Solar Power Partners SPP Fund II provided financing for the installation of solar energy systems on 18 stores in California for a leading national grocery chain. The project used solar power purchase agreements.   Solar Power Partners The solar installation for California’s Lagunitas School District provides an estimated 70 percent of the school district’s annual power needs. Over the term of the contract, it is expected to provide more than $110,000 of savings to the school district.   Solar Power Partners At the Marshall Medical Center in Cameron Park, California, the solar panel system was installed as part of the hospital’s parking structure.

Brian Tracey, Community Development Lending and Investments Executive, Bank of America

Bank of America invested in a fund that financed the development of solar installations in 24 locations across California. The investment benefited both Bank of America, which received the energy investment tax credit, and a variety of commercial and public entities now enjoying lower electricity costs.

Bank of America joined with Solar Power Partners (SPP) of Mill Valley, California, for this transaction. SPP installed the solar technology and manages and operates the solar facilities and the energy sales revenues on an ongoing basis. Bank of America committed equity of $34.5 million and, as the investor member, receives 99.99 percent of the federal energy investment tax credit benefits.

SPP is an independent solar-power producer that develops, owns, and operates facilities that distribute and sell solar-generated electricity through power purchase agreements (PPA). A PPA obligates the host customer to purchase the power generated by the solar installation at a given price over a period of time—usually 20 to 25 years.

SPP installed both ground-mounted and roof-mounted systems. Although solar-energy systems are generally placed on the rooftops of existing structures, some installations are constructed as elevated shade structures over parking lots or as free-standing structures. Many systems have stationary solar panels, while others maximize power generation by mechanically tilting panels to face the sun.

“The typical customer for a solar installation is one that uses a lot of power, supports ‘going green,’ and understands the savings that will accrue over the useful life of the facility,” said David Kunhardt, SPP’s Vice President for Structured Finance. For this fund investment, the sites hosting solar power installations include schools and universities, grocery stores, hospitals, and water districts.

Bank of America’s investment enabled SPP to install solar panels for a wide range of energy users throughout California, including schools, universities, hospitals, retail sites, and water utilities. Not only are the solar installations serving different types of public and commercial users, they also are geographically diversified, which is critical to ensuring the positive performance of the bank’s investment.

“Geographic and economic diversity are important when selecting host sites for a fund,” Kunhardt said. “The host sites should represent different sectors of the economy, various types of retail, hospitals, public institutions, and private businesses.” Geographic diversity is important to ensure steady overall fund performance, because weather variations affect energy output. Some interested potential customers approached SPP about having solar power installed. SPP also approached other potential customers with facilities that appeared to be ideal for hosting solar installations.

The PPA is negotiated separately for each host site. PPA provisions typically establish the length of the term, the starting electricity rate, an escalator clause to set a limit on the amount that the electricity rate can rise, and contractual duties, such as which party maintains insurance on the facility.

The contract also governs what happens to the solar facility at the end of the term. Solar equipment generally has a 25- to 35-year life span, although efficiency decreases somewhat over time. Therefore, the parties must decide when and how to end the contractual relationship. In this case, SPP could remove the solar installation, the host could choose to purchase the solar panels at fair market value, or SPP could negotiate another PPA with the host.

A chief benefit of PPAs is managing the market volatility of energy costs. “Users benefit from a steady and predictable energy rate and can even tailor their contracts to their own unique circumstances,” Kunhardt said. “For example, schools can take advantage of net metering by selling energy generated during peak hours in the summer months to cover the schools’ utility costs later during the school year.”

SPP is responsible for installing and maintaining the solar panels; the site host makes no initial or ongoing capital outlays. Depending on the level of electricity demand from the site host, the solar installation covers from 10 percent to 70 percent of the electricity needs for the host sites.

How the Investment Is Structured

The transaction was put together using a “master lease” structure. Four special-purpose entities were established to manage the flow of contractual rights and responsibilities: the SPP Fund II LLC and SPP Fund II-B LLC (the owner funds), the SPP Fund II Master Tenant LLC (the master tenant to both funds), and the SPP Fund II Management LLC (the managing member and tax matters partner for both of the funds and the master tenant).

Bank of America made a $34.5 million equity investment in the Master Tenant Fund. As the investor member, Bank of America holds a 99.9 percent interest in the Master Tenant Fund and the master tenant, in turn, owns a 49 percent interest in SPP Fund II and SPP Fund II-B. The managing member of these entities is a subsidiary of SPP. As the managing member, Solar Power Partners holds the residual 0.01 percent interest in the master tenant and a 51 percent interest in the SPP Funds. Figure 2 shows the flow of rights and responsibilities.

Figure 2: Structure for Solar Power Partners Transaction

During the construction phase for the various installations, SPP secured construction financing and a bridge loan until the permanent financing was in place. Both SPP and Bank of America contributed equity to SPP Fund II and SPP Fund II-B; a 15-year loan from another bank provided the balance of the long-term financing. A combination of municipal and utility subsidies available from the California Solar Initiative and receipts from the PPAs cover the debt service on the long-term financing.

The SPP Fund executed a 10-year master lease on the project and is responsible for debt service on the portfolio (construction loans were fully repaid by 2009). The tax credits flow from the SPP Fund through the Master Tenant Fund and then to Bank of America. In return for its equity investment, Bank of America also receives a preferred return, tax priority, and any residual cash, as well as, a share of the profits and losses.

The benefit of a master lease structure is that the tax equity investor can obtain all of the tax credits while effectively managing its exposure to losses. When properly structured as a “true lease” in compliance with Section 50(d) of the Internal Revenue Code, virtually all of the tax credit benefits pass through to the tax credit investors. The master tenant can also shift strategies to accommodate changing needs, such as different depreciation schedules. Bank of America, as the master tenant, was able to insulate itself from liability on the long-term financing because the loan is non-recourse, and SPP consolidated the assets and liabilities on the balance sheet of SPP Fund II, a separate legal entity.

At the end of the five-year energy investment tax credit compliance period, Bank of America can exercise its option to exit the transaction, having exhausted the tax benefits, and SPP can become the sole owner of the solar installations—after making a balloon payment to its lender for the outstanding principal balance. SPP set aside reserves for both the anticipated buyout and for six months of scheduled debt service.

As the managing member, SPP holds a 0.01 percent interest and is obligated to manage and operate the solar facilities and administer the energy sales revenues on behalf of the Funds.

Qualifying for Public Welfare Investments

To qualify its investment under the public welfare authority, Bank of America identified properties located in low- and moderate-income areas. Bank of America projected the number of jobs that would be created for low- and moderate-income workers to install and maintain the solar technology. Both the number and experience level of the jobs were evaluated. As figure 2 illustrates, Bank of America projected that most of the jobs would be for entry-level workers, either laborers or workers with specialized certificates.

Generally, more highly skilled workers are needed during the construction phase and, to some degree, for ongoing maintenance. Solar installations also create permanent jobs because the solar panels must be maintained and cleaned two to three times a year. These maintenance jobs primarily involve basic laborers and mid-level supervisors.

Community colleges and several public utilities in California offer solar training programs and workshops to help workers become more highly skilled in this specialized field. In Los Angeles, the International Brotherhood of Electrical Workers has an active solar installation and maintenance training program. Some municipalities offer solar installation job training, as well.

“Bank of America worked closely with the Office of the Comptroller of the Currency (OCC) to ensure that this investment would qualify under the public welfare investment authority,” said Barry Wides, the OCC’s Deputy Comptroller of Community Affairs. “The bank carefully documented the location and job creation potential for this investment.”

Figure 3: Jobs Generated by Bank of America’s Solar Energy Investment