Paying Solar Incentives Direct to Nonprofits — Episode 213 of Local Energy Rules

Jeremy Kalin:

In the past, the tension between climate investment and real wealth building at the community scale has been like two fully loaded locomotives pulling in opposite directions on the train, and now we’ve got both of them pushed in the same direction. Specifically, I mean it’s like ILSR and the energy democracy work that you’ve been doing. This is what we want to see happen and the time is now. So till 2032 is the timeframe of the inflation reduction act unless it’s extended ultimately. So please jump on that train and let’s keep driving.

John Farrell:

Until 2022, rules for tapping federal tax incentives for renewable energy like solar or wind basically made wealthy people wealthier. With the passage of the Inflation Reduction Act in 2022, major changes were made including a key provision called direct pay. In May, 2024, I was joined by Jeremy Kalin, a potter, lawyer, and self-described recovering politician and the co-lead of the impact council practice at Avisen Legal. He and I did a deep dive on direct pay and how it unlocks opportunities to capture the financial benefits of clean energy for previously ineligible organizations, from cities to counties to nonprofits. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance, and this is Local Energy Rules, a podcast about monopoly power, energy democracy, and how communities can take charge to transform the energy system. Jeremy, welcome to Local Energy Rules.

Jeremy Kalin:

Hey, great to be with you John, and thanks so much for doing this podcast broadly. I know that I hear all the time from folks out in the ecosystem and doing energy policy work, energy investment work, trying to find new ways to benefit communities in the clean energy economy or the energy economy writ large, how much they rely on and appreciate what you do, what Institute for Local Self-Reliance does and this podcast specifically, so glad to be here and I was just trying to remember, I think it’s been more than 20 years since you and I met.

John Farrell:

I think that might be right way back in the, you were running for office days and I thought I knew a little bit about getting out the vote, but I’ll just say this, you clearly are still very generous and you suck up better than any other podcast guest in terms of being so kind about it when you come on here. So I appreciate that very much.

Jeremy Kalin:

Well, you can take the man out of politics, but can you take the politics and the suck up out of the man? Probably not.

John Farrell:

Well, it’s great that we kind of got to start off by giving people a little glimpse into your past and my past and your state as a recovering politician because one of the things I wanted to ask you to start off with is how did you end up in this position of providing tax advice to nonprofits who are trying to develop clean energy? Is it just that you enjoy doing hard things?

Jeremy Kalin:

I guess I was actually shown from an early age of my adulthood at least, that doing the right thing may not always be easy path, but was lucky enough to be part of a group actually working on community development and community advocacy in the energy space. I don’t know how often we’ve talked about this, John, that I cut my teeth in community engagement while I was a country potter. Like most lawyers, I have a bachelor of fine arts in ceramics, and I made my living in my twenties as a potter out in Chisago County about an hour’s drive northeast of Minneapolis. And my dear friends who actually ended up being in my wedding party were served notice that they were going to have their property taken by eminent domain for a 230,000 volt power line. That, long story short, the Chisago project was ultimately rejected because we proved that it was the wrong electrical solution and was just going to be built to export power from Manitoba Hydro through our region to the Indiana, Ohio market at the time.

So we got to see what the power of communities can be in dictating our energy future or at least shaping it. So that was hard thing number one, because people told us you never win these fights. You got to fight ’em, but you never win these fights. In fact, Senator Paul Wellstone wrote a book called Powerline in the seventies or early eighties about their losing fight out in western Minnesota that he helped take on and everyone’s like, yeah, you got to do it, but we just got lucky. And we proved from a pragmatic standpoint that again, like I said, it was not the solution that was going to increase reliability and strengthen the local grid. And so I had that kind of general awareness of the interaction between our energy investments and on the ground relationships and impact on individuals lives and also how to build a coalition.

They were from very, very liberal tree hugging activists concerned about mercury from power plants, which is absolutely real, to the most conservative farmers who were likely part of the Tea Party movement and maybe even further right, all came together around this communitarian ethic of just doing the right thing. So I had that knowledge, realized that being alone in the studio is kind of depressing for me as a social introvert – too heavy emphasis on the introvert part. So I went to architecture school, left the Midwest on purpose, 9/11 happened the first month of school when I was down in Albuquerque, and that really sparked this next scale conversation with others and for myself around purpose in the world and purpose of community development and community design, particularly in a political economy that’s a geopolitical economy, global. And so after Paul Wellstone’s untimely death with his wife and daughter and others in late 2002, I thought that I would come home, be some main street little preservation architect or something like that and serve on the city council in my forties or fifties once you’re an old fart like you and me now and get back to the community that, and it just sort of accelerated that timeline.

