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Reunion's Process for Buying Transferable Clean Energy Tax Credits

Published:
May 17, 2024
Updated:
January 22, 2025
12 min read

How Reunion Helps Corporations Purchase Transferable Tax Credits

Tax and treasury teams can purchase clean energy tax credits with confidence by working with Reunion on project selection, due diligence, and risk mitigation.

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The market for clean energy tax credit transfers has accelerated rapidly in 2024, as corporate tax and treasury leaders see a significant new opportunity to reduce tax liabilities and increase corporate cash availability.

A complete transferable clean energy tax credit transaction, from identifying the opportunity to closing the deal, can be summarized in seven key steps.

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Green H4 Element

Step 1: Build your company's internal business case

Duration

Varies by company.

Goals and activities
Goals Key activities
Develop key tax credit purchase criteria and success measures Confirm your company's interest in a tax credit transfer that meets specific criteria – for instance, credit pricing, type (48 ITC, 45 PTC, 45X APMC), technology (solar, wind, battery storage, critical minerals), payment terms, indemnification and insurance
Align internal stakeholders Get an understanding of the needs of your tax, treasury, accounting, legal, and ESG teams. At the same time, understand who is ultimately resposible for the investment decision

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How Reunion helps

Through an introductory call, Reunion's transactions team can equip your company with insights on eligibility, appropriateness, market dynamics, and risk. We can also help your team prepare a business case/investment committee memo and provide supporting materials. For larger organizations, Reunion has organized tax credit "workshops," which we have found are particularly effective for aligning multiple functional teams.

Key resources

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Green H4 Element

Step 2: Identify and formally express interest in projects

Duration

One to three weeks.

Goals and activities
Goals Key activities
Identify project(s) Sign NDA to gain more information about tax credit opportunities available on the Reunion platform
Negotiate and sign term sheet(s) Formally express interest in a project through issuance and negotiation of term sheet, which defines key transaction terms and kicks off an exclusivity period

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How Reunion helps

Reunion takes a "push" and "pull" approach when helping companies find projects that most align with their needs. On the "push" front, we curate a list of tax credit opportunities based on the criteria we identified in step one and share it with your team. For many companies, we do this on a rolling basis as new projects join our platform. On the "pull" front, we provide your team with access to our managed tax credit marketplace, where we have over $7B (and growing) in near-term tax credits available.

Once your team has the right project(s) in mind, Reunion will populate our form term sheet on your company's behalf. We'll levarage our market intelligence to ensure your proposal is competitive and assist you in negotiating key terms, like timing of payment, indemnification, and tax credit insurance.

Key resources

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Green H4 Element

Step 3: Conduct Reunion-led preliminary due diligence

Duration

One to two weeks.

Goals and activities
Goals Key activities
Identify potential issues, if any, upfront before spending significant time and expense Review Reunion’s preliminary due diligence note to better understand potential risks and risk mitigation
Make a decision to proceed with the transaction Assess the risk / reward profile of the transaction

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How Reunion helps

Reunion conducts a preliminary screen to identify any major issues up front ("fatal flaw" due diligence analysis). From that point, we consult with your team to assess risks and recommend appropriate mitigation strategies. Importantly, this step ensures alignment of incentives: we do not want to move a transaction forward unless there is a high probability of success.

We also provide validated market intelligence to compare your proposed transaction to the risk/reward profile of similar tax credit opportunities in the market.

Key resources

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Green H4 Element

Step 4: Conduct comprehensive due diligence

Duration

Two to six weeks. The precise duration depends largely on the number and relatively complexity of projects in the transaction.

Goals and activities
Goals Key activities
Conduct comprehensive financial, legal and technical due diligence to gain comfort in moving forward with the transaction Ensure that proper due diligence has been performed on the project, covering the following topics: qualification, structure, recapture, prevailing wage and apprenticeship compliance, bonus credit adder qualification, and risk mitigants (indemnification and tax credit insurance)

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How Reunion helps

Reunion spearheads the due diligence process by:

  • Reviewing documents provided by the Seller, and requesting any missing or incomplete information
  • Creating and organizing a data room, ensuring that due diligence documentation meets Reunion's checklist of required documentation
  • Reunion will produce a summary due diligence memorandum summarizing our findings and highlighting any areas of concern
  • If you are working with additional diligence advisors, Reunion will work closely with advisors to organize and accelerate their review process, reducing costs
Key resources
  • Due diligence checklist (by request)

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Green H4 Element

Step 5: Procure tax credit insurance (if needed)

Duration

This step is optional and runs in parallel to step 4.

