Tribes May Wish to Explore New and Enhanced Financing Opportunities for Renewable Energy Projects

The American Recovery and Reinvestment Act of 2009 — commonly known as the economic stimulus package — introduced or enhanced a number of financing mechanisms to help Indian tribes and tribal instrumentalities develop renewable energy projects in Indian Country. Some of these may only be available for a few years. These mechanisms are described below:

1. New Economic Stimulus Bonds for Indian Tribes

The stimulus bill gave Indian tribes, for the first time, the ability to issue tax-exempt bonds, which can be used for energy development and transmission facilities (as well as for many other projects). These bonds are known as Tribal Economic Development Bonds.

A tax-exempt bond is attractive because the interest payments the tribal issuer (borrower) makes in repaying the debt are not taxable income to the person who lent the money; therefore, lenders are willing to lower the interest rate. With this financing tool, a tribe could own and develop projects, and the tax benefits would accrue to the lender.

2. New Market Tax Credits

New Market Tax Credits can also finance energy development and transmission facilities in Indian Country. This financing device permits a tribe to own the project itself. Although New Market Tax Credits are complex in nature, essentially a tribe would receive a loan from an entity for the development - with proceeds that the entity raised by providing the New Market Tax Credits to other investors.

3. Build America Bonds

This attractive new type of tax credit bond is available to any project that is eligible for tax-exempt bonding. With a tax credit bond, the lender receives a tax credit from the federal government instead of receiving interest payments. Often these bonds are lent at zero percent interest rate because the lender wants to receive the tax credit, not any interest. The tribe may also elect to keep the tax credit, pay interest on the bonds, and have the federal government cover 35 percent of the interest costs that the tribe pays. Generally, Build America Bonds are a more valuable financing tool to a tribe than tax-exempt bonds.

4. Production and Investment Credits

There are a wide variety of Renewable Energy Tax Credits to support development of energy production or manufacturing facilities used in the production of energy. In addition, in 2009 and 2010, these credits may be replaced by outright grants by the Department of Energy.

While these financing vehicles may help encourage renewable energy production, facilities must typically be owned by an entity that can take advantage of the tax credit. Because Indian tribes do not pay federal income taxes, tribes typically have to lease the land to the energy developer and receive lease payments or royalties that would reflect the amount of revenue generated from the sale of energy. There may also be an opportunity for the tribe to earn development fees for the operation of the facility.

Conclusion

Whether it is one of the above or a more traditional financing vehicle, deciding which financing tool makes the most sense for a particular project will depend on the type of project, whether the tribe has a strong desire to own the development, the availability of bonds to a particular tribe, and the value of the particular bonds or credits on the open-market. Whatever the circumstance, the stimulus bill has provided Indian tribes with a great opportunity to develop energy projects over the next few years.