Ep354: How Developers Can Protect Their Tax Credits

Speaker A: Foreign. Welcome to Currents, the Norton Rose Fulbright podcast. Today we're recording with Alan Cordova, head of strategy at MPACT Technologies. Mpact's a compliance and risk management software company focusing on renewable energy developers and owners. Alan, welcome to the podcast.

Speaker B: Thanks. Glad to be here. Longtime listener, uh, first time caller here all. Uh, right, we'll call her.

Speaker A: Maybe not, but first time guests. All right, so there's a few different angles to compliance that are probably the most relevant for people in the audience. One is prevailing wage and apprentice rules. And obviously those are fundamental to obtaining the tax credit for developers and financing parties, making sure that their counterparties know what they're doing. The purpose in general of this podcast is to go beyond kind of just high level. Here's what the rule is. And talk about what people have to do in practice to make sure that they don't jeopardize their ability to qualify for the credit. So let's start with pwa, and maybe you can highlight, based on your firm's experience, where people are most often to, uh, make a blunder here that potentially puts them in jeopardy of losing the credit.

Speaker B: Yeah, I mean, we see a lot across the millions of wage hours we've covered, billions of tax credits. I think, you know, three areas really pop up, uh, for us most often subcontractor visibility, apprenticeship hour tracking, and, uh, making sure we get the wage determinations correct. So for subcontractor visibility, that means not just as a developer, is my EPC doing the right thing, but every level below that, sometimes multiple levels of subcontractors, making sure the requirements flow down, the reporting flows up, tracking apprenticeship hours. Again, uh, we see this very often. People don't have a system for doing, making sure that they are above all the required ratios. Um, they lose track of it and then it's maybe too late to fix. They've left the project, the apprentice is gone. They may try to scramble to invoke a good faith exemption which has its own requirements. Uh, they're really kind of in a bind. And then with wage determinations, again, sometimes it's a footfall at the beginning that sets a contractor up for failure down the road. Uh, if you don't have the right laborer location and application, you may just be following the wrong requirement. And we see that quite a bit, uh, where somebody thought they were doing the right thing and then at the end realized they had a systematic record of failures.

Speaker A: So what do you do for your clients to help them try to avoid these pitfalls?

Speaker B: So I tell every developer, bring us in early. We want to be there before construction starts to make sure that the requirements are clearly spelled out, the wages are determined and uh, classified. We actually spend time with industries, uh, that may not have wage determinations. Uh, in the past we've done a lot with RNG that, you know, the specific laborers may not have been classified by the Department of Labor to get those in place ahead of time and then make sure it's communicated down and they reporting and kind of what is needed by subcontractors is flowed up. And so we can see, we typically want to see the underlying time cards and pay stubs showing exactly what hours you worked and exactly what you were paid.

Speaker A: I'm, uh, moving away from pwa. I'm going to move into a, uh, bigger landmine here of, uh, Fiat. So FIAT is probably the area where I'm getting the most questions now, just because there's a lot of uncertainty and the rules are starting to take bite. Where, from your perspective is the biggest gap in knowledge and how do you advise clients?

Speaker B: I think the biggest gap in knowledge right now is the type and extent of documentation that's required. I think developers may say, look, I'm working with a tier one supplier, I should be good. Right? They're a good supplier. They generally manufacture in the US and even if that's true, even if that's correct, that's not sufficient. Uh, the FIAC for Fiat in particular, tax credit buyers, tax equity is going to require extensive documentation, uh, because of the nature of the risk. This is a tax credit that if you trip up, you may lose the entire credit, uh, on one shot. So we will look for extensive documentation that is produced in a consistent manner that meets the requirements and is also set up for ongoing monitoring of the obligations that are set up, uh, through into operations. So we want to be looking at the ongoing payment streams that may be set up to make sure that payments are not going to a private foreign entity.

Speaker A: So when we talk about fiac, we say Fiat, but really it's three distinct tests. The material assistance, the effect of control, and the ownership. Um, one, maybe you could explain what those three tests are and then again, what are the pitfalls and specifically what do you do? How do you advise people beyond just documentation? What are the mistakes people are making?