Goals and activities
Goals Key activities
Procure tax credit insurance to mitigate risk of tax credit disallowance or recapture Work with Reunion to ensure that tax credit insurance adequately covers desired risks. Ensure that insurance coverage levels are adequate in scope and amount

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How Reunion helps

Reunion can help companies decide if insurance is an appropriate risk mitigation tool for their transaction. If we collectively determine that tax credit insurance makes sense, we can advise on insurance offerings, including the scope of coverage – e.g., structure, qualification, recapture, PWA, bonus credit adders – and where gaps might exist.

We can also help you validate that the insurance policy is appropriately sized and includes penalties and tax gross-up and contest costs.

Key resources

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Green H4 Element

Step 6: Sign tax credit transfer agreement

Duration

This step runs in parallel to step 4.

Goals and activities
Goals Key activities
Negotiate and sign a tax credit transfer agreement Review the legal contract to ensure that Buyer and Buyer counsel are satisfied with the terms

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How Reunion helps

Reunion streamlines the negotiation process for buyers and sellers by providing a template legal document and helping parties focus on the most pertinent deal topics.

Key resources

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Green H4 Element

Step 7: Post-transaction support

Duration

Ongoing duration depending on credit type.

Goals and activities
Goals Key activities
Navigate various IRS filing deadlines in the months following the transaction File IRS paperwork and stay compliant with the follow up requirements. Stay up to date on the latest market trends

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How Reunion helps

Our transactions team will issue both parties reminders about filing requirements and deadlines, including tax forms and compliance. In subsequent tax years/quarters, Reunion will provide early acccess to new deals.

Key resources

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Green H4 Element

Get started

Reunion’s team of clean energy and tax credit experts are here to support you through the entire process of buying and conducting due diligence on  IRA tax credits. We draw on our deep expertise to help you navigate tax credit transactions, and our marketplace features the widest pool of tax credit opportunities available in the industry.

Our key differentiators include:

  • Widest pool of high quality tax credits: We curate opportunities from our $10B+ marketplace, featuring technologies and projects ranging from under $3M to $300m+
  • Extensive educational materials: We offer an extensive resource library featuring content on financial, legal, and market-related topics pertaining to IRA tax credits
  • Hands-on due diligence: We support buyers throughout the transaction process, ensuring that the due diligence is performed at high quality and that risks are minimized upfront, saving you time and expense
  • Industry-leading transaction team: Reunion has facilitated more than $2 billion in tax credit transfers in 2024. Our transaction team consists of industry veterans, with experience raising $5+ billion in clean energy project financing `with partners such as US Bank, JP Morgan, Wells Fargo, Bank of America, Key Bank, PNC, Nord/LB, D.E. Shaw, First Reserve, and over a dozen Fortune 500 companies
  • Market intelligence tools: Available upon request, we offer proprietary insights on tax credit pricing and data on key trends
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Register

Instructions for joining the webinar will be sent once you have registered. If you have any questions, please contact Maria Verbaite.

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We will make a recording available for those who cannot attend the webinar live.

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Topics

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Speakers

Jordan Tamchin – CAC Specialty

Jordan Tamchin is Executive Vice President and leader of the Tax Insurance Practice at CAC Specialty, where he specializes in delivering innovative and unique insurance solutions for the most complex tax risks across a variety of tax credit and tax equity deals.

Andy Moon and Billy Lee – Reunion

Andy Moon and Billy Lee are the co-founders of Reunion and work closely with Fortune 500 corporations and clean energy companies to buy and sell clean energy tax credits.

Andy and Billy have led hundreds of clean energy financings since 2006, including some of the first solar transactions with institutions such as US Bank, JP Morgan, Wells Fargo, Bank of America, D.E. Shaw, and others. 

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Questions welcome

We want our office hours to be interactive, so please bring any questions you have, whether related to current market conditions, pricing, or commercial terms.

You're welcome to ask questions beforehand.

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August 23, 2024
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Section 48 ITC Due Diligence and Documentation Guide

Executive summary

Transferable tax credits are sold at a discount to face value, providing attractive financial benefits to corporate investors. They are not without risk, however, and tax credit buyers should have a clear sense of how to identify, track, and mitigate relevant risks.

At the same time, clean energy developers should understand the scope of due diligence during a tax credit transfer.

