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On July 9, 2009, the U.S. Treasury Department issued long awaited guidance concerning cash grants in lieu of income tax credits for certain renewable energy projects. Treasury is not accepting applications now, but it has released this guidance in order to give ample time for businesses to prepare applications and expedite implementation of this program. Links to program documents include: the official Program Guidance, Terms and Conditions for the program and a sample Application. Additional information can be accessed at the Treasury Department's website for this grant program.
Overview
Section 1603 of the American Recovery and Reinvestment Act of 2009 permits the owner or lessee of certain renewable energy projects to receive direct payments from Treasury in lieu of receiving investment tax credits (ITCs) or production tax credits (PTCs). It is intended that this grant program will temporarily fill the gap created by the existing diminished investor demand for tax credits. The grant generally tracks the ITC in terms of the amount of the grant (30% of the qualified cost of the project for most types of projects). Furthermore, the grant payments are not includible in gross income and the basis of the property is reduced by an amount equal to 50% of the payment. Projects must be placed in service in 2009 or 2010, but if construction begins during 2009 or 2010, then applicant will have extra time to place the project in service.
Deadlines/Application Procedures
Application Deadline for All Applications: October 1, 2011
For projects placed in service in 2009 or 2010:
- Application must be submitted after the project has been placed in service, but before October 1, 2011.
- Treasury will make payments 60 days after the later of receiving the application or the date the project is placed in service.
For projects not placed in service in 2009 or 2010:
- Application must be submitted after construction commences on the project, but before October 1, 2011.
- Treasury will review the application and notify the applicant if all eligibility requirements have been met.
- Project must be placed in service according to the deadline applicable to the type of project (e.g., end of 2012 for a wind project, end of 2016 for a solar PV project).
- Applicants must submit any required supplemental information with 90 days of the project being placed in service.
- Treasury will make payments 60 days after receiving any required supplemental information.
Eligible Applicants
- Applicant must own or lease the property
- Applicant must, generally, originally place property in service
- The following types of entities are not eligible to receive Section 1603 grants:
- Federal, state and local governments
- 501(c) tax exempt entities
- partnerships or other pass-through entities which have a direct or indirect partner or owner that is not eligible for the grants, unless such ineligible entities only own an interest in the applicant through a taxable C corporation.
Note: REITs are not considered pass through entities for such purposes
- There are limitations on the ability of foreign persons to receive grant payments
- Lessees must follow additional rules - see below.
Property and Payment Eligibility
Timing
Projects must be placed in service in 2009 or 2010, but if construction begins during 2009 or 2010, then applicant will have extra time to place the project in service. By way of example, this extended deadline ranges from the end of 2012 for large wind projects to the end of 2016 for solar projects. An expansion of an existing project originally placed in service prior to 2009 may be eligible for a Section 1603 grant.
Construction
Treasury indicates that construction begins when physical work of a significant nature begins. Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, or researching. Furthermore, preliminary work, such as clearing a site, test drilling to determine soil condition, or excavation to change the contour of the land (as distinguished from excavation for footings and foundations) does not constitute the beginning of construction.
To eliminate uncertainty surrounding commencement of construction, Treasury created a safe harbor to determine when construction begins for purposes of applying for a grant. An applicant may treat physical work of a significant nature as beginning when the applicant pays or incurs more than 5 percent of the total cost of the property excluding the cost of any land and the costs of any preliminary activities.
Multiple Units of Property
The owner of multiple units of property that are located at the same site and that will be operated as a larger unit may elect to treat the units (and any property, such as a computer control system, that serves some or all such units) as a single unit of property for purposes of determining the beginning of construction and the date the property is placed in service. In such a case, the entire cost of such larger unit of property is taken into account in applying the safe harbor described above. The owner may not include within this larger unit any property that was placed in service before January 1, 2009.
Original Use
Generally speaking, the original use of the property must begin with the applicant. An applicant is permitted to incorporate used parts into the project provided that no more than 20% of the property (calculated on a cost basis) consists of used parts.
