2. Community Banks and Sunwealth Tax Equity are a Match
By Jon Abe, Chief Executive Officer
Sunwealth’s rooftop solar installation at the Yarmouth Fire Department is part of a portfolio of seven municipal projects in Cape Cod & Martha’s Vineyard that deliver nearly $2 million in lifetime energy savings.
In this second installment of our Banking on Solar series, we examine why solar tax equity is good for community banks. To start at the beginning of the series, read Banking on Solar.
Tax Equity is Good for Building Local Solar Economies and Resilient Communities
With their focus on big transactions and big companies, megabanks overlook a solar opportunity that community banks are uniquely suited to recognize and capture. Community-based solar projects – while smaller in scale – can offer outsize 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 – think rooftops, carports, and other spaces adjacent to buildings – represent a $500+ billion investment opportunity in the U.S. that can be tapped to achieve our climate goals. The Biden and Harris era combined with leadership from state governments and our communities is going to keep the solar market growing at a robust pace for years to come.
We created Sunwealth to bring new capital to this untapped market. We develop, source, and underwrite quality smaller-scale solar projects with clear community impact and package them in portfolios for tax equity investment. We focus on investors who recognize the value of investing in local markets, and we work to make the process of investing simple and easy. It is hard work, but we are good at it and it pays dividends for communities and investors.
Community banks are natural partners. They recognize the value of underwriting projects in their own communities and understand the importance of partnering with small businesses. They know that financial models and investment-grade ratings shouldn’t replace old-fashioned underwriting, the importance of knowing your customer and the value of building long-term relationships. And they’ve seen first-hand that investing in communities lays the foundation for local and regional resilience.
Sunwealth’s experience during the pandemic provides a good example of community impact solar investing in action. Despite this extraordinarily challenging time, over the last 6 months, together with our partners, Sunwealth has completed or started the construction of $30+ million of impact solar projects representing 75+ properties located in 25+ municipalities across eight states (mostly in the Northeast). This work provides almost $25 million to small solar installation businesses and supports 150+ construction jobs. Once completed, these solar projects will save $20+ million for the communities where they operate. We continue this work while prioritizing the health and safety of our team and partners, especially the installers that work hard and smart to build our projects on time and to specification.
In another “feat of strength” during the pandemic, Sunwealth’s investment portfolio achieved 23 quarters of consecutive targeted returns paid on-time to investors and zero solar power customer defaults. We are on track for another year of profitability and are well-positioned heading into 2021. This happens because of continued tax equity investment from our trusted partners.
Tax Equity is Good for Community Banks
Sunwealth’s progress this year could not have happened without investment from our 200+ institutional and individual investors, and in particular, repeat tax equity investment from our local community bank.
Here’s how it works:
Solar tax equity allows a third-party investor to provide an equity investment into Sunwealth’s impact solar portfolio in exchange for a 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 26% Investment Tax Credit (ITC) that allow the tax equity investor to recoup upwards of 75% 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 and corporations with regular taxable income
Solar tax equity investing with Sunwealth is consistent with our community bank partner’s bread and butter - investing in projects that strengthen and revitalize our communities. Additionally, many of Sunwealth’s projects benefit low-income organizations and neighborhoods. The opportunity for community banks to shape who benefits from the solar economy is clear and present.
The Solar Industry is on Solid Footing and Has So Much Room to Grow
It is still early in the solar growth story. The market ten years ago was the break of day - a $10 million market in Massachusetts - compared to $500 million in 2019. Despite this growth and widespread capacity building, solar power production is still less than 3% of U.S. electricity generation and there remains huge solar potential, especially within communities overlooked by traditional investors. As described above, that market is poised to grow.
It’s a Match
As community banks develop products to increase return on equity, manage risk, and revitalize their communities, solar tax equity investing with Sunwealth is a great match:
Attractive risk return profile
Large and rapidly growing local investment opportunity
Resilient and established asset class
Community impact through local clean energy production, jobs and savings
Proven and like-minded solar tax equity partner, Sunwealth
Streamlined investment process
Rebeca Romero Rainey, CEO of the Independent Community Bankers of America, recently stated, “the 5,000 community banks across the nation continue to get the job done without fail while serving as the backbone of local economies through nimble decision-making, personal relationships and yes, technological innovation.”
Sunwealth agrees. We believe that Community Banks are poised to play a leadership role in financing the growing solar economy and shaping how our communities benefit from it - local jobs, keeping savings in the community, equity, and justice - in ways that megabanks cannot imagine.
Read the next post in our Banking on Solar series: What a Biden-Harris Administration Means for a Sunwealth Solar Tax Equity Investment.
Return to the homepage to check out our other Banking on Solar blog posts.
Want to learn more about solar tax equity investing? Reach out to Darreck Mitchell at darreck@sunwealth.com.
Jon Abe is Chief Executive Officer at Sunwealth. He has over 20 years of experience developing, building and managing solar and distributed energy resources and working with community banks to finance the growing solar economy. Jon also is proud to help green and electrify his community as a member of the Belmont Light Advisory Board.