Aggregate-site, solar energy project financing transactions for municipalities, school districts and other local governments in New Jersey have had a successful beginning in the state. This solar financing model was formulated to achieve lower and stabilized electricity costs through economies of scale in both the procurement and roll-out of renewable energy. This article addresses how those leveraged local government transactions served as the base from which to launch an analogous program structured to achieve similar results for nonprofit entities in New Jersey.
Since the so-called “Morris model,” commenced in 2008 and closed in February 2010, several of these aggregate local government solar transactions have been financed, many are in construction and a few are operational, producing 3-10 MW of solar power each. Most importantly, power purchase agreement (PPA) savings off of present tariff rates have locked in savings for local governments from one- to two-thirds off present market rates for a state maximum allowable contract period of 15 years. One of the keys to the success of the Morris model was finding a way to essentially unlock the federal tax benefits that are available to a private solar developer, but not directly available to the site hosts, allowing nontax-paying local governments to gain the benefit of this renewable energy source at below-market cost.
Nonprofits are another group of entities that are unable to directly take advantage of the 30 percent federal investment tax credit (ITC) under Section 48 of the Internal Revenue Code of 1986, plus the accompanying accelerated depreciation. Last year, a group of nonprofit entities in New Jersey undertook the challenge of adopting the Morris model. The effort was spearheaded by the Bergen County Community Action Partnership, Inc. (BCCAP), a nonprofit corporation organized and existing under the New Jersey Nonprofit Corporation Act (N.J.S.A. 15A:1-1 et seq.). BCCAP, a nonprofit itself, has for years been providing a variety of services to the poor and underserved in New Jersey, combining government grants and subsidies with market solutions. Recently, BCCAP had extended its interest in public-private partnerships into the renewable energy field. When it heard of the Morris model for local governments, it sought to develop an analogous model for nonprofits.
The economic viability of the Morris model grows out of the ability of the regional, lead government organization to provide the private solar developer with municipal bond funding much more cheaply than such developer could obtain in the private marketplace. Specifically, county improvement authority bonds were issued to finance these projects at comparatively low interest rates due to the full faith and credit guaranty of such bonds by the credit supporting county. The county views such a guaranty as a shared service, leveraging its taxing power (and the high rating that accompanies it, directly resulting in cheaper borrowing costs) for the direct economic benefit of its constituent local governments hosting the solar projects, and receiving the attendant benefits.
In the nonprofit arena, there is no equivalent to the deep-pocket county to provide the low-cost financing that enables the Morris model to work. So the initial hurdle facing any nonprofit aggregate solar model was substituting the deep-pocket county guaranty of the Morris model with an alternative government grant or subsidy that would entice a sufficiently inexpensive private capital funding source to allow for similarly below-market PPA energy costs.
BCCAP worked with its private capital funding source, the investment banking firm of Goldman Sachs & Co., to arrive at a new market tax credit (NMTC) structure that would provide the additional subsidy required to fund an aggregate nonprofit solar transaction, as there would be no county guaranty and the credit quality of a group of nonprofit entities is, except in rare circumstances, likely materially below that of taxing power supported local governments. Pursuant to Sections 38 and 45D of the Internal Revenue Code, NMTCs provide a 39 percent federal income tax credit over seven years to a qualified equity investor (QEI), in this case an affiliate of Goldman, which makes an investment in a federally authorized qualified community development entity (CDE) to create jobs and improve the lives of residents in low-income communities (those where the poverty rate is at least 20 percent).
Specifically under the BCCAP Model, the QEI invested $10 million in the CDE, which in turn invested in and made a loan to a qualified active low-income community business, CAP Solar New Jersey I, which is a for-profit affiliate indirectly owned by BCCAP and located in a low-income community targeted by Congress to benefit from the NMTC. The investment in and loan to CAP Solar, and the solar projects it will develop for nonprofits in primarily low-income communities, meets the NMTC rules to make qualified low-income investments. Under the BCCAP model structure, CAP Solar is staffed by a number of full time employees in a low-income community to perform essentially two main functions. At a foundational level, they act as a solar developer on behalf of multiple nonprofit entities, where at least half of the nonprofit beneficiaries of this financing structure are located in low-income communities. On a more day-to-day level, CAP Solar staff manages and otherwise oversees the postclosing obligations of CAP Solar (bill and receive the PPA payments, maintain the solar facilities, etc.).
