- Generating a lower cost of capital than the industry standard “flip” structure
- Often delivering over double the present value to the project sponsors
- Making marginal projects financeable
This productivity is needed more now because of potentially decreasing corporate tax rates. Lower rates typically decrease overall economics. It is clear that it is time for the industry to adopt this innovative financing structure.
With the “flip,” complacent project sponsors are forced to face declining economics combined with the need to provide substantial indemnifications to investors. And the supply of investors is limited, which gives investors the ability to demand high profits. The sale-leaseback solves these issues.
It is typically possible for active project sponsors to use the increased profitability of the lease to offset the lost tax benefits. It is also possible to prepay the lease passing on enough of the benefit of the financing to the investors to offset potential decreases from a lower corporate tax rate.
The lease achieves this by lowering the risk in the wind farm for the first 10-year period, which is when investors are most concerned. The lease brings together a consortium of parties to take different risks through third-party contracts.
The profitability lets Jupiter Renewables create custom solutions for issues. Jupiter has solutions for location basis risk, marginal wind speed, and other project specific risks.
The industry has been implementing many of the risk management tools included in Jupiter’s original patent. But these tools are still used within the “flip” structure. For this reason, they are missing out on significant benefit.
With the addition of the prepayment, the lease shares the tried and tested tax structure used by over 1,000 MW of wind farms in the US Northwest – it is a prepaid service contract. But for book and regulatory accounting it qualifies as a lease. Earnings for Sponsors are accretive, and financial investors can book this investment as high investment-grade debt.
Filed Under: Financing, News, Projects