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Paycheck Protection Program (PPP): Resource for lenders

04.16.20

Read this if your financial institution is providing funding under the PPP. This information is current as of April 6, 2020.

The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. 

The Treasury Department is encouraging people to apply ASAP because there is a funding cap.


When to accept applications?

Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply.

What underwriting is required?

In evaluating the eligibility of a borrower for a covered loan, a lender shall consider whether the borrower:

  • was in operation on February 15, 2020.
  • had employees for whom the borrower paid salaries and payroll taxes.
  • paid independent contractors, as reported on a Form 1099-MISC.

Lenders are also required to follow applicable Bank Secrecy Act requirements. Refer to the SBA’s Paycheck Protection Program Information Sheet for Lenders and recent FAQs issued by the Treasury on April 6, 2020.

Loan provisions

The Treasury Department issued guidance on March 31, 2020, that alters some of the assumptions around PPP:

  1. At least 75% of the forgiven amount should be used for payroll (changed due to anticipated high demand for program)
  2. Repayment of non-forgiven amounts are now repaid over 2 years at 0.5% interest (not 10 years and 4% as in the CARES Act)

Although the “covered period” is February 15, 2020 to June 30, 2020, forgiveness of the loan is based on expenses (primarily payroll) during the eight-week period after the loan is received.

Regulatory capital requirements

With respect to the appropriate Federal banking agencies or the National Credit Union Administration Board applying capital requirements under their respective risk-based capital requirements, a covered loan shall receive a risk weight of zero percent.

Borrower certification

An eligible recipient applying for a covered loan shall make a good faith certification: 

  1. that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; 
  2. acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  3. that the eligible recipient does not have an application pending for a PPP  loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and
  4. during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan.

What are considered payroll costs?

Payments of any compensation with respect to employees that is:

  • Salary, wage, commission, or similar compensation
  • Payment for vacation, parental, family, medical, or sick leave
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Other qualified payroll costs under Sec. 1102 of the CARES Act

Payroll costs are limited to $100,000 per employee, as prorated for the covered period, and exclude qualified sick leave wages and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

Important to note:

  1. Questions around 500 employees
    We don’t know for certain how the 500 employees are counted. Other SBA programs use average headcount over the prior 12-month periods. Some companies are proceeding on that assumption. We are awaiting additional guidance from the SBA for confirmation. Certain industries have an expanded headcount. The list can be found on SBA websites and BerryDunn has a lookup tool to help. If you don’t know, please reach out to us. We’re here to help.
  2. The CARES Act states that loans taken from January 31, 2020, until “covered loans are made available may be refinanced as part of a covered loan.”
  3. Participation in PPP (Section 1102 and 1106 of the CARES Act) precludes participation in the Employee Retention Credit (Section 2301) Payment of Employer Payroll Taxes (Section 2302)

Fully forgiven

Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Must keep employees on the payroll—or rehire quickly

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

All small businesses eligible

Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.

The Paycheck Protection Program is implemented by the Small Business Administration with support from the Department of the Treasury. Lenders should also visit sba.gov or coronavirus.gov for more information.

Economic Injury Disaster Loans (EIDL)

EIDLs are available through the SBA and were expanded under section 1110 of the CARES Act. Eligible are businesses with 500 or fewer employees, including ESOPs, cooperatives, and others. Terms: Up to $2 million per loan. Up to 30 years to repay. Comes with an emergency advance (available within 3 days) of $10,000 that does not have to be repaid – even if the loan application is turned down. This $10,000 does not impact participation in other programs/sections of the CARES Act. Some portion of the EIDL may reduce loan forgiveness under PPP, but receiving an EIDL does not preclude the borrower from participating in the PPP.


BerryDunn COVID-19 resources

We’re here to help. If you have questions about the PPP, contact a BerryDunn professional.

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Read this if you administer a 401(k) plan.

On December 20, 2019, the Setting Every Community up for Retirement Enhancement (SECURE) Act was signed into law. The SECURE Act makes several changes to 401(k) plan requirements. Among those changes is a change to the permissible minimum service requirements.  
 
Many 401(k) retirement plan sponsors have elected to set up minimum service requirements for their plan. Such requirements help eliminate administrative burden of offering participation to part-time employees who may then participate in the plan for a short period of time and then keep their balance within the plan. Although plan sponsors do have the ability to process force-out distributions for smaller account balances, a minimum service requirement, such as one year of service, can help eliminate this situation altogether.  

