Selected Treasury 1603 Grant Materials

Edited by John Marciano, III Chadbourne & Parke LLP

Page | i

Selected Treasury 1603 Grant Materials
Edited by John Marciano, III Chadbourne & Parke LLP © 2011 Revised as of June 30, 2011

TABLE OF CONTENTS
I. Section 1603 Cash Grant Legislation. .................................................................................1 A. B. II. Cash Grant Authorization (American Recovery and Reinvestment Tax Act of 2009, 1603) (P.L. 111-5)..........................................................................................1 Cash Grant Extension (Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) (P.L. 111-312). .......................................................5

Treasury Guidance ...............................................................................................................6 A. B. C. D. E. F. G. H. I. J. K. L. M. N. Program Guidance (July 2009/Revised March 2010, January 2011 and April 2011) ........................................................................................................................6 Start of Construction FAQs ...................................................................................29 Start of Construction Checklist ..............................................................................37 General FAQs. .......................................................................................................39 Final Application Checklist. ..................................................................................49 Accountant's Certification......................................................................................51 Accountant Guidance (Agreed-Upon Procedures) ................................................57 Evaluating Cost Basis for Solar Photovoltaic Properties .......................................63 Assignment Conditions ..........................................................................................68 Notice of Assignment. ...........................................................................................69 Annual Report Format. ..........................................................................................70 Terms and Conditions ............................................................................................73 Sample Start of Construction Application .............................................................77 Sample Final Application. .....................................................................................86

III.

Commentary. ......................................................................................................................99 A. Special Update: More Subsidies for Energy Projects (Jan. 10, 2011) ...................99

B. C. D.

Under Construction in Time for a Treasury Cash Grant? ....................................108 Cash Grant Update ...............................................................................................115 Strategies for Starting Construction .....................................................................121

I.

Section 1603 Cash Grant Legislation. A. Cash Grant Authorization (American Recovery and Reinvestment Tax Act of 2009, 1603) (P.L. 111-5).

SEC. 1000. SHORT TITLE, ETC. (a) SHORT TITLE.—This title may be cited as the ‘‘American Recovery and Reinvestment Tax Act of 2009’’. … SEC. 1603. GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS. (a) IN GENERAL.—Upon application, the Secretary of the Treasury shall, subject to the requirements of this section, provide a grant to each person who places in service specified energy property to reimburse such person for a portion of the expense of such property as provided in subsection (b). No grant shall be made under this section with respect to any property unless such property— (1) is placed in service during 2009 or 2010, or (2) is placed in service after 2010 and before the credit termination date with respect to such property, but only if the construction of such property began during 2009 or 2010. (b) GRANT AMOUNT.— (1) IN GENERAL.—The amount of the grant under subsection (a) with respect to any specified energy property shall be the applicable percentage of the basis of such property. (2) APPLICABLE PERCENTAGE.—For purposes of paragraph (1), the term ‘‘applicable percentage’’ means— (A) 30 percent in the case of any property described in paragraphs (1) through (4) of subsection (d), and (B) 10 percent in the case of any other property. (3) DOLLAR LIMITATIONS.—In the case of property described in paragraph (2), (6), or (7) of subsection (d), the amount of any grant under this section with respect to such property shall not exceed the limitation described in section 48(c)(1)(B),

1|Page

48(c)(2)(B), or 48(c)(3)(B) of the Internal Revenue Code of 1986, respectively, with respect to such property. (c) TIME FOR PAYMENT OF GRANT.—The Secretary of the Treasury shall make payment of any grant under subsection (a) during the 60-day period beginning on the later of— (1) the date of the application for such grant, or (2) the date the specified energy property for which the grant is being made is placed in service. (d) SPECIFIED ENERGY PROPERTY.—For purposes of this section, the term ‘‘specified energy property’’ means any of the following: (1) QUALIFIED FACILITIES.—Any qualified property (as defined in section 48(a)(5)(D) of the Internal Revenue Code of 1986) which is part of a qualified facility (within the meaning of section 45 of such Code) described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d) of such Code. (2) QUALIFIED FUEL CELL PROPERTY.—Any qualified fuel cell property (as defined in section 48(c)(1) of such Code). (3) SOLAR PROPERTY.—Any property described in clause (i) or (ii) of section 48(a)(3)(A) of such Code. (4) QUALIFIED SMALL WIND ENERGY PROPERTY.—Any qualified small wind energy property (as defined in section 48(c)(4) of such Code). (5) GEOTHERMAL PROPERTY.—Any property described in clause (iii) of section 48(a)(3)(A) of such Code. (6) QUALIFIED MICROTURBINE PROPERTY.—Any qualified microturbine property (as defined in section 48(c)(2) of such Code). (7) COMBINED HEAT AND POWER SYSTEM PROPERTY.—Any combined heat and power system property (as defined in section 48(c)(3) of such Code). (8) GEOTHERMAL HEAT PUMP PROPERTY.—Any property described in clause (vii) of section 48(a)(3)(A) of such Code. Such term shall not include any property unless depreciation (or amortization in lieu of depreciation) is allowable with respect to such property.

