Hunton & Williams Renewable Energy Quarterly, September 2009

Renewable Energy Quarterly
the owner or the partnership that is a direct or indirect
owner to a disqualified person; (2) the property ceasing to
qualify as specified energy property; and (3) other specified
events applicable to particular types of renewable energy.
A property may be sold to an entity other than a disqualified
person without triggering recapture, so long as the
property continues to be specified energy property, and the
purchaser of the property agrees to be jointly liable for any
recapture. Private investment fund sponsors should consider
addressing potential recapture issues in fund partnership
agreement provisions prohibiting transfers and assignments
of fund interests to disqualified persons, investment
guidelines prohibiting dispositions of projects to disqualified
persons, distribution clawbacks requiring partners to return
distributions associated with the recaptured amounts, and
provisions establishing specific reserves.
Because of these difficulties in providing maximum benefits
(and therefore returns) to some of the traditional sources of
private equity capital — tax exempts, high-net-worth individuals
and offshore investors — sponsors of a new Project
Fund should carefully consider its target investor base
before launching the fund. Before embarking on a renewable
energy project investment or strategy, an existing fund
should consider its investors and any provisions in its partnership
agreement or other fund documents that allow it to
consummate investments while excluding certain investors.
Timing
The Treasury began accepting applications for the grant
program on July 31, 2009, and awarded approximately
$500 million of grants in the first round of awards in early
September 2009. For property placed in service in 2009 or
2010, an application cannot be submitted for a project until
after the project is placed in service, and must be submitted
before October 1, 2011. For projects that are under
construction in 2009 or 2010, but not placed in service until
after 2010, applications must be submitted after construction
has begun, and before October 1, 2011. As a result of these
timing issues, fund managers may have a limited window in
which to deploy capital under these beneficial programs, so
will need a plan to raise and invest this capital on a diligent
basis.
Conclusion
Existing and new private investment fund sponsors confront
several threshold considerations in determining whether
renewable energy investing is right for them. Fund managers
generally are likely to come under increasing regulation
and scrutiny, and it is likely that taxes on traditional forms of
private equity compensation will increase. Federal and state
governments have traditionally provided incentives to investors
in renewable energy projects, and those incentives have
recently been expanded. However, fund sponsors should
consider whether these benefits can be adequately transferred
to their anticipated investor base, as several traditional
sources of private equity capital may have problems realizing
these benefits or require special structuring in order to do so.
There are strategies to deal with many of these issues, but
they should all be confronted early in the planning process
so all parties have realistic and achievable expectations.
29 Renewable Energy Quarterly www.hunton.com