MUSKEGON — A West Michigan solar energy developer is pursuing new projects and job-training in low-income communities across the state that qualify for tax relief under recent federal tax reforms.
The Tax Cuts and Jobs Act of 2017 created qualified Opportunity Zones that allow investors to defer taxes on capital gains meant to spur development in low-income areas. While most projects involve real estate development, some developers across the U.S. are beginning to explore the potential for renewable energy in Opportunity Zones.
Rob Rafson, founder of Muskegon-based Chart House Energy LLC, says he has multiple projects lined up in these zones over the next two years.
A key component of his projects is job training for residents in low-income communities. He has $5 million of projects expected in 2019 and at least $15 million in 2020.
“We think this Opportunity Fund we’re developing is going to allow us to not just build solar in these communities, but create permanent jobs in these communities,” Rafson said.
Rafson says the qualified Opportunity Zone program adds another 15-percent tax benefit on top of 30-percent federal tax credits already available for solar energy projects. He created an Opportunity Fund specifically for solar projects in these designated distressed communities.
Chart House recently completed solar projects in Ypsilanti and Detroit with others planned in Flint, Muskegon Heights and Muskegon. Qualified Opportunity Zones are available in every Michigan county.
“We’re in the process of reviewing all of the locations and opportunities,” he said.
The federal program, which runs through 2026, incentivizes investment in economically distressed areas. It defers taxes on capital gains if they are directed into qualified Opportunity Zone funds, and also allows for up to 15-percent tax savings on the new investment if it’s held for seven years. After 10 years, there are additional tax savings on the appreciation of the investment.
Fund investments have to be made within 180 days of capital gains events.
With trillions of dollars in unrealized capital gains in the U.S., some clean energy advocates see the potential to spark investment in the industry even though the mechanism hasn’t yet seen widespread interest, Greentech Media reports.
“For the past 20 years, there has been new market tax credits, which are an incentive for banks to invest in low- and moderate-income communities. That has done some great things,” Rafson said. “This is one of the few tax benefits that allow and encourage private investment in these communities.”
Katie Roskam, an associate at Varnum LLP in Grand Rapids who helps investors wade through the new rules, said funds are “definitely being established,” particularly focused on rehabbing properties.
“The end of the year was busy; a lot of people were trying to deploy capital,” Roskam said.
She added that renewable energy projects are also part of discussions, ranging from only energy installations to installations as a part of an accompanying new development.
“(Developers) are trying to find costs they can capitalize into the property to increase its value so it makes sense,” Roskam said.
But while projects are getting off the ground, the Internal Revenue Service still hasn’t finalized rules for reporting taxes under the program. The proposed regulations were released in October.
“There is so much we don’t know,” Roskam said of the draft rules.
She said clarity is needed in defining active businesses, selling fund interest versus assets and clarifying cross references in the tax code “that don’t even quite make sense right now,” to name a few.
“There’s guidance out there that helps us get comfortable to pursue projects right now, but there’s still a lot missing in terms of how this plays out five to ten years down the line,” she said. “For now, it’s not stopping people from moving ahead at this point.”
Jigar Shah, president of Generate Capital, a San Francisco-based firm that recently redeveloped a shuttered biodigester facility in Fremont in Newaygo County, says he’s looking at Opportunity Zones spurring clean energy projects with a “glass half-full” attitude.
“In general, there’s a lot of uncertainty,” Shah said.
Particularly, qualifying for a bonus 5-percent capital gains deferral requires investing by the end of 2019, he said.
“A lot of people want to do that, but you need the rules to figure that out,” he said, adding that it’s unclear how much savings are possible. “The question of how much I give you depends on how much I think I’m saving money on taxes. I can show my intention of wanting to do this all day long, but if I can’t get to the bottom of it, I’m not necessarily going to wire the money for it.”
For the program to be effective in driving clean energy growth, Shah says it’s about additionality, or whether the policy will act as a sole driver of the projects.
“Is something going to happen that would have but for this policy? I don’t know the answer to that,” he said.
However, Rafson is hitting the ground running. He said his projects will mostly involve nonprofit and government facilities, with a strong focus on job training.
His concern involves out-of-state developers who may bring in capital for projects, and “then 10 years later take their money out of the community.”
“One of my guys coined the phrase, ‘We’re empowering people in the community, not just powering the community,’” he said.