Tax Credit Transfer Bridge Loans: Structuring Issues and

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PRACTICE NOTE

Considerations

byEli Katz and Kelly Cataldo, Latham & Watkins LLP, with Practical Law

Status: Maintained | Jurisdiction: United States

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A Practice Note discussing tax credit transfer bridge loans, loan facilities entered into by project

owners to ﬁnance their projects and that are repaid with the proceeds of a tax credit sale. This Note

also discusses how these loans may be structured to reduce the risk of tax credit recapture and the

contractual and structural measures tax credit bridge lenders may implement to ensure the security

and repayment of these loans.

The Inﬂation Reduction Act of 2022 (IRA) (Pub. L. 117-

169, 136 Stat. 1818 (2022)), a key piece of US industrial

and energy policy, is having a transformative effect on

clean energy project ﬁnancing and development. The

IRA heralded new opportunities for project developers

to monetize tax credits and arrange project ﬁnancing for

renewable energy and energy transition projects in the US.

Following the enactment of the IRA, project developers

now have the option to monetize these credits by selling

their tax credits to unrelated third parties in addition to

the well-established tax equity market.

Project ﬁnance markets are beginning to coalesce around

novel ﬁnancing structures designed to make optimal use

of the IRA’s provisions. This Practice Note examines key

structural changes implemented under the IRA, with a

focus on how these changes are:

• Shaping the way US renewable energy and energy

transition projects are capitalized.

• Inﬂuencing project ﬁnancing structures for clean energy

projects.

This Note also examines how project developers are

raising bridge ﬁnancing before receipt of the purchase

price from a sale of qualifying tax credits.

Selling Tax Credits

Most US wind and solar projects qualify for either an

investment tax credit (ITC) under Section 48 (Section 48

ITC) of the Internal Revenue Code (IRC or Code), which

is available when a project is completed, or a production

tax credit (PTC) under Section 45 of the Code (Section 45

PTC), which is generated over a ten-year period starting

when the project is placed in service.

The IRA introduced signiﬁcant changes to the Code to

accelerate the energy transition. These changes include:

• Extending existing tax credits through the next decade.

• Creating new tax credit bonuses (also referred to as

adders) for projects in fossil fuel communities and those

that use certain domestic components.

• Establishing new tax credits for emerging technologies,

such as stand-alone battery energy storage systems

and clean hydrogen projects.

(See Legal Updates, Inﬂation Reduction Act: Key Energy

Provisions and IRS Issues Proposed Rules Regarding

Clean Hydrogen Tax Credits and Practice Note, Battery

Energy Storage Financing Structures and Revenue

Strategies Post-Inﬂation Reduction Act.)

One of the most fundamental changes the IRA introduced

is the right of project owners to sell their tax credits for

cash to unrelated third parties in the open market. Before

the passage of the IRA, tax credits could not be bought

and sold. If a project developer did not have sufﬁcient

tax liability to take advantage of tax credits, they could

monetize them only through complex and structured

transactions, including joint ventures known as tax equity

partnerships (see Practice Note, Sources of Available

Project Financing: Tax Equity).

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Tax Credit Transfer Bridge Loans: Structuring Issues and Considerations

Following the enactment of the IRA, most tax credits,

including the Section 45 PTC and Section 48 ITC, may be

sold in the market under Section 6418 of the Code. This

change, coupled with detailed Internal Revenue Service

(IRS) regulations, are transforming the US renewable

energy project ﬁnance market (26 C.F.R. §§1.6418-0 to

1.6418-5; and see Practice Notes, Transferability and

Direct Pay Provisions for Clean Energy Projects Under

the Inﬂation Reduction Act and Buying and Selling

Clean Energy Tax Credits: Key Issues and Risk Mitigation

Strategies).

Financing clean energy projects that sell tax credits to

unrelated third parties involves new considerations and

opportunities. These include how project owners can:

• Obtain needed ﬁnancing before the time when a tax

credit may be sold.

• Protect against the risk of ITC recapture. The Section

48 ITC may be recaptured under several circumstances

including if the lender forecloses on the project and

the project changes ownership at any time during the

ﬁve-year period after a taxpayer has claimed the ITC

(IRC§50).

