Understanding the Economics and Running the Numbers

Why is it important to prepare a financial model?

Who are the users of the financial model?

When does the financial model get prepared?

Who prepares the model?

Understanding (balancing) the sources and uses How much debt can the project afford and at what terms/rates? How much is available in state & local incentives? How much PPA revenue is available? How much equity can the project attract/afford?

What’s the maximum fee the developer can charge? When will developer collect their fee? Projecting future cash obligations Investor issues addressed proactively

• Yield requirements

• Book / GAAP issues

• Structuring / Exit issues

Running the Numbers: Developer Perspective

Understanding the flow and timing of benefits When and how much capital do I contribute? How much, and when will I receive my tax credits? What, when and how much will my other tax benefits

be? How much and when will I receive cash distributions? What other benefits can I expect? Who do I share the benefits with? What is my risk? When will the investment end? What is the projected IRR?

Evaluate structuring options Problematic issues can be addressed timely

Running the Numbers: Investor Perspective

Key Assumptions: Entity type, allocations, life term

– Partnership Flip- Investor exits after 5-year recapture period ends, ownership interests flip from 1% / 99% to 80% / 20%

– GP (Developer) exercises call option to buy out Investor in Year 6

– GP (Developer) owns system until year 20

– In year 20, Developer sells system to third party

Running the Numbers

Key Assumptions – System Size, Cost and Electricity Production

Project Size - kW DC 862

Project Size - kW AC 724

Installation Cost per kW DC $ 6,000

Developer Fee (% of Installation Costs) 10.00%

kWh per kW AC 1,800

Annual Degradation % 0.50%

Running the Numbers

Key Assumptions – Operations

Power Purchase Agreement ("PPA") - $/kWh - Year 1 Price $ 0.185

Annual Escalator for PPA Price 3.00%

Length of PPA 20 years

State Incentive - $/kWh (60 months) $ 0.22

Operating Expenses (Year 1), 4% escalator 30,160

Bonus Depreciation, 5 year MACRs for balance Yes

Running the Numbers

Key Assumptions – Sources and UsesSources

Tax Credit Equity From Investor $ 3,200,000

Deferred Developer Fee378,200

Permanent Loan(15 year term, 6.5%) 2,300,000

Total Sources $ 5,878,200

Uses

Hard Costs $ 5,172,000

Developer Fee 517,200

Syndication Costs (approximately 1% of equity) 25,000

Permanent Loan Fee (2% of loan) 46,000

Cost Certification Fee 3,000

Reserves 100,000

Organization Costs (approximately .5% of equity) 15,000

Total Uses $ 5,878,200

Running the Numbers

Running the Numbers: Tax Credit Calculation

Investment Tax Credit % 30.00%

Estimated Energy Tax Credits $ 1,707,660

Limited Partner Share – 99% $ 1,690,583

General Partner Share – 1% $ 17,077

Installed kW, DC 862

Installation Cost per kW $ 6,000

Project Costs $ 5,172,000

Total Development Fee 517,200

Cost certification 3,000

Eligible Energy Tax Credit Basis $ 5,692,200

Net Operating Income – Partnership Flip

Partial Year

1 2 3 4 5 62009 2010 2011 2012 2013 2014

RevenuePurchase Power Agreement Revenues 120,559$ 247,110$ 253,251$ 259,544$ 265,994$ 272,604$ California Production Based Incentive 143,368 285,302 283,875 282,456 281,044 279,639

Total 263,927 532,412 537,127 542,001 547,038 552,243Expenses

Operations and Maintenance (5,200) (10,400) (10,816) (11,249) (11,699) (12,167)Insurance (7,800) (15,600) (16,224) (16,873) (17,548) (18,250)Accounting (4,000) (4,160) (4,326) (4,499) (4,679) (4,867)

Total (17,000) (30,160) (31,366) (32,621) (33,926) (35,283)

