Summary of Clean Renewable Energy Bonds
This document summarizes certain provisions of the Internal Revenue Code and other Internal Revenue Service materials relating to Clean Renewable Energy Bonds (“CREBs”) and should be read with reference to each of those items which are included as exhibits.
CREBs were initially authorized by the Energy Policy Act of 2005 (“EPACT”) and are codified in Section 54 of the Internal Revenue Code of 1986, as amended (the “Code”). With the recent enactment of the Tax Relief and Health Care Act of 2006 (the “Tax Extenders Act”), allocation was increased from $800,000,000 to $1,200,000,000 and authorization for issuance of such increase and reallocations of the initial $800,000,000 were extended through December 31, 2008. Subject to the extension for reallocations, the current $800,000,000 in allocation is required to be issued by December 31, 2007. At this time, U.S. Treasury has not published temporary or final regulations for CREBs, but in accordance with IRS Notices 2005-98 and 2006-7, regulations are expected. Each of such notices are included and may be found at http://www.irs.gov/pub/irsdrop/n-05-98.pdf and http://www.irs.gov/pub/irs-drop/n-06-07.pdf respectively.
Purpose, Borrowers and Issuers
The purpose of CREBs is to provide governmental bodies (typically states, D.C., Indian tribal governments, localities, and any political subdivisions thereof) and mutual and cooperative electric companies, access to interest free capital for certain qualifying renewable energy facilities. Those types of bodies are qualifying borrowers under the statute. Notice 2006-7 expounds on that concept with the promise that future regulations will provide that instrumentalities of state and political subdivisions will be eligible as qualified borrowers, and that the term political subdivision shall have the same meaning given it under Treasury Regulation Section 1.103-1.
The facilities qualifying for CREBs financing include, among others, wind, geothermal, biomass, solar, landfill gas, trash combustion, refined coal production and hydropower, and are described in Section 45(d) of the Code (without regard to placed in service dates). Notice 2006-7 also states that a qualified project includes a facility owned by the qualified borrower that is functionally related and subordinate to the qualifying facility. For purposes of identifying potential landfill based projects, the U.S.
Environmental Protection Agency’s Landfill Methane Outreach Program website provides a list of existing and potential project sites. See http://www.epa.gov/lmop/index.htm
Qualified issuers of CREBs are governmental bodies, cooperative electric companies and clean renewable energy lenders. Such lenders are entities owned by cooperatives or that have loans outstanding to cooperatives. Notice 2006-7 provides that “on behalf of” issuers may also serve as a qualified issuer.
CREBs are issued in the form of tax credit bonds, and the buyers receive tax credits. The CREB program is partially based on the Qualified Zone Academy Bond (“QZAB”) program and incorporates many federal tax-exempt bond principles. The tax credit rate and final maturity of the CREB obligation will be determined by U.S. Treasury on a periodic basis and posted on Treasury’s website. For QZABs, such information is found at https://wwws.publicdebt.treas.gov/SZ/SPESQZABRate. The amount of the CREB tax credit is determined and applied quarterly and is one quarter of the annual rate. The annual rate is the product of the published tax credit rate and the outstanding face amount of the bond.
The CREB tax credit is included in gross income, and the included amount is treated as gross income. CREBs can be sold to a wide range of investors and an equal amount of the principal of CREBs must be repaid each year while outstanding. CREBs may also be pooled and refinance existing debt for a qualified project so long as the original debt was issued after enactment of EPACT (August 8, 2005).
Significantly, it is expected that future regulations will provide guidance on the implementation of the change in use and remedial action provisions and the arbitrage requirements found in Sections 54(d)(2)(D) and 54(i).
For purposes of Section 54, 95% of the CREB proceeds must be spent on qualifying capital expenditures, and the proceeds must be spent within five years of issuance. There must also be a binding commitment with a third party to spend at least 10% of the proceeds within 6 months of issuance. Like tax-exempt bonds, proceeds of CREBs may be used to reimburse for prior expenditures so long as the borrower adopted a reimbursement resolution, a sample of which is attached. For CREBs, the prior expenditure must have occurred after August 8, 2005.
An issuer of CREBs must receive an allocation of issuing authority from the U.S Treasury Secretary. Notice 2005-98 detailed the allocation process for the initial round of $800,000,000. The allocation process for the $400,000,000 increase is expected to be similar, according to the explanation of the Tax Extenders Act provided by The Joint Committee on Taxation. A sample application, based solely on Notice 2005-98, is enclosed. Of the initial $800,000,000 amount, no more than $500,000,000 was available for governmental body projects. As for the $400,000,000 increase, no more than $250,000,000 of it is available for governmental body projects. Under Notice 2005-98, the application required an engineer to provide a written certification that the project qualified under Section 54(d)(2)(A). Notice 2005-98 also stated that allocation was awarded based on the smallest dollar amount requested and continuing with the next smallest dollar amount until the CREB allocation was exhausted. See section 11 herein for the December 2006 client alert and an IRS press release describing the awards for the initial round of allocation.
A - IRC Code Section 54 and Section 45(d)
B - Notice 2005-98
C - Notice 2006-7
D - Sample Allocation Application
E - Sample Reimbursement Resolution 1