Payment Limitations

Under Section 6418 of the Code:

• The payment for the tax credit must be made in cash and

within a window of time starting at the beginning of the

year in which the credit is generated and ending on the

date the tax return is ﬁled for the credit. For example, if

a ﬁling is made to extend the tax return ﬁling deadline,

the buyer may pay from January of a given year up to

midsummer (or later) of the following year.

• Buyers cannot prepay the tax credit purchase price. Tax

credit buyers cannot provide bridge capital to project

developers whose projects have not yet earned their tax

credits.

To address these limitations, project developers are

turning to banks and other capital sources in the form

of tax credit bridge loans to secure the funds needed

until they receive the purchase price under their tax

credit transfer agreements (see Practice Note, Tax Credit

Transfer Agreements: Common Negotiation Points).

Section 48 ITCs are granted in one installment once the

project is placed in service. The project developer can

therefore repay the tax credit bridge loan when the tax

credit buyer pays for the credit. This payment may be

made after substantial completion and term conversion

but not later than the tax credit ﬁling date in the year

following the year in which the project is placed in

service.

By contrast, Section 45 PTCs are generated annually as

the project produces power and sells it to unrelated third

parties. In bridge ﬁnancings of Section 45 PTC transactions,

the tax credit bridge loan will likely be paid in installments

over a period that could be as long as ten years, as this is

the period over which Section 45 PTCs are generated.

Tax credit bridge loans are distinguishable from term

loans, which are typically sized on and repaid with cash

revenues generated by a project from the sale of energy.

Tax credit bridge loans are expected to be repaid from the

proceeds generated from the sale of tax credits.

ITC Recapture

The Section 48 ITC is claimed in full when a project is

completed but vests over a ﬁve-year period in equal 20%

installments. If the project loses its tax credit qualiﬁcation

status at any point during this ﬁve-year period, the

unvested part of the credit is recaptured and must be

repaid to the IRS (IRC§50).

This rule applies to Section 48 ITCs claimed by project

owners (including a project developer and a tax equity

investor) and those purchased by tax credit buyers in the

open market. Recapture is most commonly caused by a

casualty event that destroys the project, a systemic design

failure that renders the project inoperable, or a sale of the

project assets or equity during the ﬁve-year recapture period.

Tax credit bridge loans are repayable with the proceeds

of the sale of the Section 48 ITC, including any payments

for any applicable bonus credits for which the project

may qualify. Because the bridge loans are not required

to be repaid before the project is placed in service and

ITCs vest over a ﬁve-year period after the project is placed

in service, it is possible for the ITC to be recaptured

before the bridge loans are repaid. However, the project

developers’ obligation to repay these loans is not affected

by a recapture of the ITC.

For more information on the recapture of Section 48 ITC,

see Practice Note, Buying and Selling Clean Energy Tax

Credits: Key Issues and Risk Mitigation Strategies.

Clean Energy Project Financing

Structures Before the IRA

Tax equity investors typically do not take construction

risk and fund their commitments only once the project

has achieved speciﬁed completion milestones. Project

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Tax Credit Transfer Bridge Loans: Structuring Issues and Considerations

developers can obtain loans from lenders against the

tax equity investors’ binding commitments to raise the

capital needed to construct renewable energy projects.

The structure of a typical tax equity bridge loan (TEBL)

facility is depicted in Image 1 below.

Image 1

Like a construction loan, the TEBL is drawn during

construction and used to pay project costs as incurred

(see Practice Note, Construction Financing: Overview).

The TEBL is secured by the assets of and the project

developer’s equity in the project company. The TEBL

is sized based on and is repaid with the proceeds of

the tax equity investor’s future funding commitment.

As a result, lenders focus on the credit quality of the

tax equity investor and any conditions to its funding

obligations that may hamper the project company’s

ability to repay the TEBL.

A tax equity investor generally memorializes its

commitment in an equity capital contribution

agreement, which is signed concurrently with or shortly

after the closing of the bridge loan facilities. Once the

project is operational, the tax equity investor funds its

commitment and the project company repays the TEBL

with the proceeds. Any remaining construction loans are

then typically repaid with proceeds of a term loan (term

conversion). For more information on term conversions,

see Practice Note, Financial Covenants: Project Finance

Transactions.

Tax equity investors generally do not permit the tax equity

partnership to incur secured debt. They want to ensure

that there are no secured creditors that would have a right

of priority in payment over the tax equity investors who

anticipate receiving a return on its capital contributions

(see Practice Note, Sources of Available Project Financing:

Tax Equity).

