What Marie Kondo does for tidying up, Dan Siegel does for solar tax structuring: everything in its place and a place for everything.
As vice president of Renewable Energy Business Development at U.S. Bank, Dan Siegel is an expert of tax law and highlights the order, logic, and understated (if not life-changing) magic of solar tax equity done well.
In this interview, Siegel discusses 2019 solar financing trends, the importance of solar data, and “Zen and the Art of Tax Equity Structuring.”
ZEN AND THE ART OF TAX STRUCTURING
Jason Kaminsky: Thanks for making time to chat, Dan.
Dan Siegel: Sure. I’ll try to bring out the most interesting version of myself for this. I’m a tax equity provider, so keep that in mind.
Jason Kaminsky: [laughs] Well, I’m a former tax equity banker. We’ll both try not to go down the technical rabbit hole.
To start, you have an LL.M. in tax, then did project management at U.S. Bank for five years before moving into Business Development. How did you begin working at U.S. Bank and later move into the role that you are in today?
Dan Siegel: I graduated from Washington University in St. Louis for undergrad, and like many who finish college without a lot of forethought into what they want to do with their life, I ended up enrolling in law school. Frankly, I didn’t love it. I initially envisioned myself as a litigator, but then quickly realized that I’m not really the kind of person who would be very good at arguing both sides of an issue. I’m more black and white than that.
I ended up taking a year off from law school to work for the Kerry campaign and bartend, both of which were humbling experiences in their own way. After that year, I came back and took a taxation course, which unexpectedly resonated with me. I’ve always been a numbers person and I think that’s one area of the law where having that type of mind is helpful. Something that is sort of geeky about tax law that I have always appreciated: it comes with a set of instructions. You have tax law, and then you have the regulations that accompany it. That’s how I ended up pursuing my LL.M. in taxation.
While I enjoyed the subject of tax law, I realized that I didn’t really want to be moving people’s money from one place to another. Thankfully, I learned that there was a field called ‘tax equity financing’ and that one of the largest financers in the country is based here, in St. Louis. There was something very appealing about using tax law and getting a brick-and-mortar result out of it. To this day, I may be the only person ever to come out of school knowing I wanted to be a tax equity provider.
Jason Kaminsky: It’s funny—I studied pure math as an undergrad. And similarly, there’s a strict set of rules that helps you come to a conclusion. And, in some ways, tax law—even though the rules seem even more arcane—has a similar set of principles.
Dan Siegel: Absolutely. I think the real interest in tax equity is knowing that you have a rule set. Trying to pair what can be a regimented rule set to the commercial goals, knowing there’s a line, not wanting to get too close, and yet still wanting to achieve a desired result, is where I think the creativity comes in. That’s what has always been really appealing to me about this industry—using those arcane principles to try to achieve positive commercial results for the industry.
Jason Kaminsky: It’s more creative than outsiders might realize. It’s kind of like “Zen and the Art of Tax Equity Structuring.”
2019 TRENDS IN SOLAR FINANCE
Jason Kaminsky: We just got back from Infocast last month. What themes are you seeing for 2019?
Dan Siegel: Every year since we started in 2008, people seem to say, “This is the year when nothing’s going to happen.” But every year we’re wrong as something always seems to come up. It’s interesting to see what’s already been happening this year.
A few big things that we’re watching this year so far:
First, the continued development of community solar gardens. As a tax equity provider with a mission-oriented bent, these types of programs appeal to us and we are always interested in exploring new ways to participate in markets as they develop. We’re seeing a good deal of investment opportunity and feel that will continue to accelerate.
Second, I think that this is the year storage finally starts gaining traction in large-scale commercial application. There’s going to be a series of unknowns that we’re going to work through, with everything from the specific technological complexities of the storage components, to making sure that we are being thoughtful about which storage providers and accompanying software applications that are used. The underwriting of those uses will be supremely important, as will the resulting revenue streams that I think people are only just now starting to imagine.