Plus I realized the scale I wanted to work was the scale of policy rather than individual buildings. So came back home, ran for the legislature, we lost that first race in 2004, but won in 2006 and got to apply all of my hard won knowledge on the ground around green building and whatever. And I hardly knew anything in the architecture and engineering world, but knew more than 200 other legislators because that’s kind of how a citizen legislature works. So got to do crazy stuff on the policies front and then really started recognizing that other regions had a greater emphasis on clean energy economic development. And so we were the second in the country behind California. In fact, we had actually passed a more aggressive version of global warming mitigation act, I mean renewable electricity standards in 2007, but we didn’t have the economic development to come with it, and as soon as you start looking at economic development, you’re looking at finance and access to capital and who wins and who loses. So it’s been a gosh 17, 18 year journey into the depths of finance and capital deployment and capital mobilization, and that’s really what continues to drive me is how do we get capital moving most efficiently for the benefit of communities, not just those who have access to capital and have the wealth and they say it takes money to make money, and if you have a lot of money, you can often be the first to enter into a market and kind of dictate that. And I’d like to flip that on its head.

John Farrell:

That’s great and I really appreciate you, I didn’t know some of your origin story there either, which was fun to get as part of this, but kind of your long interest in and seeing that from a legislator’s perspective, like passing good policy, but then wanting to see those economic outcomes and then realizing that you had to be deliberate about it, which gives I think a good segue here to us talking about policy and economic impact for the Inflation Reduction Act, which was the federal policy passed in 2022 and it attempts here to address a problem that has plagued clean energy investment for decades. Can you maybe just explain a little bit for folks what is the problem that it’s solving? I just want to note that in the article that you wrote about this, you had a nice phrase, which was before the inflation reduction act, the effect of the clean energy tax credit and the investment tax credit really was that we were making wealthy people wealthier. So how did this policy change help to address that issue?

Jeremy Kalin:

Well, of course, before you talk about a change, you got to talk about what it was before the change. And so they got to do some cool things in the legislature just to help to put some barter boards to the foundation of this conversation. So in 2007, I was really focused on energy efficiency, so I got to work with Senator Scott Dibble and Chair Bill Hilty and Ellen Anderson and Yvonne Prettner Solon in the Senate on the energy efficiency and conservation side of things. And then soon after started looking on the generation side and was author of a single paragraph provision that became the first solar incentive in Minnesota, neither 2009 or 10, the Solar Rewards program. And at the time there were 600 kilowatts installed when we passed that bill across the entire state of Minnesota, generously 2,000 panels. Now there’s probably, I don’t think I’m overstating that there’s at least 2 billion panels installed in the state, so a million times growth, that’s ridiculous.

I’m just going to stop myself there from blowing my own brain around that. That’s wild. And then because of a number of things including getting elected as a progressive pragmatist, wrap your brain around that one, in a very conservative district, I got to work for the White House as the state legislative lead of the climate and energy team back in 2009, 10, 11 when there were hopes of the Senate actually getting the 60 votes needed at the time to pass a federal climate bill that the house had already passed. Well, through that investigation into finance and capital structures, of course, the 2005 Energy Policy Act really expanded the traditional investment tax credit to include a number of items including solar. So we’re just going to focus on solar for this conversation if that’s okay. Make it easy to talk about the technology side. So in general, the standard investment tax credit, while there’s been a solar coaster, a roller coaster of when it’s sunsetted and been extended several times since, but in general, a million dollar solar project was eligible for a 30% investment tax credit under section 48 of the code.

So these are commercial projects, not residential projects, so that’s a $300,000 credit. As the solar world started taking off in 2009, 10, 11, the question became who’s eligible to monetize that credit because it has been, before the Inflation Reduction Act, a non-refundable and non-transferable credit, and almost every tax credit in the world is not transferable, but it’s the non-refundable part that becomes trouble. And because the traditional investment structure is what’s called a partnership flip where a limited partner is taking the tax credit, so they’re investing into the solar project entity, the LLC that owns the solar project, and then a general partner, let’s say Ferrell Kalin Solar Development would own and operate the system. We would be the managing partner or the general partner of that project, and then some remote, let’s just pick on Goldman Sachs, I’m not going to pick on them, but let’s pick Goldman Sachs as a tax credit investor as an example. They would own 99% of the project title of the membership of that partnership, and they would then get 99% of that tax credit value. So that $300,000 of tax credit plus a bunch of depreciation deductions, et cetera. But let’s just focus on the, well, because they’re a remote party that’s not actively engaged in the business. They’re a passive partner, a passive investor, therefore they’re subject to what’s called the passive loss rule, and it’s under section 469 of the tax code if anyone wants to look it up and then quickly go to sleep thereafter.

