PULSE

Taking Advantage of Tax Equity

SHARIFF BARAKAT AKIN GUMP STRAUSS HAUER & FELD

Shariff Barakat, partner with Akin Gump Strauss Hauer & Feld, discusses the tax-equity and project finance implications of upcoming Biden administration legislation, including the proposed bipartisan infrastructure bill and related renewable energy matters.

CCBJ: Shariff, you recently joined Akin Gump. Tell us about your practice and what your primary focuses are.

Shariff Barakat: I work mainly on renewable power projects, on the finance and tax side. In the United States, many technologies – and renewable energy projects in particular, such as solar and wind power plants – are subsidized by the federal government using tax credits. There are relatively complex financing structures in place to efficiently monetize those tax credits, and those structures are often referred to as “tax equity”. I specialize in tax-equity financing, and for the last number of years it’s been very solar and wind focused. Overall, I’m a tax lawyer. I started out as a tax lawyer and I practiced pure tax law for the first four years of my career. Then I also became a corporate lawyer, primarily handling the commercial and corporate side of tax-equity financing transactions, but also other related transactions in the renewables and infrastructure space. At Akin Gump, I’m in the tax group and I’m the go-to person for all things related to renewables taxes and tax equity. I also support the project finance and development group from the tax side as well as the commercial and corporate side of the transactions. Again, for the most part, I focus on tax equity, but I also handle some mergers and acquisitions and some debt financing as well.

That’s where my practice is right now. But there are some growing areas of focus. Renewables are not going anywhere. They’re growing and they’re showing no signs of deceleration. There is some really cool stuff on the horizon as well. One of the things I’m really excited about is carbon capture and the asset class and industry that

is growing and developing around that. In fact, that was one of the really cool synergies between myself and Akin Gump, which as a firm has a really venerable traditional energy practice. So marrying that up with my tax-equity expertise has been an area of focus for myself and for the firm and many of our clients right now, and it should be a growing area going forward.

What developments do you anticipate we will see from the Biden administration within tax equity and project finance?

We probably need another interview – or a whole series of them – to go over everything that’s going to happen here. There is some major legislation making its way through Congress right now that is focused on implementing “the Biden agenda.” There are going to be a great deal of changes there, but as it relates specifically to my world, including power projects and infrastructure assets, there’s been a bipartisan infrastructure bill in the works for a couple of months now and it has now been passed by both chambers of Congress. There is also a companion bill that is getting worked on as well. If we take a step back from the project finance and development perspective, the big-picture takeaway is that there’s a lot of public money coming into this space. All of this is going to lead to more project opportunities and financing opportunities because the public dollars aren’t going to cover all of those costs.

Then on the tax side, we’re sticking with the same framework for about five years. We’re not doing a major overhaul of the system here, but we are tweaking things in very material ways. One of the things that is

The Build Back Better Act contains, if passed, will mean a big boom for renewable energy project development.

most interesting to me is how these bills are going to impact the tax-equity markets. For several years now, since the Tax Cuts and Jobs Act, there’s been a lower level of corporate tax capacity in the United States, which interestingly enough has not helped companies in the renewables space. That’s actually been a problem for them, because the tax credits generally need to be monetized by large financial institutions like Wall Street banks and insurance companies. Those guys had their tax liability cut almost in half. So there has simply been less supply while at the same time you have growing demand in the form new renewables projects. The Build Back Better Act that is still being negotiated contains mechanisms that are designed to eliminate this bottleneck. However, these “direct pay” mechanisms come with their own considerations that make them only situationally ideal. Tax equity will still have a place, especially for solar projects.

Then on top of that, you have a whole host of incentives, subsidies, and carrots and sticks that are being put into law to promote renewable energy and address climate change generally. Much of those are getting run through the tax code. There is a proposed tax credit for hydrogen, for instance. There are tax credits that will become active in about five to six years that are technology agnostic that wouldn’t just be for wind or solar – they would be for anything that reduces greenhouse emissions. So, big picture, there is a very concerted effort to address climate change and to address the country’s aging infrastructure. That’s going to create opportunities. How has the Biden administration influenced investor attitudes toward domestic infrastructure and renewable energy projects?

