Unleashing the Power of Tax Credit Transferability in Sustainable Infrastructure Projects

With the introduction of tax credit transferability under the Inflation Reduction Act (IRA), the landscape of sustainable infrastructure financing in the United States has undergone a massive shift. This novel provision has created excitement within the industry, promising transformative benefits to the tax credit marketplace and sustainable infrastructure financing.

[For those who may not know] Tax credit transferability refers to transferring or monetizing tax credits associated with sustainable infrastructure projects to third parties. Before the IRA, the limitations of tax equity investment and the need for entities with substantial tax liabilities created barriers that prevented smaller projects or those without direct tax equity connections from being included in the market. At that time, the US tax credit market saw about $20 billion in annual exchanges. The IRA and its tax credit transferability provisions are expected to triple that figure. The advent of tax credit transferability changes the amount of players in the market by opening the doors to smaller-scale participants and projects and could create unprecedented growth within the renewable infrastructure industry.

Transferability broadens market diversity and scalability.

Previously excluded projects and sponsors now have a mechanism to participate in the market, helping to simplify complex financing structures and reducing risk for the sponsors. This streamlines the deal-making process and allows projects to operate more efficiently by exchanging credits.

Further, the transferability clause has reduced construction financing barriers. Lenders can now underwrite construction loans against future tax credit monetization, providing developers with the necessary capital for construction or other project needs. This shift has alleviated substantial compliance and legal costs, resulting in expedited timelines and decreased financial risks.

Clarity will be necessary for success.

Despite the massive potential of this provision, the industry is seeking more guidance from the IRS. Project developers are being left to navigate uncharted waters because of the uncertainty around the specific rules and guidelines, which has led to them relying on educated guesses and assumptions. Because of this, tax credit qualification and compliance become uncertain, and sustainable infrastructure deals idle in the pit lane. 

The necessity for clear directives extends beyond transferability and reaches into the interaction of various tax credits with state and local requirements. Take, for instance, community solar or brownfield project development. The definitions of community solar and brownfields vary from local to state to federal legislation, and so do their respective tax credit incentive values. Although these various bodies offer these incentives for developments, more clarity in transferability requirements is needed for developers and investors to capitalize on them.

Project finance software provides necessary data management and deal flow.

Individuals and organizations can take strategic steps to mitigate project risks as the industry awaits more comprehensive guidance from the IRS. Establishing flexible, comprehensive software purpose-built for project finance is a proactive measure to ensure data integrity. Project finance software can also automate data gathering and streamline project documentation, allowing transaction documents to be organized in one location, maintaining data visibility, and improving the likelihood of adherence to potential future requirements. Project finance software, like Banyan Infrastructure, can monitor ongoing compliance and project performance to cut out manual steps in covenant tracking and help deliver deal performance insights faster once your project is up and running. 

Tax credit transferability presents an opportunity for unprecedented growth and inclusivity within the sustainable infrastructure sector. However, the industry needs clarity to proceed effectively. As the industry navigates these uncharted waters, collaboration, communication, and software are our most significant advantages. The sustainable growth of the project finance industry depends on its ability to evolve into the modern age and leverage digital tools to move faster with confidence. 

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Access the full white paper here for an in-depth discussion of tax credit transferability and the IRA's potential for unleashing capital into the sustainable infrastructure market.