John Farrell:

Thanks for the invitation

Jeremy Kalin:

I guess I’m a lawyer because I use terms like thereafter, but the effect means that you either have to have a bunch of passive income because you and I couldn’t, even though this is my day-to-day world as it is yours. Neither you and I are exempt from this limitation from this rule, and we can’t offset our W2 sort of active ordinary income. So if we were to invest in someone else’s solar project to buy the tax credit, we, I mean we could, but we can’t get the credits, so I would not advise you to do so. So it is wealthy real estate investors with either lots of passive income or who have lobbied over the years to get this real estate professional exemption, which also the other exemption that’s big is corporations. So like banks that are structured as C corporations or publicly traded companies like Walmart, Apple, Google, that’s why you see Berkshire Hathaway, Apple, Google, et cetera, being the big investors in tax credits is because they don’t need to worry about the passive loss rule.

But if you own lots of real estate and make billions of dollars and get lots of rents, you can offset all of that income and bring your federal tax bill down to zero before the inflation reduction. So that’s what we mean when we say that the tax credit was making wealthy people wealthier because it was not available for community members just to buy in and offset their ordinary income. And I tried 10 ways till Sunday over the course of more than 10 years to try to bust open this potential investment, and it’s really, really, really difficult. There are ways to sidestep it, but they have to be very big projects and you have to be willing to do the work, both put in the hours yourself and to pay a lawyer to get clever about how to do so, again, who has the money to do that and can take the risk? Somebody who’s got the means. That’s what I mean, what happened before the Inflation Reduction. So should we talk about what changed?

John Farrell:

Yeah, I just think it’s really helpful to emphasize, right, the kinds of people who could take advantage, as you said, wealthy real estate investors, C corporations, notably not on that list would be things like places of worship, nonprofit organizations, cities, all of them unable to get into that game because they don’t have that kind of tax, they don’t have a tax burden at all potentially, or they just don’t have the right kind of taxable income. So you also can’t even do crowd financing, which is another thing that came up under Obama that was kind of interesting, but it was again complicated to access the tax credit. So anyway, I don’t want to get into crowd financing, that’s a totally different subject, but just to say most ordinary folks were not going to get into this game. So what did the IRA do that changed things?

Jeremy Kalin:

It was interesting because let’s go back a decade first, because when I was in office and then working for the White House, Congress had just passed the American Recovery and Reinvestment Act, ARRA, the stimulus bill as we called it back then, that included a provision section 1603 of that bill that was a grant in lieu of credit program that for, I think it was through the end of 2012, don’t hold me to that sunset date, but I think that was right that a project entity could apply to the Department of Energy for a grant instead of the investment tax credit. So we actually had this data set and I think John, you might’ve even done a little bit of work a looking at the impact. I was doing projects and you were doing the policy analysis I think at the time where it was just really obvious that if you could take a few hours to get that credit through as a check rather than selling the credit and giving preferred returns, 10 to 20% to Goldman Sachs, again, we’ll just pick them as a stocking org here because they’re a well-known tax credit investor.

Any tax credit investor needs to get returns for their investors. That’s what they do. But if you could just get the grant, it’s less overhead, less administrative costs, and you don’t have to give someone else the return and you can get the cash when you place the product in service. Right?

John Farrell:

For people who want to go back to the archives of this podcast, we have some interviews with some of the great community wind projects that were developed taking advantage of that cash grant. There was one Green Energy Farmers in Western Iowa. There was one called South Dakota Wind Partners. Not as much solar then because of solar was still relatively more expensive, but some really innovative, exciting things. And then it closed.

Jeremy Kalin:

Right? And one reason that it closed is it was a grant, right? It was a federal appropriation, and this is really interesting of what happened in the inflation reduction. I was just chatting with a colleague about talking to some farmers about reducing their carbon intensity for their enterprises and potentially becoming sellers of carbon credits and just reminding them that the Inflation Reduction Act is the largest climate investment and climate legislation passed by any legislative body anywhere in the world in history. It was originally scored at around 550 billion with three quarters of that going, not direct appropriations, but 345 billion going to the Department of Treasury because it used the tax code. This was easily the most important energy change to the tax code since the 1986 big Tax Reform Act, and I think it’s actually the most important revision of any sort since 1986. It is so important, actually, I know we’re not doing a video of the podcast, but I’m holding up the Nerd Bible, which is the complete internal revenue code updated to reflect the inflation reduction act.

John Farrell:

I just want to note for people who can’t see it, that the tax code booklet that he held up, booklet, sorry, is not the right way to put it, is about the size of three combined dictionaries if you’ve ever seen a paper dictionary and it’s probably bigger than his head and the video, so it’s giant.