Generally, the private sector, the people, the electorate, the business community and the world – everyone is looking around and saying, “We need to do something about climate change. We need to create a sustainable environment that humans can continue to grow and thrive in.” And the Biden administration is in that camp. They’re among the people who want to do that. There’s already a very eager attitude, openness and a desire to invest in and develop renewable energy projects, infrastructure projects, pipelines for captured carbon or hydrogen, those kinds of things. Many people are also thinking about information technology and how we’re going to be communicating and sharing data over the next several decades.

The Biden administration is doing a lot of good work to help the U.S. government play a major part in all of those opportunities. As we were discussing earlier, there are the subsidies and incentives, some of which are getting run through the tax code, some of which are getting run through grant programs and research credits and programs. It’s all coming together to create a really optimal time to be looking at U.S. domestic

Shariff Barakat is a partner in Akin Gump’s Washington, D.C. office. His focus is on domestic infrastructure and renewable energy projects. Shariff represents developers, sponsors, tax equity investors, lenders and other stakeholders in the acquisition and development of power generation projects. Reach him at sbarakat@akingump.com.

I’ve seen more startups in the carboncapture space in the last year than in the previous four years put together.

infrastructure and renewable energy projects – and the investor base, the private community, is seeing this and they’re jumping all over it. I’ve seen more startups in the carbon-capture space in the last year than in the previous four years put together. The Biden administration is amplifying existing investor sentiment and private sector sentiment in terms of where to build projects and develop infrastructure.

What types of new investment vehicles do you anticipate?

From what I’m seeing, the contours of who is investing and how the investments are being made isn’t changing too dramatically. But I think you’re going to see a bit more innovation on the investment vehicle side. For example, in the renewable energy space as I mentioned earlier, there are negotiations going on right now in some of the legislation for “direct pay.” And that would effectively make some of the tax credits refundable. Looking at the structure of those direct pay options, it’s not perfectly equivalent to what tax equity is or will be in the future, in terms of how the money comes in or the timing of the diligence. But even for direct pay, you’re going to have new types of financial products that are going to help bridge the gap between what tax equity looks like today and what any kind of direct pay option might look like in the future.

We may also see an uptick in public-private partnerships. That’s likely coming given how much focus there is on infrastructure and due to the inherent public utility nature of infrastructure. And then finally, in a world that’s flooded with money from central banks everywhere, there’s going to be leverage. That will be an interesting dynamic to watch develop – the forms that the leverage takes, particularly in the renewable energy sector, and where that leverage sits, whether it sits with the projects or further upstairs in investor pools somewhere. I don’t know what it’s going to look like, but it feels like there’s going to be a lot more leverage in the system over the next 10 years than there was over the previous 10 years.

What should our readers know about tax equity and project finance to ensure that they are best representing their companies and stakeholders?

We can break that down into opportunities and traps for the unwary. Let’s start with the opportunities. Much of corporate America does not participate in tax equity and the tax-equity markets. Tax-equity financing sources are dominated by major financial institutions, banks and insurance companies – although there are some profitable corporates, tech companies, media companies, and others that do participate. But I think there is untapped potential there. Tax equity is something to take a look at to see if your organization might have an appetite for it. The way I like to describe it to people is that you can cut a check to the Treasury or you can cut a check to a renewable energy project developer. Those are both methods to pay your taxes, but by doing the latter and supporting a developer, at a fairly minimal risk, there are some good returns to be had.

There’s a learning curve, but it’s not as steep as people might think. You have to understand the assets, of course. But it’s worth looking into. It’s worth seeing if your company has the profile to do it. And there’s a lot that can be outsourced, which brings up the question of how

you are dealing with project finance generally. Are you being well advised? And this is where we get into traps for the unwary – because project finance is inherently a non-recourse type of mindset. The developer is not on the hook generally is a project does not work out, but specific assets are, so you have to ask, you know, what the covenants are. What does the deal really look like? How is it going to impact the commercial side of the company going forward? What constraints is it going to place on management and their flexibility and their ability to pursue their own endeavors?