2|Page

(e) CREDIT TERMINATION DATE.—For purposes of this section, the term ‘‘credit termination date’’ means— (1) in the case of any specified energy property which is part of a facility described in paragraph (1) of section 45(d) of the Internal Revenue Code of 1986, January 1, 2013, (2) in the case of any specified energy property which is part of a facility described in paragraph (2), (3), (4), (6), (7), (9), or (11) of section 45(d) of such Code, January 1, 2014, and (3) in the case of any specified energy property described in section 48 of such Code, January 1, 2017. In the case of any property which is described in paragraph (3) and also in another paragraph of this subsection, paragraph (3) shall apply with respect to such property. (f) APPLICATION OF CERTAIN RULES.—In making grants under this section, the Secretary of the Treasury shall apply rules similar to the rules of section 50 of the Internal Revenue Code of 1986. In applying such rules, if the property is disposed of, or otherwise ceases to be specified energy property, the Secretary of the Treasury shall provide for the recapture of the appropriate percentage of the grant amount in such manner as the Secretary of the Treasury determines appropriate. (g) EXCEPTION FOR CERTAIN NON-TAXPAYERS.—The Secretary of the Treasury shall not make any grant under this section to— (1) any Federal, State, or local government (or any political subdivision, agency, or instrumentality thereof), (2) any organization described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code, (3) any entity referred to in paragraph (4) of section 54(j) of such Code, or (4) any partnership or other pass-thru entity any partner (or other holder of an equity or profits interest) of which is described in paragraph (1), (2) or (3). (h) DEFINITIONS.—Terms used in this section which are also used in section 45 or 48 of the Internal Revenue Code of 1986 shall have the same meaning for purposes of this section as when used in such section 45 or 48. Any reference in this section to the Secretary of the Treasury shall be treated as including the Secretary’s delegate.

3|Page

(i) APPROPRIATIONS.—There is hereby appropriated to the Secretary of the Treasury such sums as may be necessary to carry out this section. (j) TERMINATION.—The Secretary of the Treasury shall not make any grant to any person under this section unless the application of such person for such grant is received before October 1, 2011.

4|Page

B. Cash Grant Extension (Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) (P.L. 111-312). SECTION 1. SHORT TITLE; ETC. (a) SHORT TITLE.—This Act may be cited as the ‘‘Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010’’. SEC. 707. EXTENSION OF GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS. (a) IN GENERAL.—Subsection (a) of section 1603 of division B of the American Recovery and Reinvestment Act of 2009 is amended— (1) in paragraph (1), by striking ‘‘2009 or 2010’’ and inserting ‘‘2009, 2010, or 2011’’, and (2) in paragraph (2)— (A) by striking ‘‘after 2010’’ and inserting ‘‘after 2011’’, and (B) by striking ‘‘2009 or 2010’’ and inserting ‘‘2009, 2010, or 2011’’. (b) CONFORMING AMENDMENT.—Subsection (j) of section 1603 of division B of such Act is amended by striking ‘‘2011’’ and inserting ‘‘2012’’.

5|Page

II.

Treasury Guidance A. Program Guidance (July 2009/Revised March 2010, January 2011 and April 2011) Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009 Program Guidance

Under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603), the United States Department of the Treasury (Treasury) makes payments to eligible persons who place in service specified energy property and apply for such payments. The purpose of the payment is to reimburse eligible applicants for a portion of the expense of such property. Eligible property under this program includes only property used in a trade or business or held for the production of income. Nonbusiness energy property described in section 25C of the Internal Revenue Code (IRC) and residential energy efficient property described in section 25D of the IRC do not qualify for payments under this program but may qualify for tax credits under those provisions. By receiving payments for property under section 1603, applicants are electing to forego tax credits under sections 48 and 45 of the IRC with respect to such property for the taxable year in which the payment is made or any subsequent taxable year. Applicants must agree to the terms and conditions applicable to the Section 1603 program. This guidance establishes the procedures for applying for payments under the Section 1603 program and is intended to clarify the eligibility requirements under the program. Treasury welcomes questions about the program and the application process at 1603Questions@do.treas.gov. I. Overview On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (Public Law 111-5). The purpose of the Recovery Act is to preserve and create jobs and promote economic recovery in the near term and to invest in infrastructure that will provide long-term economic benefits. Section 707 of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 amends the Act to extend, for one year, certain program deadlines. Section 1603 of the Act’s tax title, the American Recovery and Reinvestment Tax Act, as amended by Section 707 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312), appropriates funds for payments to persons

6|Page

who place in service specified energy property during 2009, 2010, or 2011 or after 2011 if construction began on the property during 2009, 2010, or 2011 and the property is placed in service by a certain date known as the credit termination date (described more fully below in the Property and Payment Eligibility section). Treasury will make Section 1603 payments to qualified applicants in an amount generally equal to 10% or 30% of the basis of the property, depending on the type of property. Applications will be reviewed and payments made within 60 days from the later of the date of the complete application or the date the property is placed in service. Applicants who receive payments for property under Section 1603 are not eligible for the production or investment tax credit under sections 45 and 48 of the IRC with respect to the same property for the taxable year of the payment or subsequent years. In addition, any credit under section 48 previously allowed with respect to progress expenditures for the property will be recaptured. It is expected that the Section 1603 program will temporarily fill the gap created by the diminished investor demand for tax credits. In this way, the near term goal of creating and retaining jobs is achieved, as well as the long-term benefit of expanding the use of clean and renewable energy and decreasing our dependency on non-renewable energy sources. II. Application Procedures Applicants interested in receiving payments under Section 1603 may submit an application on-line by going to www.treasury.gov/recovery. Applications may only be submitted after the property to which the application relates is placed in service, or is under construction. A completed application will include the signed and complete application form; supporting documentation; signed Terms and Conditions; and complete payment information. All applications must be received before the statutory deadline of October 1, 2012. For property placed in service in 2009, 2010, or 2011, applications must be submitted after the property has been placed in service and before October 1, 2012. Treasury will review the applications and make payment to qualified applicants within 60 days from the date the completed application is received by Treasury. For property not placed in service in 2009, 2010, or 2011 but for which construction began in 2009, 2010, or 2011, applications must be submitted after construction commences but before October 1, 2012. If the property has been placed in service at the time of the application, Treasury will make payments to qualified applicants within 60 days from the date the completed application is received. For property not yet placed in service at the time of the application, Treasury will review such applications and notify the applicant if all eligibility requirements that can be determined prior to the property being placed in service have been met. If so notified, applicants must then submit, within 90 days after the date the property is placed in service, supplemental information sufficient for Treasury to make a final determination. Treasury will conduct a final review of the application at that time and make payment to qualified applicants

7|Page

within 60 days after the supplemental information is received by Treasury. Instructions provided on the application will indicate which portions of the application must be completed at the time the application is initially submitted and which portions must be completed at the time the application is supplemented. If an applicant is applying for Section 1603 payments for multiple units of property that are treated as a single, larger unit of property (see Section IV. D. below), all such units may be included in a single application. The application form requests, among other identifying data elements, the applicant’s Data Universal Numbering System (DUNS) number from Dun and Bradstreet. If the applicant does not already have a DUNS number, it may request one at no cost by calling the dedicated toll-free DUNS Number request line at 1-866-705-5711. Applicants must also register with the Central Contractor Registration (CCR). To register, go to www.ccr.gov/startregistration.aspx. The registration must be completed before a payment can be made. When Treasury determines that an application is approved, it will send a notice to the applicant. The notice informs the applicant that the payment will be made and incorporates the information contained in the applicant’s completed application form and the Terms and Conditions. Treasury makes payment to the applicant no later than five days from the date of the notice. Payment will be made by Electronic Funds Transfer based upon the banking information in the CCR. In cases where an applicant has not submitted sufficient information upon which a determination can be based, the applicant will be so notified and given 21 days from the date of the notice to submit additional information. If additional information is not received within the 21 day period, the application will be denied. When Treasury determines that the application does not qualify for payment, the applicant will be so notified. Such notification will include the reasons for the determination and will be considered the final agency action on the application. III. Applicant Eligibility Certain persons are not eligible to receive Section 1603 payments. These include: • any Federal, state or local government, including any political subdivision, agency or instrumentality thereof • any organization that is described in section 501(c) of the IRC and is exempt from tax under section 501(a) of the IRC

