Flip Partnerships: A Tax Advantaged Renewable Energy Investment Structure

Green energy is having its moment. Electric cars now represent 15% of all passenger vehicles on the road. Almost half of all new homes in the United States have solar panels. And Congress has decided to go all in to incentivize investment in renewable resources. As a result of that new focus in Washington, investing in renewable energy projects has become increasingly attractive for investors — both socially and, as a result of government incentives and smart legal structuring, financially. We’ve explained one such legal structure — the Investment Tax Credit program that was part of the 2022 Inflation Reduction Act (IRA). Here, we’ll explore an extension of that strategy and an opportunity for investors to multiply their tax benefits and significantly increase their returns: The solar flip partnership.

What is a flip partnership?

A flip partnership is a version of the IRA’s qualified solar investments — a partnership structure that allows investors to receive a greater share of the tax credits and depreciation associated with a specific project. The key mechanism is that by borrowing, the investor can increase the amount of cash in the project and, as a result, the tax credits and depreciation available.

How do flip partnerships work?

The partnership is typically structured with three partners: a sponsor (the developer), an investor (you) and a bank that provides a loan. The sponsor partner is responsible for developing and operating the renewable energy project, the investor partner provides funding for the project, and the bank provides debt financing that increases the total investment in the project and the tax credits and depreciation available to you.

The flip partnership structure works by allocating most of the tax credits and depreciation — typically 99% of the tax benefits — to the investor partner in the early years of the project’s life. This can be particularly advantageous for the investor, as they can use these tax benefits to offset their taxable income. In return for these supercharged up-front tax benefits, the sponsor partner receives the majority of the cash flow from the project over its lifetime.

Who is this for?

Due to the rules regarding leveraged solar investments, the investor has access to uncapped tax credits and depreciation. Accordingly, flip partnership solar investments are for individuals and families aiming to offset more than $600,000 in income taxes. In addition, due to active-investor requirements, interested parties have to be willing to spend 100+ hours on the project (via site visits, continuing education, and the like).

The numbers

Let’s take a look at an example. Imagine the following allocation of cash invested in a qualified solar project:

• $10 million from the investor
• $5 million from the sponsor partner
• $15 million in loans from the banking partner.

In a traditional solar partnership structure, the tax benefits and revenue would be split between the two equity partners according to their investment. So if the investor put in $10 million and the sponsor $5 million, the investor would receive two-thirds of the tax benefits and revenue stream.

In a flip partnership structure, by contrast, those benefits are allocated almost exclusively to the investor partner in the early years of the project’s life and, in exchange, the sponsor takes the revenue stream in later years. The typical schedule is the following:

• 99% of the benefits go to the investor for the first five years
• 1% to the sponsor for the first five years
• 100% of the revenue to the sponsor for the remaining life of the project

The Financial Returns from a Solar Flip Partnership

This arrangement takes advantage of the particular structure of these projects’ tax benefits to supercharge the returns for the investor. Specifically, because the tax benefits are front loaded — virtually 100% of the credits and depreciation are used up in the first five years — virtually 100% of those benefits accrue to the investor. For example, using the schedule outlined above, the investor partner would receive 99% of the tax benefits for the entire $30 million dollar project.This would mean credits and depreciation against $29.97 million of the solar investment, even though the investor only committed $10 million. The result would be more than $15 million of tax savings, or more than 150% of the initial $10 million investment.

The sponsor and the banking partner receive almost all of the projects income upfront and have a right to buy the investor out after 5 years. But that’s a small price to pay for total tax benefits that are multiples of the initial investment.

The Risks

There are two main tradeoffs — one risk and one constraint — associated with the solar flip partnership:

• Recourse Debt: If the project fails — that is, if the buyer of the solar power fails to pay — the debt is “recourse,” which means that the lender would have a cause of action against the investor’s personal assets to recover the value of the loan. Fortunately, there are three entities ahead of you in line — three entities that would be on the hook for payments before the bank could seek a penny from you. First, the debt holder would look to the income stream from the energy generated by the solar project; second, they would seek to repossess the solar panels themselves; third, they would target the developer; and then, finally, if the banker had not yet been made whole, they could come to you. (In other words, this is a very low risk in practice.)
• Higher Minimums: For those seeking basic (un-leveraged) solar infrastructure credits, the current minimum investment to work with Valur’s partner investment funds is $135,000. The minimum for the flip partnership is higher, at $350,000.

Conclusion

Flip partnerships can be an attractive option for investors looking to invest in renewable energy projects. With same tax benefits as ordinary solar investments, but uncapped, investors can potentially see a higher return on their investment while contributing to a cleaner and more sustainable future.

Next Steps

If you are interested in learning more,schedule a time to chat with our team.

Related Readings

• Exploring Solar Investments in 2023
• Case Study: Financial Benefits of Solar Investments (2023)
• Solar Flip Partnership: An Advanced Renewable Energy Strategy

About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard to access tax advantaged structures so you can build your wealth more efficiently at less than half the cos of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers.