Financing Government Facilities Using the Low Interest CREBs Program
As an alternative to conventional sources of municipal financing, the Clean Renewable Energy Bonds (CREBs) program allows municipalities access to low-cost financing opportunities in order to invest in renewable energy projects. These project types can yield tremendous savings for municipalities interested in reducing expenditures in gas and electricity while also helping the environment. Solar, wind, landfill gas, geothermal and trash combustion are just some of the types of cost saving projects that qualify for CREBs financing.
CREBs differ from traditional tax-exempt bonds; the tax credits issued through CREBs are treated as taxable income for the bondholder. This tax credit may be taken each year the bondholder has a tax liability, as long as the credit amount does not exceed the limits established by the federal Energy Policy Act of 2005. The tax credit rate is set daily by the U.S. Treasury Department. Under past allocations, the credit could be taken quarterly on a dollar-for-dollar basis to offset the tax liability of the bondholder. However, under the new CREBs allocation, this credit has been reduced to 70% of what it would have been otherwise.
The maximum term that CREBs are issued for is determined by the Secretary of the Treasury after estimating the number of years that it will take to repay the principal on the bond. The formula used takes 50% of the face amount of the bond and applies a discount rate equal to 110% of the loan’s federally adjusted interest rate, compounded semi-annually. A bond is “sold” on the first day on which there is a binding contract in writing for the sale or exchange of the bond.
For example, let’s say a municipality is awarded $20,000,000 of CREBs on January 1, 2014 to finance a qualified wind facility. For the month of that issued date (January 2014) the long-term adjusted rate was set at 5%. The maximum number of years of the loan’s term would be calculated as how long it would take for $10,000,000 compounded semi-annually to equal $20,000,000. Fifty percent of the $20,000,000 equals $10,000,000 and the percent used to determine the maximum term is 110% of the adjusted rate - in this example 5% = 5.50%. The maximum term for this CREB issue would be 12.775 years.
Participation in the program is limited by the volume of bonds allocated by Congress for the program. To take advantage, a public entity must apply to the Internal Revenue Service for an allocation when funds are available. CREBs can be issued by electric cooperatives, government entities (i.e., states, cities, counties, territories and Indian tribal governments), public power providers and by certain bond lenders. Qualified recipients may also include public utility providers, cooperative electric companies and not-for-profit electric utilities.
A qualified project must describe in “reasonable detail” the qualified renewable energy facility or facilities constituting the project to be financed with the proceeds of the new CREBs. The application must demonstrate that each project will constitute a “qualified renewable energy facility” and indicate the expected date that the acquisition and construction of each project will commence, as well as the expected date that each project will be placed in service. One challenge to these projects is that the bond must be issued in full within three years. Additionally, the window for reimbursement of project costs is only 18 months. Project developers must pay close attention to this deadline. Seeking time extensions is possible, but not necessarily straightforward or easy. Applications must also include certification by an independent licensed engineer that the project will meet the requirements for funding and is viable.