8|Page

• any entity referred to in paragraph (4) of section 54(j) of the IRC or • any partnership or other pass-thru entity, any direct or indirect partner (or other holder of an equity or profits interest) of which is an organization or entity described above unless this person only owns an indirect interest in the applicant through a taxable C corporation. As long as each direct and indirect partner in the partnership or shareholder or similar interest holder in any other pass-thru entity is eligible to receive Section 1603 payments, the partnership or pass-thru entity is eligible to receive Section 1603 payments. Having as a direct or indirect partner, shareholder, or similar interest holder a taxable C corporation any of whose shareholders are not eligible to receive Section 1603 payments does not affect the eligibility of the partnership or pass-thru entity. Neither a Real Estate Investment Trust, nor a cooperative organization described in section 1381(a) of the IRC is a pass-thru entity for this purpose. For an applicant to be eligible to receive a Section 1603 payment it must be the owner or lessee of the property and must have originally placed the property in service. Lessees are eligible to apply for Section 1603 payments only if the conditions described in Section VI of this Guidance are met. A foreign person or entity may be eligible for a Section 1603 payment if the person or entity qualifies for the exception in section 168(h)(2)(B) of the IRC. Applicant eligibility will be determined as of the time the application is received. IV. Property and Payment Eligibility A. Placed in Service Qualified property must be originally placed in service between January 1, 2009, and December 31, 2011, (regardless of when construction begins) or placed in service after 2011 and before the credit termination date (see below) if construction of the property begins between January 1, 2009, and December 31, 2011. Qualified property includes expansions of an existing property that is qualified property under section 45 or 48 of the IRC. Placed in service means that the property is ready and available for its specific use. B. Credit Termination Date and Applicable Payment Percentage The following chart lists the Credit Termination Date and the applicable percentage of eligible cost basis used in computing the payment for each specified energy property.

9|Page

Specified Energy Property Large Wind Closed-Loop Biomass Facility Open-loop Biomass Facility Geothermal under IRC sec. 45 Landfill Gas Facility Trash Facility Qualified Hydropower Facility Marine & Hydrokinetic Solar Geothermal under IRC sec. 48 Fuel Cells Microturbines Combined Heat & Power Small Wind Geothermal Heat Pumps

Credit Termination Date Applicable Percentage of Eligible Cost Basis Jan 1, 2013 Jan 1, 2014 Jan 1, 2014 Jan 1, 2014 Jan 1, 2014 Jan 1, 2014 Jan 1, 2014 Jan 1, 2014 Jan 1, 2017 Jan 1, 2017 Jan 1, 2017 Jan 1, 2017 Jan 1, 2017 Jan 1, 2017 Jan 1, 2017 30% 30% 30% 30% 30% 30% 30% 30% 30% 10% 30%** 10%*** 10% 30% 10%

*Geothermal Property that meets the definitions of qualified property in both § 45 and § 48 is allowed either the 30% credit or the 10% credit but not both.

10 | P a g e

** For fuel cell property the maximum amount of the payment may not exceed an amount equal to $1,500 for each 0.5 kilowatt of capacity. *** For microturbine property the maximum amount of the payment may not exceed an amount equal to $200 for each kilowatt of capacity. C. Beginning of Construction Construction begins when physical work of a significant nature begins. Work performed by the applicant and by other persons under a written binding contract is taken into account in determining whether construction has begun. An applicant may elect the safe harbor described below to determine when construction begins. Physical work of a significant nature. Both on-site and off-site work may be taken into account for purposes of demonstrating that physical work of a significant nature has begun. For example, in the case of a facility for the production of electricity from a wind turbine, on-site physical work of a significant nature begins with the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation. If the facility’s wind turbines and tower units are to be assembled on site from components manufactured off site and delivered to the site, physical work of a significant nature begins when the manufacture of the components begins at the off-site location. If a manufacturer produces components for multiple facilities, reasonable methods must be used to associate individual components with particular facilities. Physical work of a significant nature does not include preliminary activities such as planning or designing, securing financing, exploring, researching, clearing a site, test drilling of a geothermal deposit, test drilling to determine soil condition, or excavation to change the contour of the land (as distinguished from excavation for footings and foundations). Self construction. If an applicant manufactures, constructs, or produces property for use by the applicant in the applicant’s trade or business (or for the applicant’s production of income), the work performed by the applicant is taken into account in determining when physical work of a significant nature begins. Construction by contract. For property that is manufactured, constructed, or produced for the applicant by another person under a written binding contract (as described below) that is entered into prior to the manufacture, construction, or production of the property for use by the applicant in the applicant’s trade or business (or for the applicant’s production of income) the work performed under the contract is taken into account in determining when physical work of a significant nature begins. A contract is binding only if it is enforceable under State law against the applicant or a predecessor, and does not limit damages to a specified amount (for example, by use of a liquidated damages provision). For this purpose, a contractual provision that limits damages to an amount equal to at least 5 percent of the total contract price

