PPA Deal with 3 Investors: Questions to Ask to Model and Structure the PPA

When you’re working on a PPA deal with multiple investors you need to know each investor’s end goal and then structure the PPA accordingly. Do you need to consider a Partnership Flip or the Unstructured model returns? Here’s a discussion from our Solar Executive MBA training. Please share your experience with this type of deal in the comments section.

Student Question:

I’m working on a PPA deal that involves three different investors, and I would like to know how do you structure or model this? I guess the revenue that comes in is split up between all of them depending on each contribution to the project? Right!?

Keith Cronin:

Good question. It would depend upon each investor’s end goal:

• Are they tax equity investors? Cash? Debt?
• Are they seeking to flip the project to an entity at the end of the depreciation schedule (5-6 years)?
• Are you the investor?
• Do they have enough tax appetite for absorbing the benefits?
• Is it a time-based flip or a return-based flip?
• Are the investors familiar with the active/passive rules?

There are more questions, but this would help shape the conversation further.

Chris Lord:

As Keith notes, the most important question is to determine whether one or more of the investors want or prefer the tax benefits. If they do, and at least one prefers a cash return (because they are unable to use the excess tax benefits), they you are looking at a Partnership Flip.

If a Partnership Flip is not right (all of the parties want to share the cash and tax together) then you are best looking at the Unstructured model returns. At that point, as you suggest, you simply allocate the investment (cash in) and the returns (cash out) proportionally among the parties.

Student Response:

The PPA is going to be applied on a non-profit (60kW), and that’s where the three investors come into play. At this point in the negotiations we haven’t defined their goals regarding tax or/and cash benefits. However, one of them wants a 5% IRR vs. the remaining two who only want 4% IRR.

Can the PPA be structured for 10-yrs instead of 20-yrs? And maybe by then offering the nonprofit a buy-out option at FMV?

If I’m not wrong, the only way they can enjoy the tax benefits is against their passive income and not their active/portfolio income. Right?

Chris Lord:

You are right that a shorter PPA is possible, but you will have to model to determine what will work. Remember that the FMV cannot be determined until it is exercised; so you can have an agreement for an option to purchase at FMV at a future date, but you just can’t agree on a number until that future date.

And, you are also right that solar tax credits and MACRS can only be used to offset taxes on passive income.

Enroll in the Solar Executive MBA Training to keep learning & to connect with a strong network of like-minded professionals.

Additional Reading:

• How to Price the Risk of Cash Equity vs Tax Equity Positions in Solar Partnership Flips
• Solar Partnership Flip: Alive and Well in 2016
• 50 Minutes of Video Answering 5 Questions on Finding, Pitching, Managing Solar Tax Equity Investors