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USDA REAP Financing
Source: U.S. Department of Agriculture,
Palmetto Energy Capital
Total loan volume
Number of loans
$600M
80
70
$500M
60
$400M
50
$300M
$225 million
Tax equity investments
deployed on behalf of
banks by The KeyState
Companies since 2019
40
30
$200M
20
$100M
10
$0
0
2018
2019
2020
2021
2022
A bank investing in a solar tax equity
fund would earn back its entire investment in the first year, in the form of
reduced tax liability, says Miller. Over the
next five years, a bank would then receive
additional income from the sale of energy
produced by the projects it has helped
finance. KeyState has been working with
solar tax equity investments since 2019,
when it launched its SOLCAP tax equity
fund platform.
“For any bank that is not active in tax
credit investments, whether it be solar,
[Low Income Housing Tax Credits] or
New Markets [Tax Credits], they are an
untapped resource,” he says. “With tax
credit investments, a bank can convert its
federal tax liability into earnings, which
can be quite meaningful year after year.”
As of March 2023, KeyState has closed
seven solar tax equity funds, working
with 15 banks that range from $1 billion
to $40 billion in assets. Most of those
banks invest annually, the firm says,
creating a recurring earnings benefit.
A single fund ranges from $20 million
to $100 million and could have three to
$10 million
Average bank’s investment
in a SOLCAP solar tax
equity investment fund
The KeyState Companies
eight banks invested, Miller says. In total,
the funds have deployed $225 million
across 53 projects.
“It’s our job on the front end to not
only explain the investment but to assist
[investors] with all of the underwriting,”
Miller says. KeyState also handles the
modeling and assists with regulatory approvals. The bank investors are ultimately
responsible for evaluating the developers and solar projects. After that point,
KeyState’s role transitions into an asset
manager, Miller says. The company provides participating banks with quarterly
updates on their investments.
Solar tax equity investments can also
help banks boost their environmental,
social and governance (ESG) bona fides.
Banks may soon be able to earn credit under the Community Reinvestment Act in
states that passed legislation intended to
make renewable energy more accessible
to low- and moderate-income households,
Miller says, including Illinois, New York,
New Jersey, Maine and Virginia.
A Complement to SBA Lending
The U.S. Department of Agriculture’s
Rural Energy for America Program
(REAP), launched in 2015, has also made
solar energy lending more attractive
to the banking industry by providing a
government guarantee to project financing that meets certain criteria. That can
be appealing to banks that already have
some familiarity with Small Business
Administration lending, which has similar
guarantees. That program saw a spike
in activity between 2019 and 2020 due
to a greater number of solar and biogas
projects, coupled with lower interest rates
and more incentives.
West Town Bank has done a fair
amount of REAP financing. So has $10.4
billion Live Oak Bancshares, based in
Wilmington, North Carolina. The bank,
an active SBA lender, has originated just
north of $1.5 billion in solar energy project lending since 2016, much of it through
the USDA’s program. In its own role, Live
Oak would find itself on the other side of
the table from a company like KeyState,
meaning that Live Oak provides the loan
while a fund provides the tax equity
investment.
Jennifer Williams, senior vice president
of renewable energy at Live Oak, says the
bank likes the renewable energy space
due to its expected future growth, as well
as its contributions to rural economic
development and job creation.
“This is an exciting time and there’s a
growing need, particularly in tax equity
investment,” Williams says. “There are
some real needs that a regional bank can
meet by being a good partner to someone
local.”
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