Having a good understanding of the answers to these questions, and getting good advice – which often times is external – is crucial. You want to get a product that is effective and well-tailored to the particular entities, to the particular borrower. Not just something off the shelf but something that really works for the specific project, the specific business and the specific organization. Sometimes you see folks cut corners, for lack of a better way to put it, and try to save on the costs of external advisers and whatnot. But you don’t know what you don’t know, right? So if you’re not a frequent user of project finance, be cautious and make sure at the outset that you’re are well advised and well educated. But also, be aware that there are really cool opportunities out there in terms of tax equity. There are opportunities to turn a tax liability into a profitable investment. 

Data Collection Meets Diversity, Equity and Inclusion

MARCI HUNTER BARNES & THORNBURG

With a focus on increasing its diversity, equity and inclusion (DEI) impact, Barnes & Thornburg felt it was important to begin collecting data on DEI efforts and client needs more efficiently. The firm created the position of DEI analyst and hired Marci Hunter, an experienced quality assurance professional and DEI supporter, for the role. Here, she expresses the importance of DEI data analysis.

CCBJ: What sort of quantitative analysis is being looked at by legal and corporate leadership teams? Is it mostly to improve their retention data, build their hiring pipeline, or for other reasons?

Marci Hunter: All of the above. The first rule of a map is to know where you are. Harnessing your data sets you up for success in any context, including driving change relative to diversity, equity and inclusion. The guessing goes away. The tone-deafness is undermined. The self-referencing and efforts to reshape reality are thwarted. And quite frankly, harnessing the data reveals opportunities. We can’t be successful without it.

In the past few years, diversity has grown even more important to our clients. Many request diversity demographics on a regular basis. A higher level of diversity is becoming the standard in our field. An example of this is the Mansfield Rule Certification; Barnes & Thornburg is working to become Mansfield Certified in the 2021-2022 certification period.

The Mansfield Rule Certification measures whether law firms have affirmatively considered at least 30 percent women, attorneys of color, LGBTQ+ and lawyers with disabilities for leadership and governance roles, equity partner promotions, formal client pitch opportunities, and senior lateral positions. The goal of the Mansfield Rule is to boost the diverse representation in law firm leadership by broadening the pool of candidates considered for these opportunities. And it’s succeeding at its intended purpose. It is said that what doesn’t get measured doesn’t count. What are some areas that aren’t getting measured that should be?

Who gets promoted. In our law firm world, who receives billable credit. Who are the client leads or relationship lawyers? Other areas that should be counted are average length of service regarding diverse talent and employee engagement. We as employers should want to be the best version of us, so we have to dig deep.

It seems important for organizations to make clear to employees the connection between their daily decisions and the resulting diversity outcomes. What is one way companies can do that?

Diversity training and education is key. There are many tools and resources. For Example, Barnes & Thornburg has diverse Talent Resource Groups that anyone can join whether you’re a member of the specific demographic or not. These groups help us celebrate culture, diversity, awareness, and education for those demographic groups. If employees don’t have the capacity to join the groups, we highly encourage them to participate in any event held by the various groups. They are very fascinating and everyone comes away learning something new.

Marci Hunter is a diversity, equity and inclusion analyst at Barnes & Thornburg in the greater Fort Wayne area. In her role, she facilitates data collections and analysis surrounding DEI efforts across the law firm and entire legal industry. Prior to Barnes, Marci had an extensive career with Lincoln Financial Group and served as their Project Manager, Q&A Testing, Technical Specialist, Compensation Research Consultant and Data Engagement Analyst.

A 2019 McKinsey and Lean In survey of 329 companies across the United States and Canada showed that 34 percent of HR leaders said their company sets gender targets for representation at junior levels of management, and 41 percent at senior levels of management. Is it feasible for organizations to have DEI goals that involve actual numbers when trying to attract and retain a diverse workforce?

Targets are okay, but they only focus the “diversity” component of DEI. Standing alone (even if all set targets are met), such tells you nothing about whether those women (the example in the study) are part of an inclusive team or are treated equitably when it comes to promotion and advancement opportunities. Targets sometimes give folks the false impression that they are moving the ball when in reality, the story is incomplete. So they are fine, but only as a part of a strategy.

