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An earlier blog post covered why bundling residential solar makes sense for project developers. In this post, we will be covering why it makes sense for buyers and the ways they can de-risk these more complex transactions.
Bundling tax credits can be a powerful strategy for several reasons:
1. More Attractive Package & Larger Tax Credit: A combination of multiple tax credits is more substantial and attractive for buyers. This could appeal to high-net-worth individuals (HNWI) looking to offset their tax liabilities. Plus, buyers can get tax credit insurance by bundling credits above $5M.
2. Simplified Transactions: Bundling can streamline the transfer process, reducing the administrative burden and making the transaction more straightforward for both parties.
3. Risk Mitigation: By bundling credits from various projects, the buyer risk is spread, ensuring that the overall value of the bundle is less impacted by the performance of a single project.
As developers increasingly bundle residential solar projects to take advantage of tax transferability for clean energy tax credits, buyers face a unique set of risks. Implementing strategies to de-risk such transactions is crucial for all parties involved.
Some of the key methods to evaluate include:
1. Insurance Solutions
One of the most effective ways to de-risk a complex solar investment is through insurance. Buyers can purchase performance insurance, which guarantees financial returns based on expected system output, and warranty insurance, which covers potential hardware malfunctions or failures. Insurance products that cover potential losses from underperformance, homeowner non-compliance, or installation defects can provide an additional layer of security.
Pro Tip: Partner with a reputable insurance provider familiar with solar investments and tax credit structures to get tailored coverage. Atheva can provide a referral as well to vetted insurance providers.
2. Establish a Secure Data Room
The well-organized data room with Atheva can significantly improve the due diligence process by providing clear and transparent documentation of all legal, financial, and technical aspects of the bundled projects. This includes tax credit documentation, homeowner agreements, installation warranties, performance guarantees, and system maintenance records.
Best Practice: A robust, secure data room ensures that all relevant information is readily available for review, making it easier for buyers to understand the risks associated with the investment and to conduct thorough audits. If you don’t already have a data room in place, Atheva will create one for you to use.
3. Engage Third-Party Verification and Auditing Services
Buyers should enlist third-party experts to verify the technical and financial assumptions underlying the bundled project. This includes independent audits of system performance and verification of tax credit eligibility. By relying on external specialists, buyers can gain greater confidence that the project will perform as expected.
Suggestion: Look for auditors with deep experience in the solar industry and tax credit compliance to ensure a thorough review of all aspects of the bundle. Don’t have any contacts? Atheva can refer to you to professional auditors.
4. Incorporate Strong Contractual Safeguards
When purchasing bundled residential solar projects, buyers should work with legal counsel to draft comprehensive contracts that include strong performance guarantees, homeowner compliance clauses, and clear provisions for the transfer of tax credits. Contracts should also outline what happens if homeowners fail to uphold their obligations or if systems underperform.
Key Tip: Including clearly defined penalties for non-compliance or underperformance, as well as exit options, can help protect the buyer's investment.
5. Diversify Bundled Investments
One way to manage risk in bundled projects is through diversification. Rather than investing in a single bundle tied to a specific geographical location, buyers can seek out opportunities to invest in projects across different regions. This geographic diversification reduces exposure to localized risks such as extreme weather events, regulatory changes, or market downturns.
Advice: Work with developers that offer bundles with diversified assets, minimizing risks related to underperformance or localized compliance issues.
While bundling residential solar projects for tax transferability can provide significant financial incentives and scalable investment opportunities, buyers must be cautious of the unique risks that come with these complex structures. By leveraging insurance, organizing secure data rooms, engaging third-party auditors, enforcing strong contractual terms, and diversifying investments, buyers can significantly reduce their risk exposure. Implementing these strategies enables buyers to navigate the complexities of solar tax credit bundles while maximizing returns on clean energy investments.
Ultimately, taking a proactive approach to de-risking can help establish the best position for buyers while supporting the broader transition to a cleaner, more sustainable energy future.
Connect with our team of experts to get started today. Our team can consult you through the best approach given the current market dynamics. Schedule a call today.
