer is really conservative and wants to take zero risk, you should expect to pay more for those tax credits.

Same on the seller side. If the seller doesn't want to take a lot of those risks and wants to put those risks on the buyer, and the buyer is open to taking those risks, as a seller, they should expect to see a reduction in the price because if there is a recapture, then the risk falls on the buyer. So then the buyer is going to say, “OK, yes, but this looks like a $0.01 or a $0.02 or a $0.03 discount.”

The additional factor that plays a role into pricing is the insurance. Because while the insurance premium and fees will be paid by the seller, there will be a deductible that's charged in connection with any claim. And so we have seen where insurance companies have done an analysis and there's some concerns that they have around the project, and they want to increase the deductible. That's the amount of money that the buyer has to suffer before the insurance will pay out. And we've seen the buyers turn around to the seller and say, “OK, it is what it is, but I'm certainly not paying you $0.93 on the dollar because now I have to suffer this much more loss before the insurance is going to pay out, and that was what I was looking to primarily as my recourse in the event of a recapture of the tax credits.” And so we've seen tax credit sales in the 70s, but admittedly I will say those are outliers with a lot of additional hair, as we like to say.

But I would say, as John said, by and large the pricing is very similar across utility-scale or residential solar. It's the commercial risks and the quality of the seller or the seller guarantor that impact the pricing a bit more.

JE: You certainly see different buyers just choosing their own approach here. Some buyers, to Alejandra’s point, they don't want any risk. It's like, “Hey, you know, we have no risk, zero risk if we pay the dollar of tax to the federal government. So we're comfortable just having a slight discount for the purchase to account for the counterparty risk of why you want to do the transaction, but not anything else.”

And then we have other buyers that we've been working with who are looking at this as really more of an opportunity to get a higher return, quite frankly. They may be looking for the edgier deals that can't support $0.96 pricing because of whatever reason. And they want to seek those out. They want to seek the lower purchase price amounts out just because they're looking at it more strategically from an overall yield.

AGE: And it's really important as the buyers are looking for sellers and the sellers are looking for buyers, that there's clear alignment on what end of the spectrum each of the counterparties is. Because if you have a seller with very little creditworthiness who's looking to get $0.96 on the dollar, you're looking at insurance policies of 150% because they're looking to cover not just the tax credits that they lose, but also the additional interest and penalties and fees and enforcement costs. So the seller is going to expect to pay a lot more for the insurance coverage than if they had a higher credit-worthiness quality. So it's really important that buyers and sellers are really clear on where they would like to lie on that spectrum so that the counterparty isn't frustrated saying, “Well, this isn't what I expected.”

KB: We wanted to go back quickly to a topic that came up a little bit earlier, and that's the idea of making some kind of a commitment to a portfolio of projects that are under development. So as a buyer, you're committing to but also receiving tax credits on some kind of cadence.

‍Thinking about how the timing of payment works in these transactions, maybe it's a good chance to talk about the unique features of payment timing in a residential portfolio deal versus a single, large utility-scale deal, for instance.

JE: A buyer of credits ideally would want to wait until the very last minute to pay for those credits, and they would have until the timing of their tax return was being filed. If we use 2024, for example, their 2024 tax return won't be due until September or October of next year. So they would rather wait till the very last minute and say, “OK, well I'm writing the check to the government and then I'm going to write a check to the seller, and we're good.”

We haven't seen that in any transactions. The seller understandably will want to see their money much earlier than that. And where we're kind of seeing it occur is during the life of the purchase agreement in the year that the asset’s place in service. So if you enter into a contract in January of 2024, you basically would expect payment happening in 2024 at some point when the asset is placed in service for tax purposes. Which is where it makes it kind of really fun with a residential solar portfolio where these projects are coming online by the thousands every month. So you'll end up seeing payments — Katie, to your point about a cadence, on a regular cadence based on when the assets are being placed in service.

Now, you don't want 40,000 funding dates. That totally doesn't work. But you end up seeing maybe quarterly dates aligning with when the buyers are filing their estimated tax payments. That's pretty common. We've also seen situations where there's payments more frequently than that, but not often less frequently. For a resi portfolio, I think you could probably assume it's most likely going to be quarterly based on the assets that are placed in service in the price quarter.

AGE: Yeah, I would concur. Perhaps the only distinction would be if this is a deal that's signed later toward the end of the year where they have a little more certainty around the volume of projects that they have, or they have a large pipeline of projects that are ready to be placed in service, or more projects that will be placed in service in a tighter time frame than they would, for example, in January or February. We have seen monthly payments, but, again, it's easier to do quarterly payments for everyone involved. But sellers will sometimes want their cash sooner than quarterly. So we have on occasion seen monthly payments, but it really requires a well-thought-through process for satisfying the conditions for payment if you're going to be doing this once a month.

JE: And that may also be reflected in the price. If we're at $0.94, assuming that we're doing quarterly payments and the seller really wants payments every two weeks or every month or something, maybe that's worth the buyer's hassle of dealing with that for a half a cent reduction or something. So these can be negotiated items.

KB: Can you talk a little bit about how the pre-filing registration portal process is managed? What are the unique requirements if you are managing a portfolio of assets? Now we have about two years of experience with the portal. Are there any best practices that are emerging for sellers to be able to access, navigate, leverage the portal, and then communicate that material over to the buyer in a timely manner?

JE: Every project needs its own registration number. This is the way that the IRS is tracking the owner of the credits and the buyer of the credits. So when you have a residential solar portfolio of 40,000 projects, that means you have 40,000 numbers. That can be, as you might imagine, a huge administrative burden to get 40,000 numbers. But our understanding is that most of the developers out there have actually been in discussions with the IRS about this as an issue, and the IRS has been quite responsive in understanding that there needs to be a more streamlined way of doing this.