Jeremy Kalin:

I’m Jewish, so I’m mostly familiar with Bibles that have only the Old Testament, but certainly have handled many Bibles with the New Testament as well, and it’s the same thin paper, the same tiny font and two or three times as long when you include both the Old Testament and the New Testament. So it’s the tax bible, so huge use of the tax code and because it’s not an appropriation, but it’s an open item in the tax code that it’s largely a blank check through the expansion of tax credits of energy technologies and different tax credits, so not just the investment tax credit, but the carbon reduction credit, the clean energy manufacturing credit, et cetera. What the two interesting things related to this conversation that Congress included and Minnesota’s Senator Tina Smith really pushed hard for these two provisions. One is you can now sell the tax credit through section 64 18, but sadly that sale is still subject to that passive loss limitation.

So while some of us had hopes that indeed you could sell it to a much broader audience, we really haven’t changed the for-profit pool of potential investors, but just as you said, nonprofits and tax exempt entities like cities and counties and tribes now don’t need to worry about finding a tax equity investor, a tax credit investor to buy the credit and they don’t need to give them extra returns. Instead, they can take advantage of this direct pay. It’s technically known as elective payment under section 64 17. So I am a tax credit lawyer, so I will use 64 17 for the next few minutes here and I apologize, but just in your head, every time you hear 64 17 think elective payment, which is actually what we all call, what we think of as direct pay.

John Farrell:

Just before you move on, the section 64 18 about selling the tax credit, is that what I, is also known as transferability that I’ve heard?

Jeremy Kalin:

That’s exactly what it is. In fact, I’m going to look in the Bible just because I have to do it start on a deal later today. Transfer of certain credits is what 64 18 is called. So yes, the transferability, which can help a little bit, but the elective payment is the only true blank check for climate investment in the Inflation Reduction Act. And obviously we want to continue past this election and beyond to avoid that political uncertainty, but for the moment, and I think it will survive going forward. Churches, cities, counties, nonprofit organizations, 501c3s, any of the 501c tax exempt entities, actually rural electric cooperative utilities, tribes, tribal enterprises, anyone who is on the list of tax exempt entities can own the energy project, so could own a solar system for at least the five years of the recapture period of the tax credit and get that 30% credit. There is no size limitation. There are some requirements going forward to meet things like the domestic content requirement and other pieces that could affect and pay prevailing wage for larger projects. But in general, if a tax exempt entity owns a project, let’s say it’s a million dollar cost basis solar project, you could directly get that $300,000 credit.

John Farrell:

We probably won’t be able to do the 10 year look back on every question that I ask here if we want to get done in a reasonable amount of time, although I really appreciate the history there, but you’ve thankfully jumped into my next question, which is you’ve kind of answered already, how does the Inflation Reduction Act solve the problem of the tax credit and who it solves it for? Could you maybe talk about just some of the promising opportunities that you see out there in your article for Avisen? You talk about, for example, municipal wastewater treatment plants are now able to invest in renewable energy and get tax credit. What are some of the other things that you’ve seen?

Jeremy Kalin:

Well, I’ll just put a tiny little plug in here. I guess, can you use the word plug when talking about wastewater treatment plants? But methane is such a powerful and potent greenhouse gas and methane digestion is so easily incorporated into the thousands, and I actually don’t know the number, but I imagine that it’s thousands of wastewater treatment plants around the country that can capture, digest that methane and either use it for their own purpose of combined heat and power or can actually displace fossil gas using the existing natural gas pipeline and not building any more infrastructure or creating any new customers. I know that’s a concern for some of the environ movement, but this is essential. Wastewater treatment plant operations is an essential part of a civilized and sanitary society, and methane is what we produce as humans and animals. So you can easily capture that methane under the biogas property definition in section 48 of the investment tax credit and reduce your budget 30% because you can just get a direct payment from the IRS within 18 to 24 months after you place the project in service and it’s active.

So there are projects that are being completed now that might have a $30 million budget that all of a sudden have a $9 million credit that’s going to come back to that city. And we’re, cities to think very carefully about not just having that get dumped into a general fund or an enterprise fund, co-mingled at everything else, but to say, hey, this is a federal investment in your carbon reduction plan for your community. So share the benefits, but don’t let it all go into unrestricted accounts and recycle that, invest in new projects that can be eligible. The other space that I’m really excited about, and this is probably 70 to 90% of my workload, is I’ve even done this before, the inflation reduction act, where for many clients we had to set up for profit subsidiary entities or for-profit cooperatives that could own the solar system because you need a for-profit entity in order to have an investment.

