Sustainable Returns: Solar Tax Equity Investments for Family Offices with Passive Income

In this white paper, Justin Amirault, Jon Cheng, and Mandy Fryer, the three founders of Glasswing Capital Management, aim to break down the fundamentals of how solar Tax Equity investments work and provide a context of why there is a unique opportunity for certain individuals and family offices to participate today.

Authors: Justin Amirault, Jon Cheng, Mandy Fryer

Company: Glasswing Capital Management

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In the United States, solar power project installations have experienced 59% annual growth over the last decade according to the Solar Energy Industries Association. Underpinning this explosive growth are federal Tax Benefits, specifically the Investment Tax Credit (“ITC”) and the Modified Accelerated Cost Recovery System (“MACRS” or “Accelerated Depreciation”), collectively the “Tax Benefits”, which are designed to attract investment in solar assets to aid in the development of the U.S. renewable energy infrastructure. Similar in many ways to other federal tax incentives that support investment in areas such as low income housing and historic properties, the Tax Benefits associated with solar projects promote growth in an area determined to be of significant importance by Congress. Often these incentives are erroneously dubbed tax loopholes, but in stark contrast to that definition, these provisions are, in fact, woven tightly into the framework of the U.S. Tax Code as a means to encourage investment in low income housing, historic properties, or in the case of this paper, solar projects. The majority of solar project developers and long-term owners, known as “Sponsors”, do not have the requisite income tax liabilities to efficiently monetize the ITC and Accelerated Depreciation afforded to solar assets and therefore raise capital from unaffiliated third parties in the form of “Tax Equity”. Traditionally, the universe of participants in these solar Tax Equity investments has been limited to large financial institutions, utilities and large corporations with little participation by individuals and family offices. This has been driven by a combination of factors including the limitations of the passive income tax and at-risk rules that apply to individual investors and the institutional size investment amounts historically required. The current dynamics of the solar industry, particularly the proliferation of smaller scale installations, present an opportune time for more family offices and individuals with meaningful passive income tax liabilities to participate as third party Tax Equity Investors and earn strong risk-adjusted returns on relatively short duration investments where capital payback is largely derived from low-risk tax savings as outlined in this paper. Solar Tax Equity investment continues to only be appropriate for individual and family office investors with passive income tax liabilities. Investors should consult their own tax, legal and accounting advisors before engaging in any Tax Equity transaction.

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