The US Treasury Department recently updated the renewable energy cash grant guidance to provide a more developer-friendly definition of when construction is deemed to start.
Created in 2009, the grant program provides grants to owners and lessees of certain renewable energy projects in an amount equal to either 10% or 30% (depending on the type of project) of the tax basis of tangible property used in the project. Energy facilities eligible for the grant include wind, solar, biomass, geothermal, landfill gas, trash combustion, qualified hydropower, marine and hydrokinetic, fuel cells, microturbine, combined heat and power and geothermal heat pumps.
To be eligible for the grants, the project must be placed in service (i.e., operational) before December 31, 2010. Alternatively, the placed in service date could be deferred to a later date (ranging from the end of 2012 to the end of 2016 depending on the type of project) as long as construction began on the project before the end of 2010.
The updated guidance issued on March 15, 2010 made developer-friendly changes to the definition of when construction begins, but did not otherwise modify the initial guidance issued on July 9, 2009. Our client alert describing the July 9, 2009 version of the guidance can be accessed here.
Beginning of Construction Generally
The revised guidance states construction begins when "physical work of a significant nature" begins. Both on-site and off-site work counts towards this requirement. An example dealing with a wind farm states on-site work begins with the beginning of the excavation of the foundation, the setting of anchor bolts into the ground or the pouring of concrete pads for the foundation. Another example dealing with a wind farm explains that off-site work begins when the manufacturer of wind turbines and tower units begins at the manufacturer's plant. The guidance maintains a manufacturer that produces items for multiple facilities must have a system to track particular products with particular facilities.
Preliminary activities such as planning or designing, securing financing, exploring, researching, clearing a site, test drilling to test the soil or test geothermal deposits, or excavation to change the contour of the land (as distinguished from excavation for footings and foundations) do NOT count as physical work of a significant nature.
If a developer manufactures, constructs or produces property used in its trade or business, the developer's work is taken into account in determining when physical work of a significant nature begins.
Construction by Contract
In most instances, a developer will contract with others for the production of property used in a renewable energy project. In such case, the work done under any such written binding contract is taken into account in determining when physical work of a significant nature begins. The updated guidance generally follows the standards set forth in the July 2009 guidance of when a contract is binding, but clarifies that minor modifications to the contract do not alter the binding nature of the contract.
The most significant changes from the July 2009 guidance relate to the safe harbor rules. The updated guidance states that physical work of a significant nature has begun if more than 5% of the total cost of the property has been paid or incurred by December 31, 2010. The guidance also states that in the case of a lessee claiming the grant, the safe harbor must be met by the lessor (unless the applicant sold and leased back the property).
Self-constructed property costs count towards the 5% threshold when paid or incurred. Outsourced property is paid or incurred either (1) when the property is delivered to the developer or (2) prior to delivery, when costs are paid or incurred by the contractor. If the property is both self-constructed and outsourced, the self-constructed and outsourced costs are combined to measure whether the 5% threshold is met. The only costs that count towards the 5% threshold are costs included in the eligible tax basis of the tangible property used in the renewable energy project.
The updated guidance can be accessed here.