The tax credit, well now we’re actually seeing it go the other way, which is we need nonprofits who can own and operate solar systems that have community benefit, whether they’re community solar gardens, whether they’re rooftop projects on affordable housing entities that might even get a 20% bonus to get the 50% credit, and boatloads of my time and work are in the low and modern income residential solar world where you don’t force homeowner to come up with all the cash and the residential tax credit is still non-refundable. And so by having a nonprofit, a community development organization own and operate that solar for a fixed number of years and sell them the power at below market, less than, in our case, Xcel Energy might charge them, that nonprofit can automatically take that 30% tax credit. I’m really excited about that opportunity and even things like heat pumps where you’re relying on thermal energy storage.

I have a foundation that is active in the climate world and said, hey, for our new space, let’s decarbonize the whole project. And so their budget’s a few million bucks and they’re going to be able to cut that cost by owning the energy system themselves and taking advantage of that direct payment. So energy efficiency through some of the eligible technologies and things like district energy projects as well where you’re serving multiple parcels. I’m just really excited about all of those spaces where you have community development organizations that already know how to own assets and build and develop ’em and serve whether it’s themselves or their constituents, and we just need to make sure that they’re complying with the investment tax credit requirements overall. But man, this is really fun work and really satisfying work to see how many millions of Americans are going to benefit from this direct pay provision.

John Farrell:

So I want to just summarize if I’ve got it right, some of these benefits of direct pay and to see if I’ve actually got them all down here in terms of an equitable clean energy transition. So it’s easier to develop community-based renewable energy projects. You can have nonprofit ownership with a simpler project structure. You don’t have to go out and seek that tax credit partner potentially. Amen. You could get more dollar for every dollar of private capital invested. It’s not getting skimmed off by that third party and skimming might be ungenerous, but I’m not very generous when it comes to Wall Street.

Jeremy Kalin:

Exactly.

John Farrell:

You get more financial benefits from solar into communities now developing more projects and more of the dollars of those projects can actually be kept local. And you’ve got the opportunities for bonus credits that you kind of alluded to for projects that serve low income communities. Did I miss anything that you’ve been seeing as benefits of direct pay for developing clean energy in our communities?

Jeremy Kalin:

Those four that you listed are the top of my list. I think there’s also, we’re going to see an opening and opportunity for new lending needs and lending instruments. So when we talked about crowdfunding or sort of community support, if you don’t have the right kind of taxable income or passive income to monetize the credit, if we can invest in a loan pool, let’s say you and I were to put a thousand dollars into a loan pool that was providing these bridge loans. I’ve mentioned it could take 18 to 24 months before we actually realized, but when you need to pay for your contractors and do the construction class for a solar project, actually getting the check via direct payment, that 18 to 24 month swing loan could be between 30 to 50% of the project cost. That’s a lot. But we could invest in and get two, three, 4% interest on our loan to these nonprofits that are developing these community-based projects or any project really.

But you and I would choose to do community-based project investment. And so now we really have this not direct tax credit investment, but the tax credit facilitation loan is essentially what it is. And interestingly, we haven’t talked about the fact that it took 14 years from my first introduction to its enactment to get Minnesota’s Green Bank established, MIN CIFA, the Climate Innovation Finance Authority, and I don’t know if you’ve had a guest on yet to talk about Min CIFA and the green banks and their role here, but I think it’s highly worth it and I can recommend a couple of guests to you.

John Farrell:

Sounds good. Yeah.

Jeremy Kalin:

But the very first project that MN CIFA funded about a month ago is The Heights redevelopment in St. Paul, and it’s a loan to, and they’re doing no natural gas service to this entire redevelopment project, so electrified everything and the District Energy Project will ultimately receive the 30% investment tax credit and I think it’s four and a half million dollars loan for that project that’s going to serve many, many, many, many parcels, many projects on that total development, and that was a swing loan for the tax credit for direct pay, and they needed the cash now in order to purchase the equipment on a certain deadline in order to keep the project moving forward. That’s a very common need I’m seeing out in the world, and I’m really excited about what the next iteration of investment vehicles may be, particularly for community investment or crowdfunding.

John Farrell:

That’s awesome and such a good example. And yes, I will take your advice on guests for the Green Bank. So do follow up with me on that.

We’re going to take a short break. When we come back, I ask about the mechanics of how direct pay works and about one key rule that not-for-profit organizations have to follow to secure the tax benefit. You are listening to a local Energy Rules podcast with Jeremy Kalin, co-lead of the Impact Council practice at Avisen Legal.

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I want to get, a lot of people I know are interested in the mechanics of how direct pay works. You’ve given this example both in the article you wrote and in this conversation like, oh, let’s say a 300 kilowatt solar right. It’s cost a million dollars. Can, you already sort of touched on what would a nonprofit in that situation had to do pre direct pay to get the tax credit and how is that project structure different now. And can you talk a little bit about how does it change the amount of cash or loan money the nonprofit needs, and maybe even the payback periods? So how has it changing the financials for those projects?

