Hybrid Structures
- Flexibility in Tax Credit Use: Hybrid structures combine traditional tax equity partnership flip models with the ability to transfer tax credits to third-party buyers. This allows investors to choose whether to utilize or sell the credits, depending on their tax appetite and investment strategy.
- Credit Transfer Mechanism: Investors can cause the partnership to sell tax credits to other parties, offering a “transfer-out” option. This flexibility benefits both investor and buyer by leveraging the due diligence conducted by tax equity investors.
- Syndication and Market Expansion: Hybrid structures facilitate market expansion by enabling existing investors to syndicate their investments and attract new participants in the tax credit market.
- Risk Management: These structures often include stringent conditions and insurance options to mitigate risks such as ITC recapture and project performance.
Traditional Tax Equity Investments
- Partnership Flip Model: Traditional tax equity often involves a partnership flip, where the tax equity investor initially receives a large share (typically 99%) of tax benefits until a predetermined return or timeline is met. After that, the benefits “flip” to the project sponsor.
- Limited Flexibility: Investors are generally bound to utilizing the tax credits directly as part of their share of project returns, with little flexibility to transfer them.
- Risk Protection: Traditional structures offer senior equity positions that prioritize investor returns over project sponsor returns, protecting against downside risks.
- IRS Safe Harbor Guidelines: These structures typically align with IRS guidelines, ensuring compliance and reducing legal risks.
In summary, hybrid structures offer more flexibility and risk management options through the ability to transfer tax credits, whereas traditional structures provide a more defined, albeit less flexible, approach to tax benefit allocation.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-hybrid-structures-differ-from-traditional-tax-equity-investments/
