Increases in project costs due to property taxes and/or a developer’s inability to secure a payment in lieu of taxes (PILOT) can make or break the economics of commercial and small utility-scale projects. According to a report written by Sunshot, Meister Consultants, and the North Carolina Solar Center, property taxes can add anywhere from $1/MWh to $120/MWh to PV system project costs. These added costs are especially critical in emerging or “almost there” markets, as well as more mature markets with dwindling incentive programs.
According to SEIA, 38 states offer property tax exemptions for renewable energy. Some states such as California, New York, and New Jersey outright exempt most renewable energy facilities from property taxes. Others, such as North Carolina and Maryland, offer property tax reductions.
State law exempting solar from property taxes is not always straightforward. This is because the interpretation of these laws is left to local assessors who have a vested interest in sourcing revenue, and understandably so. Property taxes are one of the most significant sources of local government revenue, sometimes amounting to 50% of local collections that fund schools, parks, and other government services.
Recognizing the importance of property taxes to solar project economics – and that solar panels will not be dialing 911, sending its children to school, or calling animal control – solar advocates are bringing property tax issues to the state house. On August 30, primary voters in Florida will vote on a ballot initiative that will authorize its legislators to vote to extend property tax exemptions to solar energy on commercial and industrial properties. If the process sounds complicated, that’s because it is complicated.
In Rhode Island, legislation signed into law by Governor Raimondo on July 7 will expand property tax exemptions for solar and require that the Office of Energy Resources and Division of Taxation work together toward “consistent and foreseeable tax treatment of renewable energy.” The new rules must be adopted by November 30.
Other states have not been so lucky. A property tax exemption bill in the Palmetto State was killed by a last-minute “poison pill” amendment after passing unanimously in the South Carolina Senate and House. The legislature will reconvene in January 2017. In the meantime, South Carolina developers must negotiate a fee in lieu of taxes (FILOT) and apply for a special source revenue credit (SSRC). Despite this discouraging news, we still see South Carolina as a top market in 2017 for large-scale projects.
Property tax issues will become less important for certain market sectors – especially utility-scale solar – as costs continue to fall. As a reminder, here are strategies that developers may employ to manage property tax uncertainty:
- Leverage your local relationships and knowledge of regional politics and policies to get a high degree of certainty on how property taxes will be assessed before locking in your financing. For example, in Massachusetts, some jurisdictions only approve PILOTs at biannual meetings.
- If you expect to get a property tax exemption, make sure it is legitimized and documented as early as possible, so that investors do not have good reason to assume the worst case scenarios.
- State realistic assumptions for property tax treatment(s) in your financial model. Then, contract with the investor to receive a portion of the upside if the project receives a more favorable property tax treatment.
Developers interested in learning more about property tax treatments and valuations for a given project may contact the Sol Systems team via e-mail at email@example.com.
This is an excerpt from the July edition of SOURCE: the Sol Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail firstname.lastname@example.org.
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