All security interests granted by the project company to

secure the TEBL are therefore released at term conversion.

The term loan is secured by assets of and equity in the

term borrower (an entity owned by the project developer).

The term lenders are structurally subordinated to the

tax equity partnership. This structure, known as a back

leverage loan, and the associated collateral package are

depicted in Image 2 below.

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Tax Credit Transfer Bridge Loans: Structuring Issues and Considerations

Image 2

Tax Credit Bridge Loans and Other

Considerations

Bridge ﬁnancing structures for tax credit sales borrow

heavily from TEBL structures but with signiﬁcant differences

and new considerations. Monetizing tax credits through

tax credit sales creates timing mismatches, as project

developers require signiﬁcant capital for construction

before tax credit buyers are permitted to pay for the credits

(see Payment Limitations). Tax credit transfer bridge loan

(TCTBL) facilities, which are sized based on the projected

sale price of the tax credits, can be used to bridge this gap.

Tax Credit Transfer Bridge Loans Versus

Tax Equity Bridge Loans

TCTBL facilities for Section 48 ITC transactions are

structurally similar to TEBL facilities, with the loans

incurred during the construction period being repaid on a

lump-sum basis with the proceeds of the sale of the ITCs.

Tax credit sales are not tied to construction completion

milestones. As a result, the repayment of the TCTBL

(which depends on when the tax credit buyer agrees to

pay for the credits) may be misaligned with the term

conversion and the incurrence of long-term ﬁnancing.

In contrast, repayments under TCTBLs for Section 45 PTCs

are likely to occur over a multi-year period as the PTCs

are generated and sold. These loans are sized against the

projected aggregate payments from the sale of credits

and are repaid on an amortization schedule sculpted to

match the PTC installment payments under the tax credit

transfer agreement. Similar to ITC sales, there may be a

mismatch between term conversion and repayment of the

TCTBL facility for PTCs.

Similar to tax equity bridge lenders’ diligence of tax equity

investors, TCTBL lenders must evaluate the creditworthiness

of the tax credit buyer given that they are bridging to its

commitment to buy the credits. The credit analysis for

Section 45 PTC sales is even more important given the long

tenor of the TCTBL facility. In addition to the collateral that

lenders require from the back-leverage borrower, lenders

may insist on protections from the buyer to ensure their

source of repayment will remain creditworthy over the tax

credit transfer agreement term. These protections may

include ﬁnancial covenants (such as minimum liquidity or

ratings requirements) and credit support (such as parent

company guarantees or letters of credit).

Sizing of the TCTBL

While the mature TEBL market has settled around a 95%

to 98% advance rate against a tax equity commitment,

debt sizing in the nascent TCTBL market continues to

evolve. Debt sizing for Section 45 PTC sales is further

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Tax Credit Transfer Bridge Loans: Structuring Issues and Considerations

complicated by the longer-term repayment period and the

fact that PTCs, and therefore the corresponding payments

from a tax credit buyer, ﬂuctuate based on a project’s

generation proﬁle and possible curtailment.

Some near-term projects may not have arranged tax credit

sale agreements at ﬁnancial close of the bridge loan, as

the demand for construction ﬁnancing is outpacing the

ability of project developers to source tax credit buyers

on attractive terms. Some lenders are advancing TCTBL

commitments against the value of uncommitted credits

at advance rates that range from 50% to 75% of expected

credit value. Other lenders are requiring full or partial

developer credit support during the period before a tax

credit purchase commitment is executed, which credit

support is more likely to be available for established

project developers or those with strong balance sheets.

Providing sufﬁcient credit support to back stop an

uncommitted bridge loan may be more challenging for

less well-capitalized developers.

Structuring Tax Credit Transfer

Bridge Loans

TCTBL structures use two variations on the conventional

TEBL project ﬁnancing structure, with:

• The ﬁrst, depicted in Image 3 and similar to a

conventional tax equity partnership, designed to avoid

a recapture event if the lenders foreclose (see Managing

Section 48 ITC Recapture).

• The second, depicted in Image 4, applicable to sales of

Section 45 PTCs where recapture is not an issue (see

Structuring Section 45 PTC Sale Bridge Loans).