Net Operating Income 246,927$ 502,252$ 505,760$ 509,379$ 513,112$ 516,960$

Annual Debt Service 120,210 240,420 240,419 240,420 240,422 240,421

Debt Service Ratio 2.054 2.089 2.104 2.119 2.134 2.150

Taxable Income – Partnership Flip

1 2 3 4 5 62009 2010 2011 2012 2013 2014

Net Operating Income 246,927$ 502,252$ 505,760$ 509,379$ 513,112$ 516,960$ Interest Expense:

Permanent Loan (74,130) (143,656) (137,175) (130,261) (122,883) (115,012) Depreciation Expense (2,540,144) (919,290) (551,574) (330,945) (264,659) (231,758) Amortization Expense (1,533) (3,067) (3,067) (3,067) (3,067) (3,067) Section 267 Depreciation Suspension/(Deduction) 188,576 40,165 3,475 (17,045) (25,829) (189,342) Organization Costs (15,000) - - - - - Total Taxable Income/(Loss) (2,194,304)$ (521,575)$ (180,521)$ 30,164$ 98,818$ (20,032)$

Energy Tax Credits 1,707,660$ -$ -$ -$ -$ -$

Tax Credit Equity Investor Partner :Taxable Income/(Loss) per P/L % (2,172,361)$ (516,359)$ (178,716)$ 29,862$ 97,830$ (4,006)$ Reallocation - - - - - - Taxable Income/(Loss) (2,172,361)$ (516,359)$ (178,716)$ 29,862$ 97,830$ (4,006)$ Energy Tax Credits 1,690,583$ -$ -$ -$ -$ -$

General Partner :Taxable Income/(Loss) per P/L % (21,943)$ (5,216)$ (1,805)$ 302$ 988$ (16,026)$ Reallocation - - - - - - Taxable Income/(Loss) (21,943)$ (5,216)$ (1,805)$ 302$ 988$ (16,026)$ Energy Tax Credits 17,077$ -$ -$ -$ -$ -$

Investor Return Summary – Partnership Flip

Tax Savings(Costs) Tax Savings

Cash Taxable Gain from (Costs) FromCapital Tax Distributions Income (Loss) Income and Gains Income (Losses) Cumulative

Yr Year Contributions Credits and Credits (Losses) Upon Exit (Losses) and Tax Credits Net Benefits

1 2009 3,200,000$ 1,690,583$ 1,787,522$ (2,172,361)$ -$ 760,326$ 2,450,910$ (652,152)$ 2 2010 - - 200,302 (516,359) - 180,726 180,726 (271,124) 3 2011 - - 202,986 (178,716) - 62,551 62,551 (5,588) 4 2012 - - 205,754 29,862 - (10,452) (10,452) 189,715 5 2013 - - 208,608 97,830 - (34,241) (34,241) 364,082 6 2014 - - 170,695 (4,006) 1,474,325 (514,612) (514,612) 20,166

3,200,000$ 1,690,583$ 2,775,867$ (2,743,750)$ 1,474,325$ 444,299$ 2,134,882$

Internal Rate of Return (IRR) 10.74%

Investor Benefits – Partnership Flip

• Total capital contributed by Investor = ($3,200,000)

• Tax credits allocated to Investor = $1,690,583

• Total cash distributions to Investor (Years 1-5) = $914,589

• Tax savings benefit = $438,808

• Buyout payment to Investor (Year 6) = $186,383

• Cumulative net benefits (35% tax rate) = $30,363

• Annual Internal Rate of Return (IRR) = 10.74%

Developer Benefits – Partnership Flip

• Total Fee paid to Developer (Years 1-6) = $517,200

• Tax Credit allocated to Developer in year 1 = $17,077

• Total cash distributions to Developer (Years 1-20) = $1,487,787

• Less: Limited Partner Buyout in year by Developer = ($186,383)

• Projected Residual value of system (Year 20) = $2,805,849

Questions and Answers

Tony Grappone

Novogradac & Company

LLP

www.energytaxcredits.com

(617) 330-1920 Extension

114

Tony.Grappone@novoco.c

om