Long-term part-time employees now eligible

The SECURE Act will now require that long-term part-time employees be offered participation in 401(k) plans if they are over the age of 21. The idea behind the requirement is that 401(k) plans are responsible for an increasingly larger amount of employees’ retirement income. Therefore, it is essential that part-time employees, some of which may not have a full-time job, have the ability to save for retirement.  
 
Long-term is defined as any employee who works three consecutive years with 500 or more hours worked each year. This new secondary service requirement becomes effective January 1, 2021. Previous employment will not count towards the three-year requirement. Therefore, the earliest a long-term part-time employee may become eligible to participate in a plan under the secondary service requirement is January 1, 2024.  

403(b) plans not affected 

Please note this provision is only applicable for 401(k) plans and does not impact 403(b) plans, which are subject to universal availability. Furthermore, although long-term part-time employees will be allowed to make elective deferrals into 401(k) plans, management may choose whether to provide non-elective or matching contributions to such participants. These participants also may be excluded from nondiscrimination and top-heavy requirements.  
 
This requirement will create unique tracking challenges as plans will need to track hours worked for recurring part-time employees over multiple years. For instance, seasonal employees who elect to work multiple seasons may inadvertently become eligible. We recommend plans work with their record keepers and/or third-party administrators to implement a tracking system to ensure participation is offered to those who meet this new secondary service requirement. If a feasible tracking solution does not exist, or plans do not want to deal with the burden of tracking such information, plans may also consider amending their minimum service requirements by reducing the hours of service requirement from 1,000 hours to 500 hours or less. However, this may allow more employees to participate than under the three-year, 500-hour requirement and may increase the employer contributions each year. 

If you have questions regarding your particular situation, please contact our Employee Benefit Audits team. We’re here to help.

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New permissible minimum service requirements for 401(k) plans

Read this if you are a bank with over $1 billion in assets.

It’s no secret COVID-19 has had a substantial impact on the economy. As unemployment soared and the economy teetered on the edge of collapse, unprecedented government stimulus attempted to stymie the COVID-19 tidal wave. One tool used by the government was the creation of the Paycheck Protection Program (PPP). Part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP initially authorized the lending of $349 billion to encourage businesses to keep workers employed and cover certain operating expenses during the coronavirus pandemic. The PPP was then extended through August 8, 2020 with an additional $310 billion authorized.

Many financial institutions scrambled to free up resources and implement processes to handle the processing of PPP loan applications. However, such underwriting poses unique challenges for financial institutions. PPP loans are 100% guaranteed by the US Small Business Administration (SBA) if the borrowers meet certain criteria. Establishing appropriate controls over the loan approval and underwriting process is more a matter of ensuring compliance with the PPP, rather than ensuring the borrower can repay their loan.

Federal Deposit Insurance Corporation Improvement Act of 1991 compliance 

Banks with total assets over $1 billion as of the beginning of their fiscal year must comply with the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Amongst other things, FDICIA requires management perform an assessment and provide a resulting attestation on the operating effectiveness of the bank’s internal controls over financial reporting (ICFR) as of the bank’s fiscal year-end. Although this attestation is as of year-end, management must perform testing of the bank’s ICFR throughout the bank’s fiscal year to obtain sufficient evidence regarding the operating effectiveness of ICFR as of year-end. Key controls over various transaction cycles are typically housed in a matrix, making it easy for management and other users, such as independent auditors, to review a bank’s key ICFR. 

Internal control documentation

If the process for originating PPP loans is different from the bank’s process for traditional loan products, it’s likely the internal controls surrounding this process is also different. Given that $659 billion in PPP loans have been granted to date, it is possible PPP loans may be material to individual banks’ balance sheets. If PPP loans are material to your bank’s balance sheet, you should consider the controls that were put in place. If the controls are deemed to be different from those already documented for other types of loans, you should document such controls as new controls in your FDICIA matrix and test accordingly.

As noted earlier, the risks a financial institution faces with PPP loans are likely different from traditional underwriting. If these unique risks could impact amounts reported in the financial statements, it’s smart to address them through the development of internal controls. Banks should assess their individual situations to identify any risks that may have not previously existed. For instance, given the volume of PPP loans originated in such a short period of time, quality control processes may have been stretched to their limits. The result could be PPP loans inaccurately set up in the loan accounting system or loan files missing key information. Depending on the segregation of duties, the risk could even be the creation of fictitious PPP loans. A detective internal control that could address inaccurate loan setup would be to scan a list of PPP loans for payment terms, maturity dates, or interest rates that appear to be outliers. Given the relatively uniform terms for PPP loans, any anomalies should be easily identifiable. 