This due diligence checklist and documentation guide gives tax credit buyers, sellers, and their respective advisors a set of shared expectations on the required analysis and documentation for §48 investment tax credits.

To download a PDF version of this guide, please visit our resources page.

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Jump to a due diligence category

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Transaction overview

The transaction overview should include an overall description of the transaction, including:

  • Brief description of sponsor
  • Technology
  • Project size in MW AC, location, and description
  • Placed in service (PIS) date
  • Eligible cost basis
  • Resulting ITC credit amount
  • Description of tax credit percentage, including bonus credit adders and compliance with, or exemption from, prevailing wage and apprenticeship requirements
  • Details on how the project is financed

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Major deal participants

Tax credit transfers involve a range of stakeholders on the buy- and sell-sides, all of whom should be memorialized for reference during the five-year recapture period.

Diligence item Discussion
Seller Name of company, principal place of business
Guarantor Name of company, principal place of business, relationship to Seller
Offtaker Entity that purchases power from the Project
Seller counsel Name of company, POC
Tax credit insurance broker Name of company, POC
Tax credit insurer Name of company, POC

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Seller diligence

Diligence item Discussion
Organization chart Summary of Seller and related entities, including ownership percentages and federal tax treatment (e.g., partnership, C-corporation, disregarded entity, etc.).
Affiliate transactions Buyer should investigate whether fees included in the cost basis are from affiliate transactions. For example, the EPC fee may not be eligible for inclusion in the Project’s cost basis if the EPC is an affiliate of the Seller.
Organizational documents Corporate documentation of the project company (if applicable), Seller, and the guarantor (if applicable).
Financial statements [Audited] financial statements of the Seller and/or Guarantor, for purposes of understanding the financial strength of Seller and/or Guarantor and its ability to fulfill indemnification obligations. If the financial strength of Seller is in doubt (e.g., if the indemnity is not provided by a creditworthy guarantor), then Buyer or Seller can also procure tax credit insurance from an investment grade insurer.
Fiscal year end The Seller’s fiscal year end will impact the tax year in which the Buyer can take the credit.
Upstream ownership If Seller is not a widely held C-corporation, Buyer should perform diligence on whether Seller is subject to at risk rules of Section 49. Ensure that any project financing in place does not limit Seller’s ability to sell credits.
Tax return filing date Understand timing of when Seller intends to file. This may impact the timing of when a transaction needs to be closed (e.g., if Seller is planning to file taxes by April 15, Seller will want to close the transaction in advance of filing).
Legal actions Buyer will confirm that there is no ongoing or pending legal action or notice of legal action concerning the Project.

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Qualification

Buyer should validate that the Project qualifies for the §48 tax credit. Buyer should ensure that the Project qualifies as energy property, the proper cost basis is used, and that the Project was placed in service in the appropriate tax year.

Diligence item Discussion
Description of asset/project Brief overall description of the Project.
Begun construction date Begun construction date only needs to be investigated in certain situations, such as when the Project claims exemption from prevailing wage and apprenticeship requirements due to construction starting prior to January 29, 2023. If a certain “begun construction” date is claimed, Buyer should look for documentation on how safe harbors were met (e.g., 5% test or physical work test).
Placed in service date Buyer should validate when the Project was placed in service, to ensure that credits are applicable to the desired tax year. The IRS and various courts consider five tests to determine when a project was placed in service. The Seller should ideally provide evidence that all five tests are met: (1) the receipt of required licenses and permits; (2) the passage of control of the facility to the ultimate taxpayer; (3) the completion of critical tests; (4) the commencement of regular operations; and (5) the synchronization of the facility into a power grid for generating electricity to produce income.
Cost segregation study Buyer should ensure that the cost basis for purposes of calculating a §48 ITC is validated through a cost segregation study (and section 1060 analysis, if applicable) from a reputable accounting firm with energy project experience.
EPC/installation contracts documentation Buyer should review the Seller’s Equipment, Procurement, and Construction (EPC) contract(s). Buyer should validate that the primary EPC and the subcontractors are not related to the Seller, as fees charged by a related entity may not be valid for purposes of calculating cost basis for a §48 ITC. The EPC contract will also need to include representations and warranties around compliance and documentation with respect to prevailing wage and apprenticeship requirements for both employees and subcontractors if the Project is not exempt from PWA requirements.
Appraisal In certain cases, especially when there is a step-up in cost basis for purposes of calculating a §48 ITC, Buyer should ensure that an appraisal is performed by a qualified third-party valuation firm. Buyer should ensure that the Project’s cost basis falls within the range of the appraised fair market value (FMV) based on a reasonable analysis of cost, income, and market approaches to valuation. Buyer should request a copy of the appraisal and form reliance letter.
Transfer filing and registration Buyer should obtain a copy of transfer filing documentation with registration number(s) for the Project(s).