Jeremy Kalin:

So let’s maybe not look back, let’s just look forward. We could get caught up in the mechanics of tax equity partnerships and all those things that are interesting, but I think your listeners are probably more interested in how do I do this now?

John Farrell:

That’s great. Let’s do it.

Jeremy Kalin:

Only to keep myself, I’m a capital N nerd and so I have to, plus I have ADHD, so interrupt me anytime, but I could talk about the partnerships flip structure till the cows home. I’d rather talk about direct pay. So that million dollar project, hundred kilowatt solar project, let’s say that it is going on the roof of a community center that may someday also have batteries or maybe there’s batteries there. So we’re doing a true resilience hub – that doesn’t matter, but I’m doing several of these now. So first, if the nonprofit is not the owner of the building, you do have to lease the roof space and you do have to have clear title, clear ownership of the solar system. So just because it’s elective payment or direct pay doesn’t mean that we can just assign somebody, a nonprofit, the tax credit and walk away. The statute for both the direct pay and the transferability are very clear that applicable entity, the tax exempt entity or the buyer of the credit is subject to the same what’s called recapture rules, the same obligation to own and operate the system, have the risk of loss, carry insurance, everything else for the system itself.

So one of the questions we always ask, I always ask, is should the nonprofit itself own the system or should the nonprofit create a wholly owned subsidiary that they’re the only member of the only owner of as what’s called a special purpose entity? And that’s almost always a limited liability company or an LLC, really simple to set up. I have form documents doing it for that foundation, doing the decarbonization project. It’s not a challenging process, but you want to make sure you get it right because you have a $300,000 potential credit that you might forego if you trip up with a detail here or there. So you have to own the system. And then of course, who are we selling it to? So that power purchase agreement or solar lease, typically there’s not enough grant or other incentive income that can pay for the remainder of the project costs.

You need some money coming in, so a solar lease or a solar power purchase agreement payment needs to come back to the nonprofit that owns it or their subsidiary LLC. The good news is, let’s say it’s just that 30% credit that within, let’s say you and I, again owned a solar project as a nonprofit, let’s say ILSR, you could, I don’t think you’ll want to, I don’t think that fits your business model, but let’s say that ILSR owned a solar project and could get the $300,000 credit and today May 9th, we flipped the switch and turned it on. The timing of getting that credit is such that you actually won’t be able to fully claim and get the IRS to act on your claim likely until November of 2025. So by my math, I am a project finance lawyer, but don’t rely on my math. 18 months later, you can submit the claim for the credit and let’s say the IRS is totally on top of things and 60 days later you get the payment.

So that’s 20 months from having the credit be vested because you’ve activated the system. For all those of you watching at home on the video podcast, that doesn’t exist. I’m flipping the switch metaphorically with my arm. That’s what I do when I say placed in-service. And so it takes time to get that money back. So you need this bridge loan or some other means to cover that cost. And then typically we see the remainder of the project either funded by other incentives or grants or by what’s called a term loan, so a five year, seven year, 10 year loan with fixed terms, et cetera. That’s then secured by the project assets, meaning there’s collateral just like your house is secured by a mortgage if you have one, this is secured by a similar financing statement or lien against the equipment that that LLC or the nonprofit owns. So it’s really fairly straightforward, but you do, it is not like you can just assign the credit and take it. Like I said, you do have to go through this rigmarole to show that you own the credit and own the project.

John Farrell:

I think it’s worth highlighting, you went through this fairly quickly, but that ownership is not just in title. It really, you mentioned this phrase risk of loss and having insurance that it really is the idea of ownership here is, and it is true with anything, right? If I own a car versus leasing a car, if I own a home versus renting, I’m taking the risk that something will happen to that thing and that I’ll be responsible if anything does happen to it. Now, obviously with solar panels, and if you do have insurance on them, the risks are potentially relatively low, but something is at stake for the nonprofit here and that kind of asset ownership can be maybe out of character for some nonprofits that have otherwise not focused on – maybe they have only ever rented their space in the past and now they’re looking at owning a fairly expensive and significant asset with a 20 or 30 year life, a little different than maybe their usual business model.

Jeremy Kalin:

That’s right, and I’m working with many, many clients to navigate the insurance industry who has been typically focused on larger solar projects and to get them to understand the scale of this opportunity and of this space, I’m glad to hear, glad to report that there’s significant progress. Insurance continues to be expensive in this market, but not so expensive that it’s killing deals. It’s just you need to, obviously, like you said, this is not just like, hey, I own this thing. My wife and I are trying to figure out at what point we replace our existing gasoline cars with EVs and whether to own it or lease, and I don’t trust us to lease someone else’s car and then not ding it up and scrape on the side of the garage, and I’m still a potter and woodworker, so our garage at home is filled with all sorts of other stuff, and so it can be kind of tight and we’re constantly scraping.

