Question: With more YieldCo’s coming to the market, how do you see these tax equity transactional structures fitting together with YieldCos (assuming the YieldCo can't monetize the tax benefits)?  Especially if YieldCo’s prefer steady cash flows. 

Answer: The market is still working the details of this out.  There are three primary tax issues in transferring an interest in a project subject to tax equity transaction to a YieldCo.  First, does the transfer trigger recapture of ITC for the tax equity investor.  In a flip partnership, if the developer’s interest is transferred to a YieldCo, that will result in recapture of the ITC for the developer only; usually the developer has only been allocated one percent of the ITC, so that recapture cost is de minimis.  Second, does the transfer result in a constructive partnership termination for depreciation purposes; this only happens if more than 50 percent of the profits and capital interest in a partnership is transferred in a rolling twelve month period.  See Code Section 708(b)(1)(B).  Further, it merely results in a re-starting of the depreciation schedule, so there is no actual loss of depreciation.  And third, can the YieldCo efficiently use any tax benefits being provided to it; generally, YieldCo’s taxable income profiles result in them being efficient users of depreciation but not tax credits.

Here’s a link to a presentation from a webinar I chaired on YieldCo’s, MLPs and REITS on Sept. 4:

Question: I understand that partnership flip transactions are usually used for larger deals, how large (in $) have the largest sale leaseback transactions been?  What stops them from being larger?

Answer:  There have been sale-leasebacks of $1.6 billion coal plants.  There have been sale-leasebacks of wind projects that were in the hundreds of millions of dollars.  Thus, there does not appear to be an impediment to large sale-leasebacks.

Question: Can a deficit restoration obligation (DRO) be required to be paid in case of purchase of the interest of the investor?

Answer: The DRO is not triggered on a sale of a partnership interest.  The DRO is only triggered upon a “liquidation” of the partnership.  We have never seen a DRO triggered.

Question: How does the obtaining of nonrecourse debt affect the capital accounts and tax basis?

Answer: Nonrecourse debt permits capital accounts to go negative without providing a DRO, so it is a helpful tax structuring technique.  A partner is entitled to “outside” tax basis for its share of nonrecourse debt; however, a partner also has “minimum gain chargeback” as its share of the nonrecourse debt declines.

Question: On the partner's books for ITC deals, what accounting method is typically followed for the ITC; the flowthrough or deferred method? 

Answer: This is a question about U.S. GAAP.  Different companies take different approaches.  The issue should be discussed between the company’s management and its outside auditor.

Question: Is the poor book income recognition pattern (above the line losses) usually the most significant impediment to investors? 

Answer: The above line income profile is certainly an issue for tax equity investors.  It is particularly challenging for companies that have analysts following them that believe that above the line income is an important metric.  It is difficult to determine if it is the most significant impediment as the complexity of the transactions and the difficulty for some companies of forecasting tax liabilities for future years are also challenges. 

Question: What is the financial accounting in HLBV at the flip date?  Do you adjust the equity and non-controlling interest?

Answer: HLBV method of allocation is different from the conventional equity method of accounting where you can simply adjust the ownership percentages when they change.  When applying the HLBV method, one must follow the same HLBV liquidation rules each period irrespective of the period you are in.  The general HLBV rules are as follows: i) hypothetically liquidate partnership at book value; ii) allocate liquidation proceeds to each partner per liquidation provisions in the LLC agreement, iii) calculate pre-tax income (loss) for each partner. 

Question: Are any investors willing to allow project debt in a lease pass through? 

Answer: Yes, if the debt is at the lessor level and if the lender agrees that in a foreclosure that it will not terminate the lease during the five year recapture period.