CAP Solar accepted the net proceeds from the CDE and undertook to sign up qualified nonprofit organizations as site lessees (at least half must be located in NMTC low-income communities with nonprofit-owned facilities that have the roofing, shading, electrical load requirements and other physical characteristics that would allow solar generated electricity to power their facilities). Through a 15-year site lease agreement, CAP Solar, as solar developer, is allowed to enter upon each nonprofit facility and install photovoltaic solar panels, inverters and accompanying equipment, all owned by CAP Solar, but hooked into the site host nonprofit facility’s power source. Under a PPA agreement, also between CAP Solar and the nonprofit site host, CAP Solar will sell the electricity generated by this solar facility to the nonprofit site host for the 15-year term of the PPA for a fixed, below-market price.
In addition, this financing structure, where 69 percent of the cost of the QEI can be recovered through the ITC and the NMTC, allowed CAP Solar to charge each such nonprofit site host a PPA price of 7.5 cents/kWh (roughly half of present tariff) with no escalation for 15 years. As CAP Solar was an affiliate of the nonprofit BCCAP, neither of which needed to or could take advantage of the tax benefits provided by a NMTC solar (i.e., ITC eligible) transaction, CAP Solar entered into a master lease with a Goldman-affiliated master tenant for the 15-year term of the transaction. Under this master lease, the benefits and burdens of solar facility ownership were transferred from BCCAP, as nominal state law solar facility owner, to the Goldman-affiliated master tenant, as lessee under this master lease. This transfer of benefits and burdens will allow the master tenant to claim the ITC and NMTC benefits, as owner of the solar facilities for federal income tax purposes under the Internal Revenue Code. Additionally, the master lease transfers from CAP Solar to the master tenant the additional benefits of receiving solar renewable energy certificates (SRECs) from the solar power generated at the facilities, and the PPA payments received from the nonprofit site hosts. In return, the master tenant assumes the burdens of solar facility ownership, primarily the repayment obligation of the $10 million investment. Finally, in order to assist both CAP Solar and the master tenant with their respective obligations, energy advisors Compass Point South and Gabel Associates were hired to provide advice and manage the SRECs generated from the transaction.
Although there are numerous moving parts in this BCCAP model structure, all participants receive the primary benefits they sought in entering into this transaction. BCCAP has established a renewable energy program for itself and other nonprofits, thereby furthering its nonprofit mission, albeit through a slightly unusual for-profit affiliate structure. BCCAP also earns a development fee through its CAP Solar affiliate, although half is rebated to the site host nonprofits, furthering BCCAP’s nonprofit mission, and the other half is first allocated to pay CAP Solar operating expenses. Also, this 2-plus MW pilot program is a start toward providing solar facilities for nonprofits in the scale that an aggregate program envisions.
The QEI and CDE fulfill their NMTC obligations, while establishing a financial structure that should both repay their investments (the added tax incentive structure provides cushion for the additional credit risk of a pool of nonprofits, plus there is a 10-year put option allowing them to leave the transaction after the NMTC recapture period, once they feel their return is sufficient), and allow for a market return on investment. Presumably the investment in low-income communities also provides other benefits to the entire team, as well as to society. Moreover, the nonprofit site hosts can apply their portion of the CAP Solar development fee toward any needed capital improvements not covered by this model, such as roof improvements and electrical upgrades. In addition, the nonprofits reduce their operating costs with a nonescalating, locked-in renewably energy sourced PPA price, which allows them to spend more of their scarce funds on the services they respectively provide to their constituents, while also promoting the benefits of renewable energy. •
Pearlman is a founding partner of Inglesino, Pearlman, Wyciskala & Taylor in Parsippany. He is a transactional lawyer in the fields of public finance, project finance, redevelopment and renewable energy.