11 | P a g e

will not be treated as limiting damages to a specified amount. If a contract provides for a full refund of the purchase price in lieu of any damages allowable by law in the event of breach or cancellation, the contract is not considered binding. A contract is binding even if the contract is subject to a condition, as long as the condition is not within the control of either party or a predecessor. A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions or any term is yet to be determined by a standard beyond the control of either party. For example, minor modifications to the design specifications of property to be produced under a contract, such as a cold weather package for wind turbines, do not affect the binding nature of the contract. A contract that imposes significant obligations on the applicant or a predecessor will be treated as binding notwithstanding the fact that certain terms remain to be negotiated by the parties to the contract. An option to either acquire or sell property is not a binding contract. A binding contract does not include a supply, or similar, agreement if the amount and design specifications of the property to be purchased have not been specified. Safe Harbor. An applicant may treat physical work of a significant nature as beginning when more than 5 percent of the total cost of the property has been paid or incurred and may treat physical work of a significant nature as not having begun until more than 5 percent of the total cost of the property has been paid or incurred. In the case of property constructed by the applicant, costs of the property are treated as paid or incurred when paid or incurred by the applicant. In the case of property manufactured, constructed, or produced for the applicant by another person under a binding written contract that is entered into prior to the manufacture, construction, or production of the property (i) the cost of the property under the contract is treated as paid or incurred when the property is provided to the applicant, and (ii) for periods before the property is provided to the applicant, costs paid or incurred with respect to the property by such other person are treated as costs of the property that are paid or incurred when paid or incurred by such other person. If the property includes both self-constructed components and components constructed under a contract, the costs relating to the self-constructed components and the costs relating to the components constructed under a contract are combined in determining if the 5 percent of total costs has been exceeded. All costs included in the eligible basis (as described in section V) of the specified energy property and only such costs are taken into account in determining if 5 percent of total costs has been exceeded. If the applicant is a lessee of property for which the lessor has elected to pass-through the credit to the lessee, this safe harbor must be met by the lessor (unless the applicant sold and leased back the property). An applicant may elect to use this safe harbor by stating in section 2F of the application that the applicant is electing this safe harbor and describing the costs that satisfy the requirements for this election. See also section 6B of the application regarding supporting documentation. Reliance on prior Guidance. An applicant may determine when construction begins under the Program Guidance in effect before March 15, 2010. This guidance can be found at http://treas.gov/initiatives/recovery/Documents/SUMMARY%20OF%20PROPOSED%CHANG ES%20TO%20SECTION%201603%20PROGRAM%20GUIDANCE.doc.