I’d rather do that to my own thing than someone else’s. And so there’s no free ride and there’s no free direct pay tax credit. You do have to truly own it. There are other things, there’s some interesting structures that can get us in trouble, but it’s not unlike I mentioned the 1986 tax reform bill. One of the things that it introduced was the low-income housing tax credit, which has the same problem as the investment tax credit before direct pay of making wealthy people wealthier. But the late eighties and early nineties were very much like the cycle today of trying to come up with innovative structures to make affordable housing workable and comply with all these rules, and then finally it’s become kind of rote and straightforward. That’s what I and my peers around the country, there aren’t that many sadly, but that’s what we’re really trying to do is to create this kind of much easier. I don’t like doing pretty cul-de-sacs. They’re fun, nice to have a few flowers and a ribbon cutting, but I really want on-ramps to major thoroughfares for capital to flow. And so getting these legal structures and getting them easier for nonprofits to navigate is really important to me.

John Farrell:

That kind of leads me to my last question here, which is I think an important one for a lot of folks who are doing this, which is where can nonprofits go to get help figuring out how to make a project work for direct pay? So I think many of them before this were maybe intimidated by the fact that some legal and structural work and financial work would need to be done in order for them to do a project. I guess in some ways nothing has changed. You still should have an attorney, you’re still probably going to need a good accountant, but obviously this is a new thing like you said, and maybe that low income housing tax credit is a good example. It can take a while to figure out those pathways. So who knows what’s going on right now, who can help them?

Jeremy Kalin:

This is a big problem and it’s a big challenge partly because if you’re interested in practicing clean energy law, call me please because we are all swamped across the country with opportunity, and sadly so much of it is focused on the for-profit investment side, and we need more folks, more lawyers really doing this work on the nonprofit side. I’ve tried to get some information out there myself. So you mentioned the article that we wrote with our marketing team to kind of walk through some of the considerations for direct pay. I’m a member of the pro bono group at Lawyers for Good Government that has a nice resource. I’ll send you the link so you can share it in the show notes as the kids say these days, lawyers for Good government is one place, and we can link there. I think there’s just not enough information out there yet.

That’s sort of the clearinghouse. So I’m more than happy to get inquiries and respond to emails or leads or website to just give some short answers or give some direction or to have a 15 or 20 minute chat about people’s situation. But we’re working real hard I think as an industry and an ecosystem to make it easier to navigate and have kind of annotated tax forms, maybe even some templated documents to some extent, although I’m always nervous about that every situation is different and could trip you up, but I don’t believe in form practice because of that as a lawyer. But at the same time, the templates really make it easy to move, and I’ve deliberately kept my fees about half of what my competitors – using quotes – that many of my colleagues are, maybe even a third because I want to be building this space. This is my public service work continued and my personal ethic, and so give me a shout. Let’s see what we can do together. And also I’m happy to connect you with other clients or other projects I know about that are facing similar challenges.

John Farrell:

One of the things that you and I talked about in planning for this podcast and thinking about what it is that people might want to know, do you have any advice in terms of, let’s say it’s ILSR, right? I’m interested in doing solar. We’ve heard of the direct pay. We’re thinking, hey, there’s maybe some future revenue stream here. Maybe we can just have a capital campaign. We raise some money, we go out, we get some loans, that kind of thing. Are there maybe two or three things that you feel like people should know? You really need to have something here before it’s even worth talking to an attorney. Come to me with more than just an idea. What are some of the things that, if there are things like that that people should be thinking about ahead of time to save their time when they come talk to you about figuring out things like project structure and the tax credit.

Jeremy Kalin:

I mean, it’s a kind of basic list of project development and project structuring. So site control, where are you going to put the project? Is it on your land? Is it on your building? Is it on someone else’s building? What are they going to get out of that relationship? Number two is how are you going to connect to the grid? Is it a community solar garden? If so, who’s going to own and operate that project and do subscriber management and outreach? Or is it a power purchase agreement, or is it a net metered project under your local utility rules? The third is how are you going to make revenue? How’s it going to pencil out? Even if you get a bunch of grants and the direct pay tax credit, you’re likely not going to get it all paid for. You got to be really careful.