Third, we are also already starting to see a bit of pull-in resulting from the ITC step down. It will be interesting to see how far out financiers will be willing to commit to give solar developers comfort around their safe-harboring plans.
Jason Kaminsky: Six years ago I was at a conference where people said, “It feels like we’ve been pushing a boulder up a big hill, and it’s about to start rolling down,” and I feel like I could say the same thing this year. Eventually we’ll be right.
A theme that I’d say probably emerged more last year but continued for this year: secondary market transaction of operating assets. I’m sure your team is seeing these as a tax equity investor in many of those deals.
Dan Siegel: We’re seeing a lot of more passive financial cash equity players coming in to buy these assets. There’s been a lot of low-cost foreign money moving in and acquiring these transactions. That’s something that we’ve needed to get accustomed to as we more and more find ourselves facing financial counterparts as equity and indemnity provider in these transactions rather than the original developer.
Jason Kaminsky: As you think back over the last 10 years as a baseline, how do you characterize the tax equity market?
Dan Siegel: It’s funny, I don’t think that there’s only one tax equity market. I think that there are multiple tax equity markets, and people work in different layers of those markets. U.S. Bank is the fifth largest commercial bank, with around $460 billion in assets. As a result, while we do a lot, our tax capacity is eclipsed by the fourth largest bank and up. There are the very, very large players out there who will always be able to provide a deep well of tax equity financing to their large corporate clients, but that is probably never going to be an area that we regularly play in. Given that our capital is more limited we try to be incredibly thoughtful about which developers and which markets we serve.
One thing to note, is that the DNA of our group is not project finance; it’s not even energy, really. It’s more broadly tax equity financing. Our renewable energy group sits within a subsidiary of the bank that has a broad background in financing all types of projects with tax credits from low income housing, to historic buildings, to incentivizing job creation in economically disadvantaged markets. But this background speaks to why we work with a broad array of developers today—we want to maximize impact even if it means more work.
We’re never really out there hunting elephant-sized transactions. It’s always more about: Does the underlying business model make sense? Can we mitigate the risks? Do we like the people? Do we believe in their business model? If the answer is yes across those questions, we tend to pursue it. That’s allowed us to be early in residential and to be the first movers in community solar. We certainly participate in the utility sale side too, but we’re not trying to do four transactions and be done with our year.
Jason Kaminsky: I’m always fascinated by how different banks get into the market, and U.S. Bank came from a tax perspective, versus other banks like Wells Fargo which really came at it from, “Hey, we have an environmental commitment but how can we meet it?” They’ve migrated to the utility-scale side of the market, but your team is placing a lot more bets and works with a much broader, more diverse set of customers.
Dan Siegel: I think not having a traditional energy background can be freeing in a lot of ways, because we don’t come in with preconceived notions about what can and can’t work. Through the lens of the tax equity risks on which we need to focus, that has allowed us to be supportive of a couple of different industries that, for maybe issues of internal resource constraint or just internal bias, have been passed over by other banks.
Jason Kaminsky: We work closely with your team, and I would say U.S. Bank probably has the largest tax equity group of any bank I know—and the largest number of customers of any bank I know. Can you talk about some of the benefits and challenges that come with that?
Dan Siegel: Sure. We started in 2008, and today we have financed about 11 GW of solar.
When we first started, it was basically me and my boss, Darren Van’t Hof, who had just started looking at solar.
The group has grown a lot since then. We have four people on the origination side, which is where I sit. We have about 10 people on the project management side, about 10 people on the asset management side. And then we have a lot of cross-functional people supporting us. We are set up to do a lot of volume; I think our goal in a typical year is to do somewhere between 30 to 50 different transactions. That includes everything from relatively large transactions like 150 MW facilities in the U.S. southwest, to projects as small as 5 or 10 MW. Like any bank, we have origination goals so small transactions are often not the most efficient use of our time. That said, if there’s a good story there and a potential for positive impact on jobs, the environment, etc., we will oftentimes spend time on it, particularly if we think that that small model is scalable.
