I'm curious if anyone has any experience with tax equity financing. From what I understand, the investor (bank) gives $ to the project developers. In return for this capital, the bank gets the rights to any tax incentives that the developer might have.

What I'm unsure of is this - does the bank get an actual equity stake in the project? Or, is it essentially debt that the bank is buying, so the bank receives the debt service payments + tax incentives? --- Does it just depend on the deal and there is no 'typical' way these work.

If someone could provide some insight on this, I'd be most appreciative. Sorry if my post is vague, I'm new to this.

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I worked in affordable housing debt finance for a while, so I'm not an expert on this but I do have some background.

Basically, as I recall--and it's been a while--it is called "equity financing" because there is no repayment associated with the proceeds. The investor--usually a bank--will put up, say, 25% of the project financing, which is used as equity. The other, say, 75% comes from a loan. The 25% equity stake allows the investor to take tax credits of a certain amount. For example, if the bank puts up $1 million in equity, the bank can theoretically reduce their taxes, say, $100,000 per year for 10 years.

Where it can become profitable for the investor is if they buy $1 million of tax credits, say, 75 cents on the dollars. It means they are putting up $750,000 and writing off $1 million on their taxes (over a period of time). There is risk, however, of loss when there are defaults, regulatory violations, etc., which is why you might see tax credits sell at a discount, sometimes at substantial discounts to par.

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Interesting. Thank you for your comment! I'm trying to model this for some projects, and I'm trying to figure out exactly how to make it work.

If anyone has anything useful to add, please feel free!

I'll do what I can to help ya'll. But, the game's out there, and it's play or get played.


This may seem pretty obvious, but just as a reminder--tax credits are different than tax write-offs. If we're talking tax credit investing write-offs, we're literally talking a reduction in taxes owed dollar for dollar. So your model needs to adjust for the fact that if a company owes $100,000 in taxes and applies $100,000 in tax credits then the company has no tax liability.



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