Speaker B: Yeah, so as you noted, there's three parts to it. The ownership is the best place to start. Are you as a developer, seller of the credits, or is the buyer prohibited, uh, foreign entity? The idea here is foreign entities of concern cannot be involved in receiving tax, uh, Credits or tax benefits. Second is effective control is a prohibited foreign entity for receiving payments, uh, for a contract that provides effective control, which can be for example the right to turn off or affect operations of a project. And finally material assistance, uh, there's certain thresholds for prohibited foreign, you can't go above those. You need to make sure for example for solar, 40% of the supply must come from non prohibited foreign entities. And so each of these must be met, they must be met separately. Uh, you can't sort of get partial credit. And so there, and there are three different distinct categories of compliance. So for ownership we again advise documentation, looking up your ownership ranks, looking at who has control over the entity, uh, and who provides the debt for effective control, looking at the specific contracts, particularly ones that do involve some measure of control over the project or intellectual property. So something as simple as a warranty, where a service provider may come in and be able to switch off a project to service could convey effective control. Again there's nothing wrong by itself with effective control it just means that you have to m monitor the contract and the counterparty carefully. And finally with material assistance, uh, we have to look at the bill of materials, manufactured products that go into the project and make sure that you can clear that threshold as being required.

Speaker A: So I'm going to shift again now to uh, start a construction which is another area that you guys consult on and where potentially you can have some pitfalls here that can cause you to lose your tax credit. And the clients that I deal with, most of them, they want to talk to one of the tax lawyers here who really know what they're doing and they say okay, how do I meet the beginning of construction test? What's the rule? What certificate do I need? How do I get to financial close? And then people here at Norton Rose say great, we're done and turn it over and it's up to the company to comply. Now once we're actually in the real world and starting to physical world, I should say, as opposed to the, the software of the, what's in documents, what happens and what are the pitfalls?

Speaker B: Yeah, I mean as a longtime project developer I and most of my peers are very familiar with the 5% safe harbor. You just take a, you know, make sure you set it up correctly and make sure that 5% is spent uh, on eligible uh, applications prior to your beginning of construction date. And then as long as that ratio is maintained within a continuity of four years, you're generally good. Unfortunately for solar and wind in particular for projects above, uh, 1.5 megawatts last year is no longer a requirement. Now those projects have to rely on the physical work test, which is a continuous work of a significant nature on eligible on site or off site activities. Folks at Norton Rose, um, you spend every day, I'm sure, interpreting that and guiding developers on what are those the correct activities, what are the contracts that will set those things up. But as you noted, that begins a process of compliance that will need to document that continuous work. And so for offsite, for example, we want to go look at the manufacturing process and make sure there's continuous effort on typically a transformer if it's onsite. We want to be seeing a record of continuous work on that project site building legitimate, uh, infrastructure that will eventually support that project. And so again, documentation, uh, will be the word of the day here. That's what we do. We want to make sure that documentation is generated in the correct way, collected, organized, so that at the end of the project we can show a record that can go to council tax, equity, tax, insurance, whoever may need it to satisfy due diligence that this work has been done. You know, I think with BoC in particular, intelligent developers, look, you don't have a time machine. Once that date passes, you can't go back and create that documentation in prevailing wage. We are often able to look back and say, okay, let's retrieve the labor records from a month ago, a year ago. But if we were supposed to have taken a picture on a day and we didn't take that picture, or we can't go back and do it. And so BoC in particular begin construction is very, very important to get set up ahead of time. Particularly, I'm sure solar and wind developers are thinking about the July 4 deadline. We're very busy with folks getting that in place so that we can kick it off and again make sure it's that record, uh, is set.

Speaker A: So what do you do in the situation where you can't get the documentation for beginning of construction or PWA compliance or even for fiac? Um, a lot of what you've hammered on so far is do a good job with your documentation. Easy for us to say, but probably the time when we're most needed is when we didn't somebody made a mistake or somebody didn't understand or the rules weren't that clear, whatever. What do you do then?

Speaker B: I mean, where there isn't documentation, it becomes a risk and it becomes a hazard to the deal. Ultimately, you know, we may look to, you know, guidance to say you Know, can we, you know, what, what can be produced, what can be substantiated and documented, um, and you know, try to bring the stakeholders together to, to address the issue. But you know this is really our, our role in this process is to, to make sure we don't get to that, make sure that when we reach that point where you know, the, the developers under, you know, is uh, withstand under due diligence from multiple parties that they can prove, you know, that their requirements are matched.

Speaker A: But there has to be many instances where that's not the case. Right? I mean the world's not perfect. It's easy for us to say set it up this way, but what have you seen done, um, in practice where people just either forgot, made a mistake, the rules were unclear, what happens, I

Speaker B: mean, I think then you know, this is, gets out a little bit out of our hands into the world of just transactions where there may be some sort of commercial solution like uh, an indemnification that can be provided with uh, a developer. Obviously tax insurance is a solution to a lot of things, especially for developers that may not have an investment grade parent standing behind them. And so again the conversation needs to be had over what is the extent and nature of the risks and who is on the hook to cover and with what credit will they cover through that risk that is created by not having the proper documentation.

