Law360 (April 13, 2020, 4:27 PM EDT) --
Because of the pervasive and significant impact of COVID-19, it is essential that sponsors and borrowers preparing wind projects for completion in 2020 perform a holistic review of their full suite of tax equity, financing, offtake and material project documents to ensure compliance with obligations, prevent any unnecessary default triggers, and manage relationships with banks, tax equity and others.
We provide this two-part practitioner's guide for in-construction wind projects to highlight key potential pain points in the various tax equity, financing, offtake and material project documents. Although each individual project is different, this article can help sponsors and borrowers better understand the variety of risks that their project may face as it moves toward completion in 2020.
Part 1 includes a summary of key points related to the equity capital contribution agreement. Part 2 will provide a summary of the financing agreement and other material project documents which are critical to ensure project completion in 2020. Careful preparation and execution to mitigate COVID-19's effects will be required, as will extensive discussion with tax equity and lenders, in many cases. To that end, we also provide a brief update on the current state of the tax equity and debt markets to provide context for such discussions.
Tax Equity and Debt Markets Update
COVID-19's rapid spread has brought severe disruption and uncertainty to the wind industry's supply chain, and could also affect the availability of labor, resulting in significant delay risk. This uncertainty has resulted in a highly dynamic environment for the tax equity and debt financing markets.
We continue to monitor these markets as well as the governmental response to the economic impacts of COVID-19. As of the date of this writing, we are closely monitoring the following issues:
- In the debt market, we are watching for liquidity issues. Currently, existing deals that are already in the pipeline are moving to close. However, deals that are in their early stages are being repriced to reflect new cost of money.
- In the tax equity market, we are watching for risk appetite in light of safe harbor and start of construction guidelines. Tax equity is continuing to move forward with a large number of 2019 deals that have spilled over into 2020. However, tax equity will likely require clarification of the four-year safe harbor for 2016 start of construction and the extension of four years to five years due to COVID-19 related delays.
Equity Capital Contribution Agreements
Under an equity capital contribution agreement, or ECCA, a tax equity investor agrees to provide funding to the project once it has been constructed and has met an agreed set of conditions. Given current uncertainty surrounding the future availability of capital, and the eagerness of tax equity to fund its existing commitments in light of the pandemic, sponsors should review their ECCAs to ensure that no items might prevent or excuse funding from occurring as planned.
Generally, tax equity partners are well-established entities with a long history in the market, and they likely will not attempt to escape their obligations. However, these partners likely will not "close over" required closing items just because of the uncertain nature of the COVID-19 pandemic. A review of the ECCA should begin with the following points:
Commitment Expiration Date
Generally, the ECCA contains a commitment expiration date that provides a final date by which tax equity is obligated to provide its funding. It is rare to find any sort of force majeure mechanism to allow for an automatic extension of the commitment expiration date.
As 2020 is the final year of safe harbor for projects that commenced construction in 2016, if the commitment expires Dec. 31, then the commitment expiration date is unlikely to be extended for any reason.
- Review the commitment expiration date and funding mechanism together with any force majeure or delay notices received under an engineering, procurement and construction agreement or turbine supply agreement.
- To the extent a delay is likely to make turbine delivery or construction completion impossible by the commitment expiration date, begin dialogue with tax equity.
- To the extent a delay is likely to push funding into 2021, consult with tax counsel immediately to discuss any potential options to ameliorate the loss of tax credits.
An ECCA contains a long list of conditions precedent that must be achieved prior to the tax equity investor providing its funding. Some of these items are in the complete control of the sponsor, and others are outside of the sponsor's control. Below are a number of the most common conditions precedent that sponsors should be concerned about in light of COVID-19.
- Representations and warranties must remain true and correct as of the funding date (discussed below).
- An updated tax counsel opinion must be provided to tax equity. This may be of particular concern if tax equity has a broader discretion in whether it will accept the form of the tax opinion, or if it must be accepted if it is in the form provided at the initial execution of the ECCA.
