• Many wind companies rushed to start physical construction of projects at year end 2013 to qualify for tax credits. The rush left issues around turbine pad excavations, roads, substations and transformers. Work must have started in 2013 on a significant task. The view of the IRS lawyer who will review disputes on audit is that excavations alone are not enough.

• Other companies “incurred” at least 5% of the project cost by year end 2013. The developer must show “continuous efforts” on any project that will not be completed until after 2015. There is a misconception in the market that it is enough to do one task a month. The IRS may also have a problem with “slow walking” the development process.

• The US Tax Court said in a case called Caltex Oil Services that costs for services are not "incurred" until the full service contract has been performed.

• Brian Americus, the IRS lawyer who fielded most calls on the construction-start guidance and who had the most liberal view of what was required to start construction, has left the government.

• Tax equity investors and lenders appear willing to rely on the physical work test in cases with strong facts. The IRS is ruling on construction-start issues, but only purely legal questions. It has at least two ruling requests pending on physical work issues and the 5% scale-back rule. A third will be filed soon about “2014 transfer” cases.

• Grandfather rights to tax credits carry over where a developer sells a project on which he started construction in time to another developer. It is not clear they carry over where a wind company with 2013 turbines buys a project in 2014 from another developer who did not start construction in time and uses the turbines. Until the IRS rules, the best approach in 2014 transfer cases is a joint venture.

• Fourteen lawsuits are pending against the Treasury under the section 1603 program. The oldest suit was filed in July 2012, and the case is probably still a year away from a decision. Four of the cases raise significant issues. The government lawyers have not been well briefed when arguing motions. Other companies may file suits if any of the plaintiffs wins. The statute of limitations is six years.

• The Treasury inspector general suggested in a report released last week that 50% of 16 large companies it audited who claimed grants and 61% of 83 small companies had “significant issues” on their tax returns, including claiming tax credits on projects on which they received grants. It also said leasing is being used to “allow fair market to be overstated to increase the grant amount.”

• Treasury believes that developer fees should not normally be higher than 2% to 5%. It has also been taking aim at prepaid rent in sale-leaseback transactions. The IRS is looking into basis in some solar rooftop transactions. The audits appear to be coordinated.

• It does not make sense to use a financing structure that entitles the owner to calculate tax benefits on the fair market value a project in a market where the cost to build is falling rapidly. Appraisers are supposed to look at replacement cost and comparable sales, as well as discounted cash flow, to arrive at the market value.

• New guidelines the IRS issued for tax equity transactions on December 30 literally apply only to transactions involving tax credits for rehabilitating buildings, but they are having an effect on refined coal and fixed-flip partnership transactions and eliciting discussion about inverted leases. The guidelines reflect three general principles, according to the Treasury. They are a response to a US appeals court decision in Historic Boardwalk.

• The Senate tax-writing committee wants to move to pooled depreciation. The tax savings for wind and solar projects would be worth 11¢ to 13¢ per dollar of capital cost compared to 23¢ to 27¢ currently. Senator Baucus also proposed to combine all renewable energy tax credits after 2016 into a single clean energy credit that could be taken as PTCs over time or as a 20% investment credit. Renewable energy projects that started construction in 2013 would have to be completed by December 2016.

• There is a growing sense that corporate tax reform will require repealing accelerated depreciation. However, corporate tax reform seems dead for this year. The House tax committee had one more chance to persuade the House Republican caucus at a retreat at the end of last week in Cambridge, Maryland.

• Tax extenders seem unlikely to move until the tax committee chairmen throw in the towel on corporate tax reform. There is more organized outside opposition than ever before to extending tax credits for wind. However, despite this opposition, the basic math inside Congress has probably not changed.

• The Obama administration has been encouraging the US Treasury to issue a revenue ruling that would allow REITs to own solar panels and possibly large parts of wind farms. The Treasury asked a working group, including the White House and the Department of Energy, to reconvene.

• Dividend yields for yield cos have fallen to as low 3.33% as share prices rise, giving yield cos a significant advantage in bidding for assets. Use of the term “yield co” to describe the successful share flotations masks very different business arrangements.

• Purchase options could become an Achilles heel in some transactions. Three courts have now suggested that if it is a "reasonable likelihood" a sponsor will exercise an option to repurchase assets from a tax equity investor, the sponsor will be considered the owner from inception. The government proves exercise is likely by looking at internal analyses and documents used to market the transaction.

• California is working on a ruling to address when out-of-state members in limited liability companies doing business in California must file state income tax returns. The ruling, by the State Franchise Tax Board, is expected in early 2014.

• Tax equity volume hit $6.5 billion for renewable energy in 2013, an increase of $1 billion over 2012, with the amounts split evenly between wind and solar. There are 25 active tax equity investors, with a growing number of smaller participants who do one to two deals and several potentially larger players in the wings looking to enter. Unleveraged partnership flip yields for benchmark wind deals have fallen slightly below 8% at the low end.

• The market consensus on forbearance in leveraged partnership flip transactions appears to have collapsed. The market is toying with more aggressive flip structures as it looks for ways to leave as much cash as possible with sponsors.

• Bank debt in the North American project finance market hit roughly $29 billion in 2013, up from $24 to $25 billion in 2012, but still down from the $40 billion reached in 2011. Bank spreads are 200 bps over LIBOR trending down. Tenors are 7 to 10 years, with some Japanese banks going to 15 to 18 years. Typical DCSRs are 1.45x for wind. B loan spreads are 275 to 550 bps over LIBOR, with a 1% LIBOR floor and 1% OID.