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Structure

Buyer should validate that Seller is an eligible transferor, and that the Seller’s underlying legal structure will be respected by the IRS.

Diligence item Discussion
Structure documentation Buyer should validate that the Seller is entitled to claim and to transfer the tax credits and that the Seller’s legal structure (e.g., sale leaseback, partnership) will be respected by the IRS. For example, a clean energy project company might be sold to a joint venture with ownership from an arms-length third party, to effectuate a “step-up” in the cost basis for purposes of calculating the §48 tax credit. Buyer should ensure that the Seller entity has sufficient equity ownership from an arms-length third party, and that the third party is a true equity owner (with both upside and downside risk). Buyer should also validate that the JV is eligible to claim and to transfer the tax credits. A legal firm can provide a memo on validity of structure.

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Recapture

To avoid recapture, a §48 ITC requires that (1) the property remains qualified energy property for five years and (2) there is no change in ownership of the property for five years. If a project fails to meet these requirements, the IRS will recapture the unvested portion of the ITC.

The ITC vests equally over a five-year period, meaning 20% of the total ITCs claimed will vest on each anniversary of Project’s placed in service date.

Qualified energy facility

A property can cease to be qualified energy property when an asset is disposed of, or otherwise ceases to be investment credit property to the eligible taxpayer during the recapture period. For example, the asset is:

  • Destroyed and not rebuilt and placed back in service
  • Abandoned
  • Repurposed to sell something other than electricity derived from the qualified generation asset

Key risk mitigation measures include sufficient property and casualty insurance, adequate site control and interconnection rights, and identification of alternatives in the event of an Offtaker default.

Diligence item Discussion
Site control documentation Buyer should validate that the Project has an unencumbered right to operate on the site during the five-year recapture period. If the site is leased, a recorded lease with title insurance may improve Buyer comfort that the site is secure. If the Project cannot be moved, Buyer should also confirm there are no environmental issues on the site that could materially impact Project operations. Environmental issues are typically flagged in a Phase I environmental site assessment report with a map and/or description of any Recognized Environmental Condition located on the site.
Interconnection documentation Buyer should confirm that the Project has approval for interconnection during the five-year recapture period.
O&M contracts documentation §48 ITCs are subject to recapture if the project is placed out of service during the five-year recapture period. Buyer should review the O&M contract to ensure that the Project will be adequately maintained. The O&M contract will also need to include covenants around compliance and documentation with respect to prevailing wage and apprenticeship requirements unless the Project is exempt from prevailing wage and apprenticeship requirements.
Property and casualty insurance Buyer should validate that Property and Casualty insurance is in place, and that coverage is high enough for the Seller to rebuild the Project in the event of a P&C event. If the Project is taken out of service due to a P&C event, the §48 ITC may be subject to recapture.
Offtake/revenue contract As §48 ITCs are subject to recapture if the Project is placed out of service during the five-year recapture period, Buyer should validate that the Project will earn sufficient revenues during the recapture period to continue operating. If electricity is being sold on a merchant basis, Buyer should validate that the Project has the ability to sell electricity to the grid. If electricity is sold to a separate power purchaser, Buyer should review the Seller’s power purchase agreement or similar contract, diligence the ability of the power purchaser to fulfill contractual obligations and understand alternative revenue sources if the power purchaser is unable to pay.

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Change in ownership

A change in ownership can occur if the project owner transfers its ownership of the facility during the five-year recapture period. If a lender has a collateral interest in the project company, a foreclosure can trigger recapture due to change in ownership.

Key risk mitigation measures include a forbearance agreement with lenders, structuring the debt in a way that foreclosure will not trigger a recapture, and indemnification from the seller.

Diligence item Discussion
Project financing documentation Buyer should confirm there is no tax-exempt financing for the Project. Buyer should also confirm if there is any financing agreement where such lenders or other financing parties have collateral security in the Project or in any intermediate holding company between the project company and Seller. If a change in ownership is triggered by a foreclosure during the recapture period, the unvested portion of the §48 ITC will be subject to recapture. Ideally, debt should be structured in a way that a foreclosure will not result in a recapture, or a forbearance agreement should be in place with lenders.