- No change in tax law should have occurred, unless such change is properly reflected in modeling. While no change in tax law has occurred at this time, the forms of governmental response are subject to change. It is important to review whether tax equity has broader discretion in this regard, or if any changes included in modeling must be acceptable to tax equity.
- Title policies must be provided. While title companies generally have not yet been prevented from providing title policies, recorders' offices are experiencing delays due to various closures or other COVID-19 related delays. These concerns may be ameliorated with sufficient planning and early recordation.
- All required permits must have been obtained. COVID-19 related closures may cause delays for even minor permits.
- Landowner estoppels must be delivered. Even in ordinary times, collecting estoppel certificates from all landowners can be a time-consuming task. Stay-at-home orders, concerns for the elderly and widespread illness can make it almost impossible. Furthermore, many estoppels must be executed within 30 days of funding.
- UCC and litigation searches must be performed. With sufficient advance preparation, these should be attainable, but special care should be taken.
- Bring-down of independent engineer and other consultant reports is required. The content of many of these reports should not be at risk due to COVID-19. But timely delivery of environmental and independent engineer reports may be at risk, because they are often based upon site visits, which may not be possible due to travel restrictions or state mandated lockdowns. "Virtual" final inspections, including the use of drones, should be considered and agreed upon well in advance of the funding date.
- No material adverse effect should have occurred. Often these provisions may apply only to the sponsor and not tax equity. This being the case, the sponsor likely has much greater control in pushing tax equity to fund than if the material adverse effect applied to tax equity.
- The project must have been substantially completed, subject to completion of punch list items. Certain risks associated with some of the major project contracts that could delay substantial completion are outlined below.
- Closely review the conditions precedent of the ECCA to determine which may be of particular concern to your project. For any particularly risky condition, review tax equity's discretion in acceptance of any required deliverables.
- Begin planning now how to address any particular conditions precedent that provide special risk to your project. These may involve sensitive discussions with tax equity.
- Realize that many conditions precedent may take more time than they have in the past, so begin to carefully plan so that they can be completed either early or on time.
- Have discussions with tax equity investors regarding landowner estoppels and other required estoppel certificates. Consider asking for a longer window (such as 90 days) in which to obtain estoppel certificates.
- For any conditions precedent that cannot be achieved as expected, begin conversations with tax equity now in order to find solutions that are achievable.
Representations and Warranties
Generally, the ECCA contains several representations and warranties that are made both at execution and at funding (or at one of those times). Below are some of the most common representations and warranties that sponsors should be concerned about in light of COVID-19.
- No material adverse effect has occurred (the same analysis in regards to the condition precedent likely applies).
- No event of default or event that with the passage of time could be considered an event of default under a material contract has occurred and is continuing.
- No force majeure event under a material project contract has occurred or is continuing.
- There has been no event of default under the ECCA or other financing documents.
- At the execution of the ECCA, exceptions to the representations and warranties were likely provided in a disclosure schedule. The ECCA likely provides certain guidelines whereby these schedules can and cannot be updated at the funding date. Tax equity likely has some discretion regarding these updates and whether they allow disclosure of facts or events that would make the representations and warranties true.
- Review the various representations and warranties to determine which may be at risk.
- Understand whether the sponsor will be allowed to make certain critical updates to the disclosure schedules at funding.
- Review the obligations of the sponsor under the ECCA, especially in regards to notice provisions and events of force majeure under the material project contracts. Closely follow these obligations to ensure that there is no breach under the ECCA or any project document that breaches a representation and warranty.
COVID-19 has severely disrupted the wind market's supply chain and labor resources, resulting in significant project delay risk. This puts wind projects' funds at risk.
Due to the pervasive and significant impact of COVID-19, it is essential that sponsors and borrowers preparing wind projects for completion in 2020 perform a review of their tax equity documents to ensure compliance with obligations, prevent any unnecessary default triggers, and manage relationships with tax equity partners.
However, just as critical is an analysis of financing, offtake and material project documents. The second part of our article will explore key points of analysis related to these documents.
Carl J. Fleming and Edward Zaelke are partners, and Seth B. Doughty is an associate at McDermott Will & Emery LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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