Paycheck Protection Program loan fees

Aside from internal controls surrounding the origination of PPP loans, banks may also need to consider documenting internal controls surrounding PPP loan fees received by the SBA. Although the accounting for such fees is not unique, given the potential materiality to the income statement, documenting such a control, even if it is merely addressing the fees in an already existing control, exhibits that management has considered the impact PPP loan fees may have on their ICFR. 

The level of risk associated with PPP loan fees may differ from institution to institution. For instance, a bank that is calculating its PPP loan fees manually rather than relying on the loan accounting system to record and subsequently recognize income on these fees, inherently has more risk. This additional level of risk will need to be addressed in the development and documentation of internal controls. In this example, a periodic recalculation of PPP loan fees on a sample basis, including income recognition, may prove to be a sufficient internal control.

With the calendar year-end fast approaching, it is time to take a hard look at those FDICIA matrices, if you haven’t already done so:

  • Consider what has changed at your bank during the fiscal year and how those changes have impacted the design and operation of your internal controls. 
  • Ensure that what is happening in practice agrees to what is documented within your FDICIA matrix. 
  • Ensure that new activities, such as the origination of PPP loans, are adequately documented in your FDICIA matrix. 

With Congress considering another round of PPP loans, there is no time like the present to make sure your bank is ready from an ICFR perspective. If you have questions about your specific situation, or would like more information, please contact the FDICIA compliance team

Article
Do your FDICIA controls "CARES" about the Paycheck Protection Program?

Read this if you are a solar developer or investor.

One of the most frequent questions we get from solar project developers is: “Will my investors be able to use the tax credits and the depreciation losses?” The answer, as with many things related to taxes, is “it depends.” One of the biggest hurdles is navigating the passive activity loss rules. While this is a fairly complicated topic, and includes a lot more of “it depends,” we’ll hit some of the major highlights here.

Passive or active?

For tax purposes, activities are grouped as either passive or active activities. Income from these activities are generally treated the same, aggregated as part of the taxpayer’s total taxable income and taxed according to the applicable tax bracket. Losses from these activities are treated very differently, though. Losses from active activities can be used to offset all taxable income, whereas losses from passive activities can only offset passive income. If there is not enough passive income in a given year to fully offset passive losses, the losses become suspended and carried forward. The losses carry forward until either there is passive income to offset or the activity is disposed of (sold or otherwise no longer owned), in which case the suspended losses release in full in that year.

Similarly, the Investment Tax Credit (ITC) takes on the attributes of the activity in which it is being generated. So if the solar project is determined to be an active activity for the investor, the ITC would be active and available to offset tax on all sources of income. But if the activity is determined to be passive, the ITC would be limited to use against tax on passive income. For an investor that has not considered this prior to purchasing a stake in a solar project, a limitation on the credit the investor can use could mean a reduction of the expected return on investment, and an unwelcome surprise.

Portfolio income

It is also important to point out here that a third type of income, portfolio income, is a very common type of taxed income comprised of interest, dividends, and gains from investments. This falls into a separate category from the active/passive analysis, which is often misunderstood. A taxpayer with lots of dividend income who thinks it is passive income ends up with a rude awakening as that is actually portfolio income and does not allow for the offset of passive activity losses.

Material participation test

IRS Publication 925 details all of the rules surrounding passive activities and includes a set of seven tests to determine material participation. If the taxpayer satisfies at least one of the material participation tests, the taxpayer’s share of the activity is considered active and not passive. The tests are: 

  1. You participated in the activity for more than 500 hours. 
  2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
  3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
  4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test.
  5. You materially participated in the activity (other than by meeting this fifth test) for any five (whether or not consecutive) of the 10 immediately preceding tax years.
  6. The activity is a personal service activity in which you materially participated for any three (whether or not consecutive) preceding tax years.
  7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

Tests one through six are pretty cut and dry, but the totality of the circumstances test presented in number seven is very open to interpretation. While this allows you to make an argument in your favor, it also gives the IRS more latitude to disagree with you, making it the riskiest test to rely on.

