Simplifying Solar Project Purchases

Last Updated on August 16, 2023

Are you looking to invest in solar energy for the tax benefits but overwhelmed by the jargon and complexity? In this guide, we will break down two popular solar project structures: sale-leasebacks and flip partnerships. 

Before we move on to explain each structure, it is useful to understand the two key tax benefits we get from buying solar project: tax credits and depreciation. In summary, tax credits are a dollar-for-dollar reduction in the amount of taxes you owe. The Government lets you deduct a certain percentage of solar project purchase costs from your taxes. Depreciation, instead, refers to the amount of value that a physical asset loses over time. From a tax standpoint, depreciation is relevant because you can take a deduction for some or all of the amount of the value an asset loses over time, reducing your taxable income and saving money on your taxes. You can read more about both tax benefits here.

We will now explain how each structure works and their financial benefits, risks, and comparisons to help you make an informed decision. 

So let’s get started! 

What is a Solar Sale-Leaseback?

A sale-leaseback is a financial arrangement in which a solar project developer sells a solar system to an investor and then leases it back from the investor. This way, the investor benefits from tax incentives and a steady income stream from the project with minimal overhead, and the developer operates, maintains the system and is able to take the risk and make a profit based on the spread between the price they sell the electricity and what they pay you.

What are the Financial Benefits?

• Tax incentives: The investor can claim federal tax credits like the Investment Tax Credit (ITC) and accelerated depreciation, which can significantly offset the system’s investment cost (typically these tax savings range between 70-85% of the projects investment)
• Stable income: The developer makes regular lease payments to the investor, providing a predictable return on investment.

What are the Risks?

• Credit risk: If the developer defaults on the lease payments, the investor may have to find another operator.

Sales Leaseback Example

A solar developer sells a $500,000 solar system to an investor and leases it back for 20 years at a rate of $25,000/year (5% of the investment). The investor can claim a up to 40% federal investment tax credit ($200,000) in the first year and accelerated depreciation that will reduce their tax liability by another $209,500, primarily in their first year. The lease payments generate an additional $500,000 over 20 years. As a result, after investing just $90,500 (because $409,500 of the $500,000 investment comes back in the form of up-front tax savings), he/she can make up to $500,000 over 20 years! That’s a 550% return!

Check out our in depth case study and calculate the potential returns with our solar calculator.

Year-by-Year Tax Savings

What is a Flip Partnership?

In a flip partnership, a solar project developer and an investor form a partnership to finance and develop a solar project. The investor provides initial capital and a 3rd party banking partner adds additional capital via debt. Critically, the investor receives almost all of the tax benefits, plus cash distributions in the initial years, calculated on the total invested (including the bank’s contribution). After a predetermined period (usually 5 years), the partnership “flips,” and the developer takes the majority stake (typically 95% of the project) — capturing future revenue — while the investor takes a minority stake or gets completely bought out. It’s important to note that even if the investor bows out after the predetermined period, they will keep all of the tax benefits and revenue already earned.

What are the Financial Benefits?

• Tax benefits: The investor enjoys the majority of the tax credits, such as the ITC and accelerated depreciation, against the whole value of the project and can earn more in tax savings than what they invest.
• Risk sharing: The developer and investor share the project risks, reducing the exposure for each party.

What are the Risks?

• Debt: While there is debt on the project that has to be paid down, there is minimal risk to the investor for two reasons: debt partners limit the debt on these projects to what the projects can cover and solar systems revenues are fairly predictable based on historical performance.
• Liability: In case the debt can’t be covered, the risk to you is extremely low because the bank would previously pursue:
  1. The revenues from the project
  2. The solar system assets (panels etc.)
  3. The developer
  4. Your LLC (critically you invest from an LLC to limit your liability)

Flip Partnership Example:

A developer and an investor form a flip partnership for a $1 million solar project. The investor contributes 40% of the capital or $400,000, the developer contributes 10% and the bank loan is 50%.The partnership allocates up to 99% of the tax benefits and cash distributions to the investor in the first six years.

After that, the partnership flips, and the developer receives 95% of the cash distributions. In total, the investor receives tax benefits worth up to $700,000 on a $400,000 investment and cash distributions totaling $50,000 in the first six years. After the flip, the investor receives a smaller share of the cash distributions but has already recouped their initial investment and profited from the tax benefits. Check out our in depth case study, and you can calculate the returns with our solar calculator.

Comparing the structures

Each of these solar financing structures has its unique advantages and risks. Sale-leasebacks allow investors to claim significant tax benefits and receive a stable income (higher cash flow). Flip partnerships, meanwhile, typically have the highest financial returns, almost entirely due to the leveraged tax benefits, but offer minimal cash flow.

Conclusion

Choosing the right solar financing structure depends on your individual financial goals, risk tolerance, and available capital. By understanding the mechanics, benefits, and risks of sale-leasebacks and flip partnerships, you can make an informed decision and invest in the rapidly growing solar industry. If you have any accounting questions, we have put together an overview of the most common technical doubts accountants have for us and you can read them here.

So, how can you go about purchasing qualified projects? It’s relatively simple: Valur has partnered with nationally recognized accounting and investment firms to facilitate investments into solar projects. We will help you identify the opportunity and choose between different solar projects, visualize the potential benefits, and calculate how much you need to invest to capture the right sized tax credits. From there, we and our partners will help you seamlessly finalize your investment and keep track of the relevant data for ongoing tax purposes. 

To learn more you can schedule a call with us here.

Related Readings

• Exploring Solar Project Purchases in 2023
• Case Study: Solar Flip Partnership
• Constraints of Solar Asset Purchases

About Valur

We’ve built a platform to give everyone access to the tax and wealth building tools typically reserved for wealthy individuals with a team of accountants and lawyers. 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 cost of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $1.1 billion in additional wealth for our customers.

If you would like to learn more, please feel free to explore our Learning Center, check out your potential tax savings with our online calculators, or schedule a time to chat with us!