Community wind projects have been using interesting financing structures, according to a report in January by the National Renewable Energy Laboratory.

The Fox Islands project, a 4.5-megawatt wind farm on Vinalhaven Island 12 miles off the coast of Maine, was developed by an electric cooperative, but the cooperative put the project in a subsidiary partnership in which it retains a 1% interest. The other 99% is owned by a local tax equity investor—an S corporation—that invested 34% of the project cost in exchange for a 99% interest.

The coop raised the other 66% of the project cost by borrowing from the Federal Financing Bank, an arm of the US Treasury, at 12.5 basis points above yields on comparable Treasury bonds and by passing the loan proceeds to the partnership. Such loans are available to wind farms that serve rural areas under a program run by the Rural Utilities Services in the US Department of Agriculture. (See related story in this issue.)

The partnership sells the electricity from the project at cost to the cooperative. The tax equity investor claimed an investment tax credit as well as depreciation. According to NREL, the cooperative has an option to buy out the tax equity investor after the five-year recapture period has run on the investment credit for fair market value, which NREL speculated should be a low price because the project is not generating any net cash flow for the partnership.

Another small project in Washington state managed to combine new markets tax credits with an inverted lease. The project is a 6-megawatt wind farm in Grayland, Washington that is owned by a community service provider called the Coastal Community Action Program, or CCAP, that helps low-income, disabled and elderly residents. CCAP is hoping to use the income generated by the project to help fund its social programs. A local public utility district is buying the electricity from the project under a long-term contract.

The project company that CCAP established to own the project borrowed the project cost from a “community development enterprise” or “CDE”—an entity that lends or makes equity investments in businesses in low-income communities and that has been awarded new markets tax credits by the US Treasury to use as carrots to raise capital from investors that it can then lend or invest as equity. An investor in the CDE gets a tax credit for 39% of his investment in the CDE. The tax credit is spread over seven years.

Wells Fargo put money into the CDE specifically to fund the loans. It contributed an amount as equity to the CDE and borrowed the remaining 61% of its capital contribution from CCAP, the project sponsor, which lent Wells Fargo grant money that CCAP had received for the project from Washington state. The IRS has ruled in the past that the 39% tax credit can be taken on the full capital contribution, even though a large share of it is borrowed money.

CDEs are able to lend at low interest rates because the new markets tax credits give them a cheaper cost of capital than other lenders.

US Bank injected money separately into another CDE that made an equity investment in the project company in exchange for an interest in the project. The project company then leased the entire project to US Bank under an “inverted” lease and assigned the power contract to US Bank as lessee. When the lease ends, the project company will get the project and power contract back. In the meantime, it elected to let US Bank claim a 30% Treasury cash grant on the project as lessee. The depreciation remains with the project company, but may be shared by the CDE as a part owner of the project company.

At the end of the day, the bank made a $6.86 million investment on which it can claim 39% in new markets tax credits and a 30% Treasury cash grant on the fair market value of the entire project.

Keith Martin