The IRS defines “participation” as “[i]n general, any work you do in connection with an activity in which you own an interest.” This does not include work that would be considered work only done by an investor – such as reviewing operations, preparing reports for your own use, or monitoring the finances or operations of the activity. The work in consideration must also not be work that is customarily done by the owner of that type of activity, nor your only reason for doing the work being to avoid treatment of the activity as passive.

While a contemporaneous log is not required to prove material participation, it is always a good idea to keep track of the work and hours you are performing on behalf of the activity in order to substantiate material participation. This is typically the first thing the IRS asks for in the event of an audit. 

As you can see from the seven tests, there is also room to switch between active and passive treatment in any applicable year. So it is important that you take the ITC in the year the project goes in service and the ITC is generated. If you are passive in year one and end up with suspended credits and or losses, a subsequent switch to active status would not change the attributes of those suspended items―they would remain passive.

Lastly, and important to note, this determination is made at the individual taxpayer level. Project investors need to work with their tax advisors and legal counsel to understand their personal tax situation before investing in a project. Depending on the individual situation, an active or a passive treatment may be more beneficial, as everyone’s tax situation is different. The most important thing is knowing ahead of time so that planning can be done and expectations can be set. No one likes a tax surprise!

If you have any questions about your specific situation or would like to know more, please contact the team. We’re here to help. 

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Passive activity loss limitation rules and solar project investment

Read this if you are a Maine business or organization that has been affected by COVID-19. 

The State of Maine has released a $200 million Maine Economic Recovery Grant Program for companies and organizations affected by the COVID-19 pandemic. Here is a brief outline of the program from the state, and a list of eligibility requirements. 

“The State of Maine plans to use CARES Act relief funding to help our economy recover from the impacts of the global pandemic by supporting Maine-based businesses and non-profit organizations through an Economic Recovery Grant Program. The funding originates from the federal Coronavirus Relief Fund and will be awarded in the form of grants to directly alleviate the disruption of operations suffered by Maine’s small businesses and non-profits as a result of the COVID-19 pandemic. The Maine Department of Economic & Community Development has been working closely with affected Maine organizations since the beginning of this crisis and has gathered feedback from all sectors on the current challenges.”

Eligibility requirements for the program from the state

To qualify for a Maine Economic Recovery Grant your business/organization must: 

  • Demonstrate a need for financial relief based on lost revenues minus expenses incurred since March 1, 2020 due to COVID-19 impacts or related public health response; 
  • Employ a combined total of 50 or fewer employees and contract employees;
  • Have significant operations in Maine (business/organization headquartered in Maine or have a minimum of 50% of employees and contract employees based in Maine); 
  • Have been in operation for at least one year before August 1, 2020; 
  • Be in good standing with the Maine Department of Labor; 
  • Be current and in good standing with all Maine state payroll taxes, sales taxes, and state income taxes (as applicable) through July 31, 2020;
  • Not be in bankruptcy; 
  • Not have permanently ceased all operations; 
  • Be in consistent compliance and not be under any current or past enforcement action with COVID-19 Prevention Checklist Requirements; and 
  • Be a for-profit business or non-profit organization, except
    • Professional services 
    • 501(c)(4), 501(c)(6) organizations that lobby 
    • K-12 schools, including charter, public and private
    • Municipalities, municipal subdivisions, and other government agencies 
    • Assisted living and retirement communities 
    • Nursing homes
    • Foundations and charitable trusts 
    • Trade associations 
    • Credit unions
    • Insurance trusts
    • Scholarship funds and programs 
    • Gambling 
    • Adult entertainment 
    • Country clubs, golf clubs, other private clubs 
    • Cemetery trusts and associations 
    • Fraternal orders 
    • Hospitals, nursing facilities, institutions of higher education, and child care organizations (Alternate funding available through the Department of Education and Department of Health and Human Services for hospitals, nursing facilities, child care organizations, and institutions of higher education.)

For more information

If you feel you qualify, you can find more details and the application here. If you have questions about your eligibility, please contact us. We’re here to help. 

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$200 Million Maine Economic Recovery Grant Program released

Read this if you are a renewable energy developer.

Key areas in which developers face critical solar project development stumbling blocks include permitting and environmental matters, site control, interconnection, and preparation for project sale. Here, Mark Vitello and guest co-author Brendan Beasley of Klavens Law Group, P.C. look at preparing for project sale.   

