Tax equity investors may find low-income housing deals more attractive than renewable energy after a decision by an emerging issues task force of the Financial Accounting Standards Board in November.
The task force unanimously recommended to FASB in November that tax equity investors in low-income housing deals should be able to amortize the investment “below the line,” meaning against after-tax earnings, over the same period tax credits are available. In the past, the investment had to be amortized “above the line” against pre-tax earnings while the tax credits showed up below the line. This meant that such transactions were pre-tax negative and after-tax positive. The new method is called the “proportional allocation method.” It will leave the transactions pre-tax neutral and after-tax positive. Management bonuses are sometimes tied to pre-tax earnings, and they are also a key metric for analysts who follow publicly-traded companies. FASB is expected to approve the new method on December 11.
The decision will apply for now just to low-income housing investments and not also to renewable energy. FASB is working on an exposure draft that will consider application of the same principle to other tax equity transactions that meet qualifying criteria.
The criteria may be hard to meet for renewable energy. They include that the investor will not have a significant say over the operating and financial policies of the tax equity partnership and “substantially all” of the return is in the form of tax credits and other tax benefits. The investor must also expect a positive yield “based solely on the cash flows from the tax credits and other tax benefits.”
By Keith Martin