Speaker A: And speaking of these risks, how have you seen the parties and deals like uh, tax equity insurers, tax equity lenders, changing their risk tolerance over the past, well, let's say since July 4th of uh, 2025.

Speaker B: You know, I think what we've seen on our side is investors and insurers have gotten a lot smarter uh, on the risks and they're really drilling down into the nature of the projects. For example, in 2025 you had almost every two months the requirements changed from pre OBB 48e to June to August to post August. Each of those has a different set of requirements and investors are willing to dig in and understand what those are, uh, in order to specifically underwrite projects of those vintages. And so their expectations are rising. The developers are going to be required to produce more in order to meet those standards. And certainly with fiat this year I think that will further increase and investors will need even more evidence that a project has met the requirements than ever before. I think there is in general an appetite to invest. I don't think a lot of investors right now I was talking to are transitioning from legacy section 48 projects from pre 2025-48E. I don't think they're seeing that transition as a hurdle. I think they're somewhat wary of fiat just given its newness, but expect a similar transition to a workable framework. And I don't think they see FIAC as a barrier to investment, but more another bar to clear as they start to process projects that are beginning construction later last year into this year.

Speaker A: So being the lawyer that I am, um, you got to look at uh, two sides of everything. Right out of every um, situation they try to take advantage of it. We've been talking about burdens, especially at some, you're very focused on documentation. But how can developers use these regulations to their advantage?

Speaker B: Yeah, I mean, I think there's going to be clear winners and losers in this. I think the winners are going to be the ones who take steps as projects are in development, as they are approaching, uh, notice to proceed, to carefully think about what they're setting up for in construction, bring together their finance, procurement, legal risk teams to evaluate, you know, what are the risks of say a June 2026 beginning construction and then what can be done from a contractual perspective to cover off those risks or to manage those risks. You know, procurement is ever more important. It's not now just about getting the best price for your panels or whatever, but making sure that the counterparty you're dealing with is able to withstand the robust diligence that's coming down the pike for the developer and ultimately for the supplier. And so, you know, contracts that build in requirements and build in leverage for uh, the developer to potentially shift suppliers if the present supplier may not meet requirements or mandate the EPC to uh, have some level of responsibility, management. I think those kinds of provisions will allow developers to navigate the challenges that are down the road as the projects begin construction now eventually reach tax, equity and ultimately kind of financing around place and service.

Speaker A: All right, so in closing, kind of trying to distill your experience with clients into a few bite sized pieces of information, what practical advice would you give people in terms of how to ensure that they stay on the right side of the regulations and they are able to use them? I guess I don't know if I should say to their advantage because I don't know if it's an advantage to have it, but use it in a way to give them a comparative advantage to other, Other developers?

Speaker B: Yeah, I mean, I'd say two main things. One is start early, understand the regulations that are on the table. Given your beginning construction timeline, talk to your council and Rose, align on what the expectations are going to be down the road. Make sure that gets baked in up front. It's much easier to enforce a contract than to have, uh, to make changes down the road. Um, and then I think the second thing that uh, I would advise developers is really to treat compliance as an ongoing process. It's just an ongoing part, much like construction project management or O and M. Um, you're going to need to think about these requirements going forward. Uh, we're looking at a 10 year recapture window for effective control. It's just part of life now. It's not something where you can kind of set and forget or take a snapshot and do one time and then you're good. Um, the industry will need to deal with it on, you know, on an ongoing basis. It's, you know, the developers, the strength of the developer's compliance program will be a competitive advantage. Um, and I think for buyers in particular, they're going to want to know, you know, how are we going to manage these risks in the future after, you know, the money's changed hands? Because ultimately the buyers are going to be the one that will be on the hook for any risks or any issues that crop up and the impact thereof.

Speaker A: All right, well, documentation, documentation, documentation.

Speaker B: It sounds like all I can say.

Speaker A: Well, thanks for recording with us today, Al.

Speaker B: Yeah, I appreciate it. Excited to move forward with the industry here.

Speaker A: You can find us online at www.projectfinance.law or send us an email at currentsordonrosefullbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our, uh, show today was produced by Emily Rogers.

Speaker B: Stay ahead of the current.