Common pitfalls renewable energy developers encounter when selling projects

Starting from infancy of a project through negotiation of an exit transaction, there are some common―and preventable―missteps developers need to avoid. These include corporate housekeeping and contract missteps; underestimating time to obtain third-party items; striking the wrong balance in a letter of intent; over-reliance on a develop-and-flip business model; undue optimism regarding project assumptions; inadequate protection against payment risk; and not covering bases with a co-developer.

Staying on top of corporate housekeeping

To a developer, the corporate side of project development is low risk and unexciting. Perhaps because of this, developers often neglect corporate matters. This is particularly common for developers without a full-time in-house counsel. Small mistakes can add up. Steps like forming a special purpose project company early in the development process and assigning any pre-existing project contracts or entitlements to the project company can be overlooked or postponed (and eventually forgotten) as a cost-saving measure.  

Here are six common mistakes we see: 

  1. the wrong entity executing a project contract;
  2. misspelling the project company name;
  3. unauthorized signatories (or incorrect title for the right signatory); 
  4. failure to pay state corporate franchise fees; 
  5. losing project documents and signature pages, or not fully compiling project documents; and 
  6. inadvertently allowing liens against a project company or project assets.

These and similar issues can be resolved during the due diligence process, but this typically comes with additional legal costs and delay, is inefficient from a capital perspective, and can jeopardize a buyer’s confidence. There are various approaches to prevent issues and help spot issues in advance. For example, forming a project company is a fairly simple and repeatable process that a good set of forms and checklist can address. As a project moves to development-stage, periodic audits of your organizational and project documents by, for example, maintaining a living data room, will support a smooth transition to marketing your project.

Obtaining third-party items early in the process

Third-party items always take longer to secure than you expect. For example, if you are selling a solar project, you will likely need landlord and offtaker estoppels and, if the deal is structured as a sale of assets, consents to assignment. You will likely need a title commitment and survey. A ground mount project will need a Phase I environmental site assessment, and, often, some sort of permitting report or opinion. An independent engineer report may be required. These are just a few examples of numerous third-party items that are common conditions to closing a sale transaction or part of due diligence. 

Lessen the impact of third-party items, and avoid surprises by attacking these items early. Securing estoppels, consents, reports, and opinions early, even if it becomes necessary to “bring down” or refresh them for the closing date, is immensely better than not initially securing them and leaving your project exposed to third-party risk. It is never too soon to raise third-party estoppels, as that sets expectations. If possible, create incentives or penalties tied to delivery by the third party. For example, estoppels can be addressed in some capacity in your project documents by establishing a covenant to deliver an estoppel within a certain number of days of request and including a form of agreed-upon estoppel. For consents, a project document can identify certain instances where consent is automatic, such as assignment of the document to affiliates, or to third parties meeting certain credit or experience thresholds.

Right sizing the letter of intent (LOI)

Developers should avoid following the middle path in negotiating a letter of intent. Typically, the only two binding terms in an LOI relate to the exclusivity period and confidentiality. Nevertheless, there can be a lot of LOI deal term stickiness when it comes to drafting the definitive purchase agreement. As a result, we usually recommend one of two approaches: (1) no LOI or a very skinny one; or (2) detailed LOIs. 

Factors such as transaction complexity, counterparty risk, potential repetition of transactions, and internal approval processes tend to dictate the right approach in any particular situation. A skinny LOI might have a shorter exclusivity period to extend as the parties coalesce on terms and due diligence progresses. This approach establishes momentum toward due diligence and negotiation of a definitive agreement. One place to avoid ending up, however, is with an LOI that was only lightly negotiated yet covers many deal terms. This scenario can leave a developer (or buyer) in a lurch if certain expected terms of a purchase agreement cannot be agreed upon and were not covered in the LOI or, worse, negotiated deal terms in the LOI are not agreeable to the developer’s management or investors. A project with a commercial operation date deadline, permitting deadlines, and/or a fixed incentive period can ill afford to be stuck in exclusivity with a counterparty unwilling to budge from agreed LOI deal terms.  

Maintaining a Plan B―and a Plan C

Sure, most developers have no tax appetite, limited capital, and want to sell at the first possible opportunity. That’s fine. However, until that exit transaction occurs, the developer owns the project and should have an ownership mentality toward the project. Taking this approach can set the developer in the driver’s seat in purchase agreement negotiations by creating a viable, and perhaps even more valuable alternative path if negotiations stall. Over-reliance on a prospective purchaser that intends to finance construction or insists on procuring key equipment can result in a situation where the buyer exerts leverage if a developer has no Plan B in place. 

