44. Tax Equity Builds Local Solar Economies and Resilient Communities
Our solar carport at JSerra Catholic High School in San Juan Capistrano, California is part of three projects on the school campus that total 1.8 MW and will deliver over $18 million in lifetime savings for the school and reduce over 57,000 metric tons of carbon emissions.
Megabanks often prioritize large transactions and big corporations, causing them to overlook a promising solar opportunity that community banks are exceptionally well-positioned to identify and seize. Community-based solar projects – while smaller in scale – can offer outsized community impact and competitive financial returns. Similarly, deals with smaller or less established developers, when appropriately underwritten and managed, offer real value that bigger banks haven’t figured out how to capture.
Solar projects in the built environment – rooftops, carports, and other spaces adjacent to buildings – represent a $1 trillion market opportunity in the U.S. that can be tapped to achieve our climate goals. The Inflation Reduction Act combined with proactive leadership from state governments and our communities is going to keep the solar market growing at a robust pace for the next decade.
Since 2014, Sunwealth has worked with Community Banks to bring capital to community-based solar projects across the country, and especially in California. We develop, source, and underwrite quality smaller-scale solar projects with clear community impact and package them in portfolios for tax equity investment. We specifically target investors who recognize the value of investing in local markets, and we simplify and streamline the investment process and have near a decade of success in diligently deploying tax equity capital, generating both meaningful community impact and attractive dividends for our investors.
Tax Equity is Good for California Community Banks
Community Banks are natural partners for Sunwealth. They recognize the value of underwriting projects in their communities and understand the importance of partnering with local small businesses and organizations. They know that financial models and investment-grade ratings shouldn’t replace old-fashioned underwriting, and the importance of knowing your customer and community and the value of building long-term relationships. Community Banks have witnessed first-hand that investing in communities lays the foundation for local and regional resilience.
Sunwealth’s progress could not have happened without investment from our 500+ institutional and individual investors, and in particular, repeat tax equity investment from our Community Bank partners.
Here’s how the process works:
Solar tax equity allows a third-party investor to provide an equity investment into Sunwealth’s impact solar portfolio in exchange for the majority of the tax benefits and preferred returns on the cash flows generated by the portfolio. The tax equity investment typically represents only a portion of the capital stack but receives 99% of the tax benefit.
Benefits of tax equity investment for Community Banks include:
Rapid return of capital via dollar-for-dollar reduction in federal taxes through the 30% Investment Tax Credit (ITC) that allow the tax equity investor to recoup upwards of 80% of an investment in Year 1.
Accelerated depreciation deductions for the majority of the cost of the solar assets, allowing investors to “keep” funds that would otherwise be paid to the IRS.
Double-digit after-tax returns from tax savings and cash yield.
Low-risk, predictable returns based on tax benefits and stable, fixed-rate cash flows from long-term contracts with credit-worthy off-takers.
Scalable structure, providing effective tax planning opportunities to banks with regular taxable income.
The Solar Industry is on Solid Footing and Has So Much Room to Grow
It is still early in the solar growth story, and we’re at the dawn of what we refer to as The Solar Generation. With tailwinds from the IRA and California being the largest solar market in the U.S., communities across the state are well-positioned to reap the benefits of equitable clean energy solutions. California has always been a leader in solar, and now it’s time for Community Banks to align themselves with this movement towards a better energy future. Sunwealth has a pipeline of over $90 million of community-based solar projects across California from Chester to Rancho Mirage, and we are rapidly deploying capital to bring these projects to life and bring resiliency and clean energy savings to our communities and predicable tax equity investment returns to our Community Banking partners.
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About Sunwealth
Sunwealth is a clean energy investment firm working to change who has access to renewable energy by changing the way we invest in it. Combining deep experience in solar development and finance with roots in community and impact investing, Sunwealth invests in diverse commercial solar projects delivering clean energy and energy savings to communities while providing strong financial returns to investors and community partners. Since 2014, the company has invested over $140 million in more than 575 community-based solar projects nationwide; the company has delivered targeted returns to investors for 33 quarters with no defaults. For three consecutive years, Impact Assets named Sunwealth to its IA50, a leading list of impact fund managers; Environmental Finance named its Solar Impact Fund its 2022 Environmental Fund of the Year. Learn more at www.sunwealth.com
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Darreck Mitchell is Vice President, Director of Capital Markets at Sunwealth. He has over a decade of experience in financial services, sales management, and asset management distribution. When he’s not helping investors put their money to work, he can be found spending time with his wife and two young daughters.