Jason Kaminsky: A lot of banks have tried to create a syndications strategy, where they bring in other co-investors, but U.S. Bank has been uniquely successful. How did you unlock this opportunity?
Dan Siegel: We have a lot of smart folks working on this, so I’ll speak for them when I say that I think there are three things that helped to differentiate us:
One, it was a source of need. Even without tax reform, we saw a day in the future where our partners needs were going to outstrip our own capacity.
Two, we’re a relatively flat organization—the CEO of our subsidiary reports directly to the CFO of the bank. As a result, when we’re talking to new co-investors, we appreciate the barriers to entry and are often able to bring the right people into those conversations who have understood and managed those issues previously.
Three, we can provide a differentiating syndication product by giving certainty to our customers; we fully commit to a transaction, even if we’re trying to syndicate it. For example, if we’re working with a developer who has a project, we will 100% underwrite the project during construction and we’ll make a finance commitment for the full project. During construction, we may try to remarket part of that interest to one of our syndication partners, but if that fails we’ll still fund it. We’re taking that risk away from the developer, which makes them a lot more willing to go with us.
As of today, we’ve brought in 19 different investors and raised over a billion dollars of tax equity. Most of our partners on the syndication side are non-traditional tax equity investors. There are some regional banks, but they’re typically not financial institutions. Most of our partners are retail, tech companies, insurance companies — people who don’t themselves have a tax equity practice and don’t plan to develop that capacity internally.
Jason Kaminsky: What’s your view when the ITC steps down on the role of tax equity in the market? Are there other products that you might develop?
Dan Siegel: That’s certainly the long-term goal, and it’s been something that we’ve been chipping away at for years. We’re not an infrastructure bank or a project finance bank, so the idea of doing project finance debt is a bit foreign in our institution. U.S. Bank is a conservative institution and sometimes, that also means that we move slowly and methodically towards new products. That said, we’d like to start doing lending soon and see it as fundamental to our growth and position in the marketplace. And then as we transition to a 10% ITC market, we would operate as a “lender-plus” and would be able to couple the loan with a tax equity investment.
Jason Kaminsky: When we track the debt markets in our Solar Lendscape, I think now we’re up to 50 banks in the market, and a lot of them are falling over themselves on margin. So, if you can provide a product that is coupled with a 10 percent ITC, I would imagine that that would be a pretty strong competitive advantage in that segment of the market.
Dan Siegel: We’re never going to be the cheapest, but I think what we try to do is be creative and we can hopefully create a niche for ourselves there.
THE LARGEST U.S. SOLAR INVESTOR ON THE IMPORTANCE OF DATA
Jason Kaminsky: You are now one of the largest—if not the largest—investors in solar in the country. What have you learned along the way?
Dan Siegel: We have an enormous amount of data about how assets are operating, and through our use of HelioStats, we’re working to get more thoughtful about how to synthesize and analyze information about our own portfolio. We are getting better at using our data to manage our portfolio: there’s lots of compliance and reporting we face as a regulated bank.
Our sponsors play an important role here— by helping us collect the data on our portfolio, sponsors contribute pieces to a broader story. Even if that information is not a direct issue or risk for us, we recognize that we have information that is crucial for the industry, so the question becomes: How do we take what we know and help the industry more broadly?
We also use the data to tell a story, and I’m part of a working group right now helping to summarize our data for U.S. Bank’s broader environmental communications efforts.
It’s funny—we started our tax equity investing as really just a pure tax equity investment play, with the projects’ environmental impacts being secondary. That’s changing. We’ve made a great deal of impact in the past 10 years and though it may run counter to the group’s midwestern sensibilities, we ought to tell the story and perhaps even be a little boastful about it.
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