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Community Developments Investments (Fall 2013)
Financing Community-Scale Wind Energy Projects
Lime WindLime Wind, a three-megawatt, community-scale wind project in eastern Oregon, produces enough electricity each year to power 800 households.
Greg Richter, NMTC Deal Team Manager, Wells Fargo Community Lending & Investment
Wells Fargo, NA, has made a significant commitment to environmental lending and investment with a goal of providing an additional $30 billion in environmental finance between 2012 and 2020. To date, Wells Fargo has invested more than $2 billion of tax equity in wind assets, reducing CO2 emissions by 42.6 million metric tons and saving more than 6 billion gallons of water.1 Most of this financing activity has occurred in the holding company, however, this article describes how the bank, Wells Fargo, NA, was able to use the public welfare authority to make an investment in a wind energy project.
In 2012, Wells Fargo provided $760 million for clean energy, more than $500 million of which went directly into solar and wind projects. Last year alone, investments reduced CO2 emissions by more than 11 million metric tons and provided one year of estimated electricity usage to 1.6 million homes.
As part of this ongoing commitment to renewable energy finance, in 2012 Wells Fargo joined forces with Albina Equity Fund 1(Albina) to finance Lime Wind, a community-scale wind farm in eastern Oregon. Unlike many of Wells Fargo’s investments, which are utility-scale projects involving major institutional players and public utilities, Lime Wind is a local, distributed energy project. It is run by a small operator for the benefit of the local community, ultimately providing a reliable source of green power at rates that are at or below traditional sources.
Tax Credit Financing Structure
The Lime Wind transaction utilized $8.4 million in new markets tax credits (NMTC) allocation provided by Albina, a subsidiary of Albina Community Bancorp, a minority-owned community development financial institution (CDFI) that focuses on providing capital to low-income neighborhoods. The NMTC allocation provided to Lime Wind came from a $10 million allocation award from the U.S. Department of the Treasury's CDFI Fund to Albina in 2009. In addition to NMTCs, the transaction was structured to take advantage of the benefits of section 1603 of the American Recovery and Reinvestment Tax Act of 2009, a temporary federal program that gave investors and developers the option to receive a grant equivalent to the energy investment tax credits that could otherwise be earned.2
The transaction was structured as follows:
Wells Fargo, NA, as the tax credit investor, provided $2.29 million in equity, the amount of the investment by the bank in its subsidiary, the WF-Lime Wind Investment Fund, LLC (WF-Wind Fund), which pooled all other funding sources for the transaction to make an $8.4 million qualified equity investment in AEF Sub-CDE 1, a community development entity (CDE). In exchange for this investment, the WF-Wind Fund received a 99.9 percent interest in AEF Sub-CDE 1, plus the tax credits derived from the transaction, which will be collected over seven years.
Subsequently, AEF Sub-CDE 1made qualified low-income community investments into the qualified active low-income community business, Lime Wind Holdings, in the form of a senior and supplemental loan. The supplemental loan tied directly to the amount of the equity investment paid by Wells Fargo for the transaction.
The Lime Wind transaction was structured as a sale/leaseback. Lime Wind Holdings negotiated a sale/leaseback with Lime Wind, LLC, in which rent was prepaid for a 20-year period to Lime Wind Holdings in return for a 40-year lease. Once the seven-year NMTC compliance period has passed, Wells Fargo will have the option to sell its interests in the WF-Wind Fund to Lime Wind, LLC, the sponsor of the project.
Lime Wind’s owner, Randy Joseph, manages day-to-day operations of the wind farm. In addition to earning management fees, Mr. Joseph negotiated the sale of renewable energy certificates to generate additional revenue to the company.
Another important source of financing was the Oregon State Energy Loan Program, which offered a fixed-rate, long-term loan funded through bonds issued by the state. This $2.5 million loan to Lime Wind Holdings covered the purchase of the wind turbines for the project.
Lime Wind, LLC, negotiated a power purchase agreement (PPA) with the Idaho Power Company. A PPA sets the length of the term, the starting electricity rate, and an escalator clause to place a limit on the amount that the electricity rate can rise, and establishes other contractual duties, such as which party maintains insurance on the facility. Revenue from the sale of electricity was used to cover the debt service on the loan from the Oregon State Energy Loan Program.