Managing Section 48 ITC Recapture

The IRS may recapture the Section 48 ITC under certain

circumstances, including a change in the ownership of

the project. Lender foreclosure on the assets of or equity

in the project company during the ﬁve-year period after

a project is placed in service may trigger the recapture of

the unvested portion of the ITC (which may be as much as

100% if the change of control occurs in the ﬁrst year after

the ITC is claimed).

A recapture event would cause a tax credit buyer to lose its

tax credit and would likely trigger an indemnity obligation

from the project owner who sold the credits (see Practice

Notes, Buying and Selling Clean Energy Tax Credits: Key

Issues and Risk Mitigation Strategies: Indemniﬁcation and

Tax Credit Transfer Agreements: Common Negotiation

Points: Seller Indemniﬁcation Obligations).

In a conventional tax equity partnership, after an ITC asset is

placed in service, the term lenders do not have liens on the tax

equity investor or on its interests in the tax equity partnership.

A foreclosure will be on the term borrower and its interests in

the partnership and does not result in a recapture of the tax

credit allocated to the tax equity investor (see Clean Energy

Project Financing Structures Before the IRA).

To achieve a similar result in a tax credit sale structure,

the project owner may choose to hold the project in a joint

venture between the term borrower and an afﬁliate and

to allocate the ITC to the afﬁliate. The afﬁliate’s equity

and assets are not part of the lenders’ collateral, thereby

avoiding recapture if the lenders foreclose on the term

borrower. Image 3 below outlines a deal structure that

avoids Section 48 ITC structure.

Image 3

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Tax Credit Transfer Bridge Loans: Structuring Issues and Considerations

This structure is easily adaptable for a tax equity

partnership or tax credit transfer transaction. It may

therefore be attractive to both project developers and

lenders, because it provides the ﬂexibility to toggle

between a bridge loan repayment from a tax equity

investor or a tax credit buyer.

For transactions in which this ﬂexibility is desired,

lenders and borrowers should determine the base case

assumption of the value of the credits for debt sizing

purposes and provide ﬂexibility for prepayments and

incremental borrowings to toggle to the correct advance

rate once the ﬁnal take-out structure is known.

Structuring Section 45 PTC Sale Bridge

Loans

In a Section 45 PTC sale transaction, in which tax credit

recapture is not a concern, the term lender may negotiate

to maintain asset-level collateral for the tenor of the loans.

One variation of this structure is depicted in Image 4 below.

Image 4

This structure is more favorable for lenders than the

conventional back leverage structure, as it permits the

lenders to maintain asset-level liens throughout the

term of the ﬁnancing and to remain structurally senior

to obligations under the tax credit transfer agreement.

Lenders may also require a pledge of the tax credit

transfer agreement and associated deposit account (for

example, if they are bridging to payments under the

agreement).

Intercreditor Terms

TCTBL lenders must conduct due diligence on the terms

in the tax credit sale agreement and evaluate the project

owner or seller’s obligations under these agreements. The

terms reviewed include:

• Remedies for underperformance for Section 45

PTC transfer agreements with minimum output

requirements.

• Liquidated damages payable by the seller for shortfalls

in delivering the amount of credits that were promised

to the tax credit buyer.

• The scope of indemnities offered by sellers. This may

include coverage for recapture regarding a Section 48

ITC transfer agreement.

Back-leverage lenders will attempt to ensure they

are shielded from or have seniority over the seller’s

obligations to a tax credit buyer. Back-leverage lenders

may require guarantees or other credit support in the

event the seller is subject to indemnity obligations under

the tax credit sale agreement. Interparty agreements

may provide certain terms that apply before foreclosure

(such as forbearance and cure rights) and specify the

TCTBL lenders’ rights to enforce the tax credit buyer’s

commitment to purchase tax credits if the applicable

conditions in the transfer agreement are satisﬁed.

Tax Credit Transfer Bridge Loans: Structuring Issues and Considerations

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Looking Forward

The IRA has heralded new opportunities to monetize tax

credits and arrange project ﬁnancing for renewable energy

and energy transition projects in the US. The ﬁnancing

landscape will remain dynamic as market players adapt

to new transaction structures that enable optimal use of

the new subsidy regimes and as developers and lenders

continue to ﬁnd solutions to optimize the value of the new

subsidies in the IRA.

A version of this article ﬁrst appeared in Project Finance

International on September 20, 2023.