Having construction finance capacity or additional equity funding can markedly change the dynamics of post-LOI negotiation. If a developer does walk away from a transaction without having continued development during the period under exclusivity, the developer losses time while often increasing project risk due to outside commercial operation dates and expiring incentives and permits. On the other hand, a developer that has moved forward on a project, and even entered construction, will de-risk a project leading to potential pricing upside.

Correctly pricing transaction assumptions

A typical pre-commercial operation solar M&A transaction involves a purchase price paid in milestones. Frequently, LOI-stage assumptions based on the expected state of the project at the time of signing the definitive purchase agreement turn out not to be accurate. While certain things, such as ultimate project size or property tax burden, are often the subject of mechanisms to adjust the purchase price if later conditions vary from an assumed baseline, it can be risky not to negotiate contingencies with respect to other items, such as whether an executed site lease (still in negotiation) or a key permit (subject to upcoming local board vote) will be in hand at signing. 

Developers tend to be optimistic. However, a developer may wish to agree on pricing or milestones at the LOI stage based on conservative estimates to protect itself if the parties are otherwise ready to sign a definitive purchase agreement. Contemplating both “base case” and “ideal case” pricing and milestones in the LOI can help ensure a developer’s management and investors are on board. It also avoids over-promising and under-delivering, which can be more harmful to reputation and may result in a bigger discounts or deferrals of purchase price than if the base case were negotiated up front.

Ensuring buyer credit quality

A developer must consider the creditworthiness and reputation of a project buyer and put in place necessary protections both to ensure payment of purchase price and continued development and construction of the project. A parent guaranty can not only decrease the general credit risk of the buyer, but, depending on the buyer’s corporate structure, can also result in independent management personnel’s reviewing a milestone payment dispute with fresh eyes. This unbiased perspective may be more realistic and potentially sympathetic to a developer’s claim for payment. 

Other options to protect against risk of non-payment are project entity (or asset) buy-back rights and escrow agreements. In iterative transactions, such as ongoing sales of a portfolio of projects, a developer’s ability to offer future projects from the pipeline to the buyer on similar terms can act as a substantial incentive to the buyer to make payment. A common payment default scenario is a buyer’s unilaterally setting off against the purchase price for claims that may not have any merit. In this case, a buyer rarely has incentive to begin dispute resolution as it is holding the money. 

Developer protections to address this issue, in addition to those discussed above, include restrictions on set-off (which may include requirement of developer written approval or commencement of dispute resolution), litigation fee-shifting, and meaningful deductibles on buyer claims.

Selling co-developed projects

If you have a co-developed project, be sure your development partner is on board before signing an LOI, even if you may have exclusive authority over project sales. Better yet, ensure that each partner signs the LOI. The benefits are two-fold. First, this can protect against a later disagreement with your development partner on deal terms and kick-off discussions regarding allocation of risk between the co-developers in the event of post-closing claims. Second, this will give confidence to the prospective buyer that all necessary parties are in favor of the transaction.

For more information

If you have questions or would like more information about these matters, please contact Brendan Beasley or Mark Vitello.

Please note, this article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Klavens Law Group, P.C. or its attorneys. Please seek the services of a competent professional if you need legal or other professional assistance.
 

Article
Avoiding project development pitfalls: Solar M&A

Read this if your company is seeking assistance under the PPP.

The rules surrounding PPP continue to rapidly evolve. As of June 22, 2020, we are anticipating some additional clarifications in the form of an interim final rule (or IFR) and additional answers to frequently asked questions (FAQ). The FAQs were last updated on May 27, 2020. For the latest information, please be sure to check our website or the Treasury website.

A few important changes:

  1. The loan forgiveness application, and instructions, have been updated.
  2. There is a new EZ form, designed to streamline the forgiveness process, if borrowers meet certain criteria.
  3. Changes now allow for businesses to use 60% of the PPP loan proceeds on payroll costs, down from 75%.
  4. Businesses now have 24 weeks to use the loan proceeds, rather than the original eight-week period (or by December 31, 2020, whichever comes earlier).
  5. The rules around what is a full-time equivalent (FTE) employee and the safe harbors with respect to employment levels and forgiveness have been clarified.
  6. Entities can defer payroll taxes through the ERC program, even if forgiveness is granted.

These changes are designed to make it easier to qualify for loan forgiveness. In the event you do not qualify for loan forgiveness, you may be able to extend the loan to five years, as opposed to the original two years.