The following chart illustrates the flow of investments, revenues, tax benefits, and contractual responsibilities in this transaction.
Compliance and Due Diligence Requirements
Wells Fargo’s underwriting analysis focused on standard elements, such as projected cash flows, cost certification, engineering reports, appraisals, feasibility studies, and evaluation of legal documents that controlled the rights and responsibilities of various parties to the transaction as well as the PPA.
As illustrated in the chart, the allocation of revenue and tax benefits had to be carefully structured to meet compliance requirements and ensure that the tax credit and grant benefits would flow to the investor. Due diligence and careful underwriting are always critical to the success of any financing transaction, but even more so in tax credit transactions where receipt of those benefits hinges on meeting all requirements over the course of a seven-year compliance period.
The NMTC totals 39 percent of the qualified equity investment and is claimed over a seven-year compliance period, but these NMTC benefits are subject to full recapture under certain circumstances. For the full seven-year period, the CDE must maintain its certification by the CDFI Fund. In addition, at least 85 percent of the proceeds must continuously be deployed during the compliance period in qualifying low-income investments, and the CDE must not redeem the equity investment. To avoid recapture, the bank must carefully evaluate the ability of its partners to exercise appropriate controls over project selection, development, completion, and ongoing performance.
A number of unique characteristics of this particular wind farm development increased the importance of due diligence regarding the developer’s strength and quality. The developer was relatively inexperienced, so third-party consultants and engineers were hired to help manage the proper installation of the wind farm. Therefore, Wells Fargo had to evaluate the capabilities of a broader set of firms and secure assurances, such as an engineering certificate, to ensure that the turbines were properly installed. The bank also had to assess the developer’s capacity to manage the continuing maintenance on the project over the 20- to 25-year expected useful life of the wind turbines. Because the developer purchased refurbished turbines, a service contract was established, a replacement reserve was set up, and replacement parts were stockpiled to ensure that the turbines would work properly over their anticipated life cycle and that repairs could be made quickly to avoid service interruptions.
The location of the wind turbines also presented issues that Wells Fargo needed to evaluate. The turbines are in the remote community of Lime, Ore., on the former site of a cement plant. The bank needed to review the 30-year lease that the developer had on the property, which the Bureau of Land Management (BLM) administers. Because the Lime Wind project is on BLM property, federal regulations required a detailed environmental impact assessment to secure the necessary regulatory approvals, which involved a lengthy period of public hearings, comments, and administrative decision making.
Wells Fargo invested directly in the Lime Wind project using the public welfare investment authority because the project primarily benefits low- and moderate-income individuals and areas by generating permanent jobs. The project also increases tax revenues in the rural area where the wind farm is located, which is a distressed low-income nonmetropolitan census tract.
Additionally, the bank may receive consideration under the Community Reinvestment Act (CRA) for its investment in Lime Wind. Although wind energy investments do not generally qualify for CRA consideration, the economic development aspects attributable to NMTC investments are generally presumed to meet the definition of community development as required by the CRA.
Although the Lime Wind project was a relatively small tax credit investment, and in some respects more complicated than much larger transactions, Wells Fargo strongly believed that the project was important for meeting its commitment to financing environmental business opportunities and improving rural areas through economic development.
For more information, contact Greg Richter at email@example.com or (951) 816-3747.
1 "Wells Fargo Environmental Finance Report" (May 2013). Details on environmental benefit calculations are included in this report. www.wellsfargo.com/downloads/pdf/about/csr/reports/environmental_finance_report.pdf.
2 When demand for tax credit investments declined in 2008, section 1603 of the American Recovery and Reinvestment Tax Act of 2009 was enacted, which provided developers or investors with the option to receive a direct cash grant payment from the U.S. Department of the Treasury in an amount equal to the tax credit that otherwise would be available under the Internal Revenue Code section 48 energy Investment Tax Credit program. Although that option has now expired, the section 1603 grant was available for qualifying property that was placed in service during 2009, 2010, or 2011 or projects that began construction before December 31, 2011, and have been or will be placed in service by the end of 2016.