As mentioned previously, the Mansfield Rule is an excellent bar to reach as far as “diversity.” To really attract and retain a diverse workforce, the focus would also need to be on equity and inclusion. The candidate pool would need to consist of open-minded people of diverse backgrounds who clearly understand the culture the company wants to achieve. 

This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

Courts Differ on the Meaning of the Work Product Rule’s "Anticipation" and "Litigation" Elements

THOMAS E. SPAHN MCGUIREWOODS

Fed. R. Civ. P. 26(b)(3)'s and parallel state work product rules apply to documents and tangible things prepared "in anticipation of litigation or for trial." But the Rule does not specify the degree of required "anticipation."

In Penn Engineering & Manufacturing Corp. v. Peninsula Components, Inc., the court ruled that work product protection only applied if "'there existed an identifiable specific claim of impending litigation'" – explaining that "even [a] 'likely' prospect of litigation is insufficient." Civ. A. No. 19-cv-513, 2021 U.S. Dist. LEXIS 153047 at *7 (E.D. Pa. Aug. 12, 2021) (citations omitted). Six days later, the court in Verret v. Acadiana Criminalistics Laboratory Commission held that the work product doctrine "'can apply where litigation is not imminent.'" Case No. 6:20-CV-01302, 2021 U.S. Dist. LEXIS 156381, at *3 (W.D. La. Aug. 18, 2021) (emphasis added) (citation omitted). Eight days after that, the state supreme court in University of Louisville v. Eckerle held that "[l]itigation must be imminent or pending" and that "'the mere potential for litigation is not sufficient.'" No. 2020-SC-0216-MR, 2021 Ky. Unpub. LEXIS 49, at *11 (Ky. Aug. 26, 2021) (emphasis added) (citation omitted).

Corporations and their lawyers must determine the pertinent court's standard when assessing a work product claim, and the likelihood of success in satisfying that standard. Of course, this can be difficult if the corporation does not know where it might be sued. Next week's Privilege Point will address a court's interpretation of the word "litigation." Of course, regular civil and criminal litigation satisfies the "litigation" standard. But other similar proceedings might not. In University of Louisville v. Eckerle, the Kentucky Supreme Court held that "the university's employee grievance process . . . does not constitute litigation." No. 2020-SC-0216-MR, 2021 Ky. Unpub. LEXIS 49, at *10 (Ky. Aug. 26, 2021). The court explained that "[a]lthough the parties in the employee grievance process are typically represented by attorneys, the mere presence of counsel does not magically transform an internal, nonbinding process regarding employment disputes among colleagues and coworkers into a judicial or even quasi-judicial action." Id. The court snarkily mentioned "U of L's untimely epiphany" – noting that the University had earlier argued that "the 'non-legal' nature of grievance process created no obligation to preserve documents in anticipation of litigation." Id. at *10, *9. Courts' varying interpretations of the work product rule's "anticipation" and "litigation" elements can create uncertainty for plaintiffs and defendants. 

Thomas E. Spahn practices as a commercial litigator. He regularly advises Fortune 500 companies on such high-stakes issues as properly creating and preserving the attorney-client privilege and work product protections when conducting corporate investigations, when hiring outside consultants, when dealing with the government, and during other daily and extraordinary situations. He also advises in-house counsel on ethics issues, including conflict of interest, confidentiality, and dealing with corporate wrongdoing. Reach him at tspahn@mcguirewoods.com

LEGAL OPERATIONS Beverly Hills

MARCH 27-29, 2022 THE BEVERLY HILTON

In-Person Events are back in full swing at CCBJ in 2022, and we are looking for speakers to join us in Beverly Hills for our upcoming Inner Circle event. CCBJ’s Inner Circle offers our audience the opportunity to participate in an interactive discussion among legal professionals. The format offers peer-to-peer solutions along with insights from subject matter experts. Guided discussions will fuel professional development networking opportunities.

If you are interested in speaking or if you would like to nominate a colleague, please contact Kimberly Fine, Managing Director – Programming kfine@ccbjournal.com.

Thank you to our esteemed faculty, attendees and supporters for a successful, in-person event, CCBJ’s 3rd Annual Women in Business & Law, at The Tarrytown House Estate this past Nov. 15-16, 2021. It was so nice to see all of your smiling faces once again!

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