There’s one thing I want to talk about before we wrap up on the no excess credit rule, but are you going to pay for the system, pay for any loan or et cetera? And then who’s going to build the thing and who has the technical expertise? And it’s not just a contractor. You also need somebody who does understand what those utility rules are, the inspection process to get permitting, et cetera. And working on a project in Puerto Rico where it’s like, gosh, there’s a 16 different interacting partners and relationships, and the elected payment is complicated to make work there, but necessary. And there are two or three parts of those local programs that we need to get copies of the contracts in English, by the way, because often they’re in Spanish there and just be able to navigate those pieces. So just having the technical assistance on the contracting and the engineering side to make sure that you know how all of that hangs together.

And then it’s really important that your board and your officers understand that you are going to own a system and that you’re going to have this responsibility for at least six or seven years, and you’re likely going to have a swing loan, this bridge loan for 18 to 24 months as well. And so the board does need to authorize all of this and take responsibility for it because it’s a significant risk for an organization. Even I’m talking to an organization that literally is chartered by Congress as a nonprofit, and I’m like, are you under 501c3 of the code? They’re like, no, we have a congressional charter that makes us exempt from taxes. I’m like, okay, well, I’m pretty sure you are exempt from taxes so you can get direct pay, but the question is you don’t actually want to own any systems ever. So how do we facilitate this? Can we do this or not? So there are real risks whether you’re a billion dollar nonprofit or a hundred thousand nonprofit.

John Farrell:

Well, I want to make sure you get a chance to talk about the excess tax credit issue real quick before we wrap up, but then we shall.

Jeremy Kalin:

Awesome. So I mentioned that there are a couple of little quirks that again you need to cover, and one of them is actually unclear for 2025 projects going forward, but we’ll get some clarity pretty quick. And that’s compliance with what’s called the domestic content rules, meaning that you have to reach at certain thresholds, started at 40% and we’ll ultimately get up to 55%, of what we think about is made in America steel and iron plus the manufactured components like solar panels and the modules and the inverters, et cetera. Because if you don’t comply, you might get a 10% reduction or you might even get a zero credit depending on specific circumstances if you’re over a megawatt. So again, talk to an attorney, watch the IRS rules. The other big quirk here is there’s no free lunch. And so this no excess credit rule says that for that million dollar project with a $300,000 tax credit, if we were to get $750,000 of tax exempt grants, that’s specifically for the purpose of building the project.

We couldn’t get a million and $50,000 between the grants and the credit. No double dipping is kind of the rule. So that tax credit gets reduced, so it’s at the cost of the project. So in this case, get $250,000, not a $300,000 credit because that combined with a tax exempt grant would get us over the million, so we reduce it. So you’re limited at the project cost. There are some ways to manage that process. I’m speaking like a lawyer very carefully here. So if you’re in that situation, let me know and we can advise. And the name of Avisen, our law firm, by the way, is old French and Middle English board advisor. It’s what I like the most doing. Documents is what I like the least about this part of the job, but it’s the necessary part of getting it all done and making everything work. So be very cautious about that no excess credit rule, for sure.

John Farrell:

Jeremy, thank you so much for joining me to talk about direct pay. There is just so much interest in this as you said. I think the scale of this, it’s the blank check, the only blank check in the IRA is direct pay, are these tax credits, and a huge investment opportunity for our clean energy future and a huge opportunity for these formerly ineligible folks like cities, counties, and nonprofits. So we really appreciate that there are folks out there like yourself that are trying to piece together how this works and to facilitate and advise folks about how to get through the process.

Jeremy Kalin:

Well, I’m really glad that you asked me, and I think that just to underscore this opportunity in this moment, in the past, the tension between climate investment and real wealth building at the community scale has been two fully loaded locomotives pulling in opposite directions on the train, and now we’ve got both of them pushed in the same direction. Specifically, I mean it’s like ILSR and the energy democracy work that you’ve been doing. This is what we want to see happen, and the time is now. So till 2032 is the timeframe of the inflation reduction act unless it’s extended ultimately. So please jump on that train and let’s keep driving because literally the federal government is ready to invest just by complying with the elected payment provisions of the tax code. And so let’s get as much carbon reduction and climate action and community benefits as possible.

John Farrell:

Awesome. Well, thank you again, Jeremy.

Jeremy Kalin:

Yeah, seriously. Thanks for the opportunity.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules with Jeremy Kalin, co-lead of the Impact Counsel practice at Avisen Legal. On the show page, look for a link to Jeremy’s articles on the Avisen legal website, his list of first steps for organizations hoping to capture direct pay benefits, as well as some ILSR analysis about the prior cost of tax equity middleman for renewable energy projects. We’ll also share a list of the type of organizations eligible for direct pay, the final rules from the IRS, and an ILSR infographic produced before the law was passed that explain its potential benefits. Local Energy Rules is produced by myself and Maria McCoy with editing provided by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear how we can take on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.