The relaxation on FTE reductions is significant. The reductions will NOT count against you when calculating forgiveness, even if you haven’t restored the same employment level, if you can document that:

  • you offered employment to people and they refused to come back, or
  • HHS, CDC, OSHA or other government intervention causes an inability to “return to the same level of business activity” as of 2/15/2020.

As of June 20, 2020, there was still an additional $128 billion in available funds. The program is intended to fund new loans through June 30, 2020. 

We’re here to help.
If you have questions about the PPP, contact a BerryDunn professional.

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PPP loan forgiveness: Updates

Read this if you are a solar energy investor, installer, or involved in the renewable energy sector.

One of the benefits to a tax equity investor investing in a renewable energy project is the losses generated by the depreciation of the energy equipment being placed in service. Projects qualifying for the federal Investment Tax Credit are given a five-year MACRS life, providing a cost recovery deduction over five years from the in-service date (typically six tax return filings).  

Investors with eligible income from other sources can offset that income using the losses generated by the depreciation. In some cases the investors have more losses than they can use, which results in a Net Operating Loss (NOL). The rules around NOLs have changed several times recently, and it’s important to know what steps investors should take in order to maximize the benefit from their investment in a renewable energy project.

Historically, individuals could use losses to fully offset their taxable income in the current year. Any excess loss was to be carried back two years to offset taxable income on a previously filed tax return, if available. Any excess NOL carried back and not absorbed would then be carried forward and available for 20 years. This provided a source of immediate funds for investors, as an NOL carryback typically resulted in a recovery of taxes paid in a prior year.

An election could also be made with the original loss return to forgo the carryback and elect to carry forward only. In some cases investors determined that it was more beneficial to have the loss available to offset future income―for example, in cases where the tax rates were set to increase, if the depreciation benefits from a prior project were set to expire, or an anticipated large income event was on the horizon. These losses could also be carried forward for 20 years.

Impacts of Tax Cuts and Jobs Act on NOLs

With the passing of the Tax Cuts and Jobs Act (TCJA) in December of 2017, tax returns filed beginning with tax year 2018 were subject to some changes around NOLs. Some impacts:

  • Losses were no longer allowed to offset 100% of taxable income in the current year, now only being able to offset 80% of taxable income. The remainder was reserved as an NOL available on future returns 
  • The removal of the two-year carryback period 
  • The 20-year cap for NOL’s carried forward was removed, letting them carry forward indefinitely

While most investors were able to use their losses in the first several years surrounding the original loss year, removing the expiration cap on the NOL carryforwards was at least a compromise to losing the other benefits of generating a loss from the investment. The changes from the TCJA shifted the tax strategy focus, as investors who had previously been able to invest in projects and avoid paying federal income tax completely now had to budget for paying tax on at least 20% of their income. The influx of cash from carrying an NOL back to a prior year was no longer an option, as many investors factored that into their ability to repay debt or final construction invoices. While these weren’t completely devastating changes, they were ones that needed to be considered, modeled, and budgeted before any investments were made to ensure proper cash flow.

COVID-19 and its impacts

Then the COVID-19 pandemic hit, and impacted businesses in all corners of the economy. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020 with wide-sweeping incentives intended to keep cash flowing to those that needed to continue paying bills while businesses were closed. One of the major tax code changes was to the rules surrounding NOLs. The CARES Act temporarily repealed the 80% limit of the TCJA, once again allowing individuals to offset all of their taxable income with an NOL generated in 2018 through 2020.  

Actions to take

In addition, the carryback was also temporarily re-instated, and expanded to five years for losses generated in 2018-2020. Some considerations:

  • An investor who has already filed their 2018 tax return should look to see if their losses were limited on that filing. If so, an amended return should be filed to retroactively claim the full amount of the losses available in 2018 on that return.  
  • Additionally, an analysis should be done to verify the benefit of carrying back the losses to 2013-2017 returns and potentially claiming additional refunds for those years, depending on the volume of available losses and taxable income.

As the pandemic continues, and project completion is potentially delayed, it will be important for investors to monitor income and losses over the next six months to determine if they will be able to fully utilize NOLs for 2020, or if they will need to plan for a return to the TCJA 80% limitation rule in 2021.

If you have any questions or would like to know more, please contact the team. We’re here to help. 
 

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Net Operating Loss rules in renewable energy: COVID-19 changes