Developers could learn a lot from communities like Franklin Hill in Dorchester, Mass. Local affordable housing developer Trinity Financial and the Boston Housing Authority are planning to install an array of solar panels with a cost of more than $1 million on Franklin Hill's 152-unit second phase, which is under construction.
The panels will be almost entirely paid for with equity from the sale of 9 percent low-income housing tax credits (LIHTCs) mixed with Sec. 48 federal renewable energy tax credits.
Here's how developments like Franklin Hill do it, according to one affordable housing green expert.
A typical array of solar panels is sized to generate enough electricity to cover the cost of lighting the community's common areas. Tax credits can support larger installations, but state housing officials might balk if too much of the LIHTC allocating authority is gobbled up by one solar project.
For a 75- to 100-unit project, solar panels cost roughly $1 million to purchase and install on average, says Jeffrey Lesk, head of law firm Nixon Peabody, LLP's syndication practice.
The solar array can receive energy tax credits equal to 30 percent of the total cost of the panels. For a $1 million array, that's $300,000 in energy tax credits.
The affordable development can also receive 9 percent LIHTCs equal to 90 percent of its eligible basis, including the $1 million cost of the panels. But half the value of the $300,000 in energy tax credits is subtracted, bringing the LIHTC eligible basis created by the solar panels to $850,000, which works out to $765,000 in additional LIHTCs.
That's a package of $1.065 million in tax credits from $1 million in solar panels. However, with prices dropping toward $0.70 for each $1 of tax credits, developers still might be short hundreds of thousands of dollars once they sell the tax credits, says Lesk. He advises his clients to seek the 30 percent increase in LIHTC eligible basis that many state agencies give to projects in difficult-todevelop areas along with a growing list of other affordable developments, often including green buildings. That would push the total package of tax credits up to $1.3 million.
Even in a weak market, investors should pay $1 million for that. “You essentially have paid for the entire solar array with tax credit equity,” says Lesk—and that's before the panels have produced a watt of electricity.
To make the deal work, developers must be aware of the rules. For example, renewable energy tax credits can only be used by the entity that owns a property when that property is first placed in service. “So don't place the solar panels in service before the investor is in the deal and has taken ownership, or you lose your ability to syndicate the tax credits,” Lesk says.
Developers must also be careful in designating what parts of each development count toward the eligible basis for renewable energy tax credits, counting only costs resulting from the solar panels. For example, the cost of strengthening a roof to support the panels is eligible. The entire cost of the roof is not, even though the panels sit on it.
“There are tricky rules for combining the two credits,” says Lesk. “There are some pretty serious ramifications for being wrong.”