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.




Modeling it can get pretty complicated, but below is the idea:

Take a solar developer, for example:

Usually a tax equity investor will come in and provide a check to a developer once the project starts commercial operations.

In exchange, the tax equity investor typically gets a certain percentage of both the cash and tax attributes of the project going forward. This is typically structured as part of a partnership flip structure, where the investor receives, as an example, 99% of the cash and tax attributes pre-flip and 1% of the cash and tax attributes post-flip. In solar, tax attributes are available in the form of investment tax credits and accelerated depreciation 5-year MACRS and/or bonus depreciation.

What determines the flip year is typically a return threshold, but many cases it's a combination of factors relating to the cash and tax attributes of the project and what the tax equity investors' investment horizon is. For some projects, tax equity investors actually make their returns thresholds in just 1 or 2 years, however many of these investors want to be invested for at least 5-6 years (for solar, that's the accelerated MACRS schedule). This makes modeling and structuring a deal pretty complicated.


because then you might as well push the DCF out another year since you did the projection and use LTM multiple for year 6 or 11

the exception being PE exit where target holding period is defined for IRR calculation purposes but then you would be sensitizing around that anyway


My shop uses the implied exit multiple as a check to make sure we are using an appropriate discount rate. We compare that implied multiple to the LTM multiple in stable businesses because the LTM reflects the current operations, although FY+1 should not be materially different except for a discounting factor.


Forward in an M&A scenario as you are normally pitching a combo at a future date. LBO would be LTM as that is the number the firm would leverage off of.


LTM is much more common from my experience.

Forward earnings is a lot of "you-say-i-say", (you can input any assumptions you want to make the figures look good) no one really takes it as seriously as the LTM figures (actual realised).


leverage multiples are calced off of ltm from what I've seen (because debt is more conservative).

equity is calced off of forward (equity should be valued off of the future FCF of a company. or, if company is a fast grower [double digits % growth], LTM doesn't really make sense to value off of).

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