So I think that, and I can't speak for all sellers, but the ones that we're familiar with in the residential solar space end up uploading big database files, Excel files, with all of the — maybe there's like 20,000 houses in it or something — to the IRS at one time, and then getting really more of that batch registration. Once again, still unique numbers for each one, but in a way that is a little bit easier to implement from both the developer's perspective, but then also from the IRS's perspective. The IRS, I think, also recognizes that these tend to all be very similar types of assets. So that's really what we've been seeing.

So if you're a buyer, you will need all those numbers. What you'll end up with is a transfer election statement at the end of the year that will include a very big attachment to it, having all the different projects identified and their individual numbers. But then if you're a seller and you're new to this, and so this is your first time you're doing this, you'd be advised to reach out to the IRS, explain what you're trying to do to basically be able to do it through a batch filing process.

AGE: I would just add two things for buyers to keep in mind and for sellers to keep in mind. Our understanding is that the IRS will only allow a company, a seller, to have one request for registration numbers outstanding at any given time. The response time really varies on a case-by-case basis. We've seen folks get their registration numbers in a matter of days, like few days, and we've seen folks get the registration numbers 120 days later. So it really runs the gamut on how quickly the IRS can come back.

From a buyer's perspective, it is very important that you have a registration number, because absent the registration number, you cannot purchase the tax credits. It is one of the pieces of information that has to be reflected in the transfer election statement that gets filed with your tax return, period. However, that number can take a bit to be obtained, not just because the IRS will take some time to respond, but also because the portal — mind you, we've only had two calendar years of portal availability, 2023 and now 2024 — but the portal for projects placed in service in 2024 didn't open until September 3. And so for all of the projects that were purchased from January through September, and the sellers really wanted their money and the buyers really wanted to recognize these tax credits on their quarterly estimated tax returns, everybody was doing it without a registration number.

While some may view that as risky, from our perspective, it's really a procedural item. It's in the seller's best interest to get that number, because if they don't, and they don't file the transfer election statement, you get your money back. And you'll probably be able to negotiate that you get it back, plus the interest and penalties that you paid for that under payment through your quarterly estimated tax returns. We have gotten comfortable when we represent buyers with not requiring that the registration number be provided on the payment date.

As far as the timing of residential solar projects, what we also end up seeing more frequently is an obligation of the seller to file for those registration numbers within, say, 15 or 30 days after the final payment date. What you want to make sure that you also don't do is inadvertently shoot yourself in the foot by requiring that they file a registration number at some point, and then, because they can only have one request outstanding with the IRS at any given time, they then can't submit for additional projects that you've purchased the tax credits for, because they have some sort of delay around that application. And so we'll tend to see the requirement be pushed to the end after the final purchase date, but with a deadline. No later than, say, March or April of the following calendar year to make sure that if you are one of those unlucky folks that takes 120 days to get your registration number, that you still have more than enough time before the filing deadlines begin in September.

KB: As we look forward to 2025 and the years ahead, we've got barely two years of transferability under our belt. Are there any lessons learned that you want to share that we haven't already discussed heading into the new year?

JE: Yeah, I think Alejandra really stated the most important thing is, it’s really to have a really good understanding between the buyer and seller of what the expectation is. Because maybe if there's misalignment, rather than trying to negotiate it out, maybe they're just not good partners. Then maybe they need to find a different person to match with. I think that is one of the things that we've certainly seen in two years of transferability is this idea that if the parties really aren't aligned — they have a different understanding of how the transaction should happen or what the risk sharing is — it's probably better for them to just move on to a different counterparty as opposed to trying to sort it out. So I feel like that's probably the biggest one.

The other, too, is with respect to the registration numbers and thinking about the fact that that is an administrative requirement. To what Alejandra said, you definitely need it by the time you file your tax return. But that's your tax return with extension, and most of these transactions consider that the corporates will end up filing with extension, because that typically is the case. So maybe not being hyper-focused on having that in hand at the time that you're sending the money over as a buyer, because it's an obligation that, for it to be an effective transaction, that everybody is interested in getting it and dealing with kind of the practical realities of the registration portal process.

So to Alejandra's point, we waited around for most of the year for that portal to open up for 2024, and from the IRS's perspective was just that, “Hey, you don't need that number until you file your return. So what's the rush, really?” I feel like buyers are starting to kind of recognize that as not really a huge concern. That's something I think that from the past two years, you start seeing people getting a little bit more relaxed about that.

AGE: And John, I would add to that, I think the lessons learned maybe a little more from the seller's perspective is: make sure that you have all of the documents ready for a buyer to review by the time you engage with the buyer. You want to make the buyer feel like you are the competent tax credit seller that you know yourself to be. Open a data site, upload the information, have the answers readily available, or have someone accessible who can help you provide those readily available answers. Because in the buyer diligence process as counsel, there will be things that jump out as unusual. And if they have a quick response that makes sense, it's something that you can overcome.

But as a buyer, if there are a lot of things that are just not adding up and the seller isn't able to provide the information, or they're disorganized, or they don't know what to do, it's not going to give the buyer the warm and fuzzies, so they may walk away from the transaction, or they're going to penalize you on the price for not having things put together properly.

So I think another takeaway, and really for the benefit of the lawyers (shameless plug) is when all of the documentation is really well put together by the seller for review by the buyer and their counsel.

KB:I can't tell you how helpful this has been. Alejandra and John, I've learned so much and we are unbelievably grateful for your time, your expertise, and we look forward to working with you on many more transactions to come. So thank you again so much.

JE: Thank you very much.