Sale Lease-Back Transactions
Similar to the ITC rules, if new property is originally placed in service by a person and then sold to an applicant and leased back to the person by the applicant within three months after the date the property was originally placed in service by the person, unless the lessor and lessee elect otherwise, the applicant-lessor is considered the original user of the property and the property is considered to be placed in service not earlier than when it is used under the lease back.
Supporting Documentation
Applicants must submit supporting documentation demonstrating that the property is eligible property and that it has been placed in service, and if placed in service after December 31, 2010, that construction began in 2009 or 2010. Applicants must also submit support for the cost basis being claimed, including an independent accountant's certification as to accuracy of all costs for projects with a basis in excess of $500,000. The documentation requirements are set forth in greater detail in the Program Guidance:
Specified Energy Property
Qualified property includes only tangible property that is both used as an integral part of the activity performed by qualified facility and located at the site of the qualified facility. Qualified property does not include a building but may include structural components of a building. Property is an integral part of a qualified facility if the property is used directly in the qualified facility, is essential to the completeness of the activity performed in that facility, and is located at the site of the qualified facility. Qualified property does not include a building but may include structural components of a building. Property is an integral part of a qualified facility if the property is used directly in the qualified facility, is essential to the completeness of the activity performed in that facility, and is located at the site of the qualified facility.
Recapture
If the applicant disposes of the property to a disqualified person or the property ceases to qualify as a specified energy property within five years from the date the property is placed in service (a “disqualifying event”), the grant must be repaid to the Treasury as follows: Timing of Disqualifying Event
(time after being placed in service) | Amount that must be repaid: |
Less than 1 year: | 100% |
| More than 1 year, but less than 2 years: | 80% | | More than 2 years, but less than 3 years: | 60% | | More than 3 years, but less than 4 years: | 40% | | More than 4 years, but less than 5 years: | 20% | | More than 5 years | No repayment |
Temporary cessation of energy production will not result in recapture provided the owner of the property intends to resume production at the time production ceases. Permanent cessation of production will result in recapture. Permanent cessation of production due to natural disaster will not result in recapture unless the property is replaced with property for which a Section 1603 payment is allowed.
The applicant may sell or otherwise dispose of the property without triggering recapture as long as it does not transfer it to a disqualified person, provided that the purchaser of the property agrees to be jointly liable with the applicant for any recapture obligations. Notwithstanding any such transfer, the applicant will remain jointly liable to the Treasury for the recapture amount even if the applicant no longer has control over the property.
Where a lessor elects to pass through the Section 1603 payment to a lessee, if the lessor sells the property to a disqualified person, the lessee is liable to the Treasury for the recapture amount even if the lessee maintains control over the property. If the lease is terminated and possession of the property is transferred by the lessee to the lessor or any other person, the lessee is liable to the Treasury for the recapture amount if the use of the property changes during the recapture period so that it no longer qualifies as specified energy property.
Applicants are not required to post a bond as a condition of receiving a grant and receipt of payment does not create a tax lien or other lien on the property in favor of the United States. Funds that must be repaid to the Treasury under these rules are considered unsecured debts owed to the United States and if not paid when due, will be collected by all available means against any assets of the applicant, including enforcement by the United States Department of Justice. Debts arising under these rules are not considered tax liabilities. This characterization will facilitate financing, because an applicant will be able to give a lender a first priority security interest in the property.
Annual Reporting
Annual project performance reports must be provided to Treasury no later than 21 days following the end of each annual reporting period. The first annual reporting period begins on the date that the project is placed in service.
Assignment of Payments
Applicants may assign the rights to receive Section 1603 grant payments to third parties by complying with the requirements of the federal Assignment of Claims Act. This will facilitate bridge financing for projects receiving grants.
Other Federal Regulations
Receiving a Section 1603 payment with respect to specified energy property does not make the property subject to the requirements of National Environmental Protection Act (NEPA) or similar laws or the Davis-Bacon Act.
If you have questions about the Section 1603 grants or any aspects of the Treasury Department's guidance, please contact one of our Renewable Energy lawyers:
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