In the summer of 2009, the US Treasury Department revealed its cash grant program to subsidize renewable energy projects under Section 1603 of the American Recovery and Reinvestment Act of 2009. Treasury then issued detailed guidance for the applications in August 2009 and is now accepting applications, with the first awards already made.

The grants equals 30% of project costs for qualifying renewable energy projects, placed in service in 2009 or 2010 or if construction started during that period and is completed by certain deadlines. These deadlines are: 2012 for wind farms; 2016 for solar, fuel cell, cogeneration facilities and gas micro-turbines; and 2013 for other renewable energy projects. The grant amount is reduced to 10% on some geothermal projects, on cogeneration facilities and on gas micro-turbines.

The government pays the grants 60 days after a complete application is received or the qualified energy project has been placed in service, whichever is later. [Qualified projects which apply for grants are entitled to get the funds--there is no discretion.] Current Congressional appropriation for the program is open-ended over its two-year term. Treasury officials expect $3 billion in grants with at least 5,000 applications. The recent success of the “cash for clunkers” program may prove these to be serious under-estimates.

Among the key issues are when is work commenced on a large project which may involve lengthy entitlements before actual groundbreaking. Construction is deemed to “start” when the developer has incurred 5%-plus of total project costs, but land and predevelopment activities preceding construction, like engineering and design work, exploring for sites, researching the market and legal fees to negotiate financing, do not count toward the 5% threshold. Instead of the 5% test, developers may show that “physical work of a significant nature” began in 2009 or 2010 to satisfy the “start” of the construction test. For example, a self-built project may have “started” physical work of a “significant nature” once work begins at the site, excavating foundations, the setting of anchor bolts, or pouring concrete pads for the foundation. However, if the developer hires third-party contractors, the contract must be “binding” for tax purposes before the contractor starts work. Though this is not totally clear, physical assembly at the factory under a binding turbine supply agreement may qualify, if the contract is clear about the quantity of turbines on order and the design specifications. If the parties make more than minor changes to the contract later, that could raise issues.

If a project started construction in 2008, then it must be completed in 2009 or 2010 to qualify for a grant. It does not matter if 90% of a project was completed in 2008. If the project is first placed in service in 2009, then it qualifies for the full cash grant.

Noncompliance with the grant program during a five year “recapture” period after the project is placed in service will result in a complete or partial loss of the grant proceeds and an obligation to repay the money to the government. The grants vest evenly over five years and are not subject to recapture once vested. So if any of the three recapture events occurs after the end of the fourth year, only 20% of the grant would be at risk of recapture.

Recapture arises in three cases: First, a complete change in project use during the recapture period, such as changing a wind turbine is “turned into a Ferris wheel” in the words of a Treasury representative, or solar pv panels being used as roofing material and not to produce power; Second, permanent shut down during this period of five years. In the case of natural disaster destroying the project there will be no recapture, unless the owner rebuilds and replaces the project with a new project for which another Section 1603 grant is allowed, and the applicant avoids taxable gain recognition under Section 1033 of the Internal Revenue Code; and third, transfer of the project or project owner to a governmental or tax exempt entity. These entities may not own and in interest in a project directly or through pass-through entities like partnerships. With other permitted project sales, the buyer must agree to be jointly liable for any remaining recapture liability.

Grant applications are signed under penalties of perjury and breaches of the program requirements may be a federal offense prosecuted by the US Attorney’s Office. Prudent grant applicants should verify with counsel and accountants’ factual issues to minimize these issues in the grey areas regarding the scope of eligible property, placed-in-service determinations, what costs are properly capitalized into what assets, when construction is considered to have commenced and similar issues.

To cut down on red tape and review of uncompleted projects, Treasury does not want applications until projects have been placed in service for projects that go into service in 2009 and 2010. Projects that are under construction in 2010 must apply in 2011, whether or not they are completed then, so Treasury can determine its funding liability under the program by the end of the program. These 2011 applications will be reviewed and applicants informed whether their projects qualify based on information received to date. The balance of the application must then be completed within 90 days after the project goes into service. Once an application is approved, Treasury will inform the company, and the grant money will be wired as directed within five days.

In addition, final cost certification similar to that performed for a traditional tax equity project does not occur until all invoices are assembled and verified–which could result in cost increases–more grant funds–or cost savings–less grant funds. It may be prudent to apply as early as possible and later amend the application form before the grant is paid to include any increased costs. While there is no formal process for additional payments, Treasury officials have suggested–so we can expect–another form could be filed to supplement the original in cases where a grant has already been paid.

Michael Williamson is a shareholder with Buchalter Nemer and is chair of its real estate practice group in the Los Angeles office. He can be reached at [email protected] or 213-891-0700. Opinions are the authors’ own.

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