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Prevailing wage and apprenticeship requirements

Buyer should validate that the Project is exempt from, or compliant with, prevailing wage and apprenticeship requirements. Prevailing wage rules require that certain workers are paid a minimum prevailing wages specified by the U.S. Department of Labor during the construction of a facility or property, and during alteration or repair of a facility or property for a certain number of years after the project is placed in service.

Buyers should require proper documentation that the correct wage was paid.

Exempt from PWA
Diligence item Discussion
Prevailing wage and apprenticeship Project is exempt from PWA requirements under two scenarios:
  • Project began construction prior to January 29, 2023. Buyer should look for documentation on how safe harbors were met (e.g., 5% test or physical work test)
  • Project’s maximum net output is less than one megawatt (as measured in alternating current) or the capacity of electrical or equivalent thermal storage is less than one megawatt (as measured in alternating current). Buyer should validate size of Project through audit of contracts

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Compliant with PWA
Diligence item Discussion
Prevailing wage and apprenticeship If Project requires compliance with PWA, Buyer should validate that proper documentation was collected, including payroll records for each laborer and mechanic (including each qualified apprentice) employed by the taxpayer, contractor, or subcontractor employed. Buyer should review the representations and warranties in the contract with the primary EPC (and potentially with their subcontractors) to validate that all parties will comply with PWA requirements.

The IRS also recommends collecting additional documentation, which are listed in proposed regulations §1.45-12(b) and (c) and can be requested by Buyer to further validate PWA documentation practices.

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Bonus credits

If a Project claims a bonus credit adder (domestic content, low-income community, or energy community), the Buyer should substantiate that the Project qualifies for the relevant bonus credit adder.

Domestic content
Diligence item Discussion
Domestic content If Project claims the domestic content bonus adder, Buyer should verify supporting cost analysis from a third-party engineer, and/or supporting documentation from legal counsel.

If the Seller utilized the domestic content safe harbor under IRS Notice 2024-41, Buyer will want to validate the developer’s safe harbor calculations, collect documentation confirming the sourcing of components and sub-components included in the calculations, and view the developer’s safe harbor certification. In many cases, a legal memorandum may be prepared by seller counsel to analyze and confirm compliance with domestic content requirements.

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Energy community
Diligence item Discussion
Energy community If Project claims the energy community bonus adder, Buyer should verify documentation that Project is located in the “Brownfield Category, the Statistical Area Category, or the Coal Closure Category” as described in IRS Notice 2024-30.

For §48 and §48E ITCs, eligibility for the energy community bonus credit is determined on the date that the Project is placed in service, and in the event the Project is only partially located in an energy community, the following guidance applies:
  • A project qualifies for the energy community bonus if at least half (50%) of its nameplate capacity is in an energy community. According to the IRS, nameplate capacity is the DC capacity that the project is capable of producing on a steady-state basis during continuous operation under standard conditions
  • If a project does not have a nameplate capacity, it can qualify for the energy community bonus under the “footprint test.” If 50% or more of the project’s square footage is located in an energy community, then the project qualifies for the bonus. The percentage is determined by dividing the square footage of the project that is located in the energy community by the total square footage of the project

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Low-income community
Diligence item Discussion
Low-income community If the Project claims the low-income community bonus adder, Buyer should verify that the Project received an acceptance/allocation notice from the IRS as well as confirmation that the project was placed in service within a statutorily set four-year period.

To validate that the project was properly placed in service, the developer must provide documentation and make attestations in the DOE low-income community application portal.

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Tax credit insurance

If a Seller is unable to offer an indemnity from a creditworthy guarantor, tax credit insurance is commonly purchased to provide additional risk mitigation in the event of a disallowance or recapture of credits.

There is a robust market for tax credit insurance, which has been utilized on tax equity transactions for over a decade. Tax Credit Insurance Brokers can help place insurance with a wide selection of investment-grade insurance carriers.

Diligence item Discussion
Tax credit insurance Buyer should validate that tax credit insurance covers desired risks, which potentially include:
  • Qualification, recapture, and structure risk
  • Representations and warranties
  • Prevailing wage and apprenticeship compliance or exemption
  • Bonus credit adders
Buyer should confirm that the insurance policy is adequately sized to cover potential damages, including lost credits, tax gross-up, penalties, interest, and contest costs in the event of a disallowance or recapture of credits.

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Download Reunion's Section 48 ITC due diligence guide

To download Reunion's Section 48 due diligence guide in PDF format, please visit our resources page.

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