Treasury Opens Door for Fund Grants
A U.S. Treasury Department ruling could create a market for funds that would back renewable-power projects using capital from wealthy individuals.
While there’s no word of specific vehicles in the works, Phil Spector, a New York-based partner at law firm Troutman Sanders, believes they will start hitting the market soon. His colleagues plan to discuss that prediction at Infocast’s three-day Solar Power Finance & Investment Summit 2010, which kicked off March 17 at the Rancho Bernardo Inn Resort in San Diego.
Two factors are at play: A January adjustment to “passiveloss” rules that limit the amounts of income individuals can shelter from taxes, and grants made available for renewable-power projects under the government’s 2009 economic-stimulus act.
Under previous passive-loss rules, investors in renewable-power projects could only claim related tax credits or grants against those projects or similar holdings — typically direct backing of energy facilities. Because those types of deals typically lose money early on, and individuals don’t have other sources of passive income, the credits and grants wouldn’t kick in for years. The result was that they proved unpopular.
Now, however, Treasury is allowing individuals to claim renewable-power credits against non-passive income right away. The upshot is an opportunity for managers to create renewable-power vehicles that would raise money from those people while getting back 30% of the cost of their underlying facilities in the form of stimulus money. “The relaxation of the rule means that high net-worth individuals can invest in these projects . . . as the Treasury grant is an immediate cash return,” Spector said.
Why funds? They offer more diversity and exit options than direct backing of projects. The key is that the individuals involved would all be taxable, making the vehicles eligible for stimulus grants. Managers wouldn’t be able to claim the grants by tapping more traditional limited partners such as pension systems or endowments, as those parties are non-taxable.
Rather than announcing the Treasury’s switch, the government made only passing mention of its new stance in a broader report from the Department of Energy’s Environmental Energy Technologies Division. For that reason, market players are only now taking notice.
But sources say the Treasury has confirmed the policy, saying passive-loss rules shouldn’t limit individuals’ access to renewable-power grants. Those payments were originally structured as tax credits, and were claimed mainly by banks that were lending against big projects. But as the global credit crisis took hold, financial institutions found themselves lacking income to offset. The credits were then replaced with grants in the stimulus act, in an effort to entice continued investments.
The Treasury granted $2 billion through the program in 2009. While there’s no specific limit on funding, eligible projects must be under way by yearend 2010 — so the window of opportunity for fund managers could be brief.
– March 17, 2010, Private Equity Insider, www.peinsider.com