12 | P a g e

D. Units of Property For purposes of determining the beginning of construction of property or the date property is placed in service, all the components of a larger property are a single unit of property if the components are functionally interdependent. Components of property that are produced by, or for, the applicant are functionally interdependent if the placing in service of each of the components is dependent on the placing in service of each of the other components. For example, on a wind farm for the production of electricity from wind energy, the electricity generating wind turbine, its tower, and its supporting pad are the single unit of property. Each wind turbine on the wind farm can be separately operated and metered and can begin producing electricity individually. A control system on a wind farm that optimizes the operation of the farm is a unit of property that is separate from the wind turbines. The owner of multiple units of property that are located at the same site and that will be operated as a larger unit may elect to treat the units (and any property, such as a computer control system, that serves some or all such units) as a single unit of property for purposes of determining the beginning of construction and the date the property is placed in service. In such a case, the entire cost of such larger unit of property is taken into account in applying the safe harbor. The owner may not include within this larger unit any property that was placed in service before January 1, 2009. For example, the owner of a wind farm may treat as a single unit a wind farm that will consist of fifty turbines, their associated towers, their supporting pads, a computer system that monitors and controls the turbines, and associated power condition equipment. In cases where the applicant treats multiple units of property as a single unit, failure to complete the entire planned unit will not preclude receipt of a Section 1603 payment. For example, in the example noted above if only 40 of the planned 50 turbines were placed in service by the credit termination date, an otherwise eligible applicant would be eligible for a payment based on the 40 turbines placed in service. E. Specified Energy Property Installed on Other Property Only the portion of a facility that is described in section 48 of the IRC is taken into account in computing the Section 1603 payment. For example, in the case of a building with solar property on its roof, only the cost of the solar property (including the cost of mounting the solar property on the roof) qualifies for a Section 1603 payment; the cost of the building does not qualify. In the case of a truck on which solar energy property is mounted, the cost of the solar energy property and the cost of mounting the property may be eligible for a Section 1603 payment. However, the truck on which the property is mounted is not specified energy property. Likewise, in the case of a forklift powered by a fuel cell power plant, the fuel cell power plant may be eligible for a Section 1603 payment. However, the forklift in which it is used is not specified energy property.

13 | P a g e

F. Location of Property Property which is used predominantly outside the United States does not qualify for a payment under section 1603. The determination of whether property is used predominantly outside the United States is made by comparing the period of time during which the property is physically located outside the United States with the period of time during which the property is physically located within the United States in a given year. If the property is located outside the United States during more than 50% of the year, such property is considered to be used predominantly outside the United States during that year. This limitation does not apply to property described in section 168(g)(4) of the IRC. G. Original Use The original use of the property must begin with the applicant. If the cost of the used parts contained within the property is not more than 20 percent of the total cost of the property (whether acquired or self-constructed), an applicant will not fail to be considered the original user of property because the it contains used parts. If new property is originally placed in service by a person and is sold to an applicant and leased back to the person by the applicant within three months after the date the property was originally placed in service by the person, unless the lessor and lessee elect otherwise, the applicant-lessor is considered the original user of the property and the property is considered to be placed in service not earlier than when it is used under the lease back. H. Required Documentation Applicants must submit supporting documentation demonstrating that the property is eligible property and that it has been placed in service, and if placed in service after December 31, 2011, that construction began in 2009, 2010, or 2011 (See section V below for documentation required to support costs). The following documents are required as indicated below: Eligible Property – the following documentation must be provided, as applicable, to demonstrate that the property is eligible (for further details on property eligibility, see sections 45 or 48 of the IRC): Design plans (required of all applicants). Final engineering design documents, stamped by a licensed professional engineer. Documentation demonstrating that the property is designed to have a nameplate capacity that meets required minimums or maximums (see Section 4A of the Application for properties with minimum or maximum nameplate capacity requirements) : [open-loop biomass

14 | P a g e

facility (livestock waste nutrients), marine and hydrokinetic renewable energy facility, fuel cell property, microturbine property, combined heat and power system property, and small wind energy property only]. This documentation can be included within the required design plans or commissioning report, or with the original equipment manufacturer (OEM)/equipment vendor specification sheets. Documentation demonstrating that the property is designed to meet the electricityonly generation efficiency requirements described in Section 4A of the Application (fuel cell property and microturbine property only). The system efficiency is typically calculated as a ratio of the electrical energy output from the device to the amount of fuel consumed to produce the electricity divided by the lower heating value (LHV) of the fuel (if alternating current, be sure to include conversion losses). OEM/equipment vendor specification sheets that specify the above values can be used as supporting documentation for nameplate capacity and system efficiency. This documentation can also be included within the required design plans or commissioning report, as long as it specifies the above values. For combined heat and power system property only, documentation demonstrating that the system is designed to meet the requirements described in Section 4A of the Application. See IRC section 48( c )(3)( C ) for calculation of the system energy efficiency percentage. This documentation can be included within the required design plans or commissioning report, or with OEM/equipment vendor specification sheets. For a closed-loop biomass facility modified to use closed-loop biomass to co-fire with coal, other biomass, or both, documentation demonstrating approval under the Biomass Power for Rural Development Program or documentation demonstrating that the facility is part of a pilot project of the Commodity Credit Corporation. FERC certification (applicable to incremental hydropower production projects only). Certification provided by the Federal Energy Regulatory Commission that certifies the baseline and incremental increase in energy production for incremental hydropower production. FERC license (applicable to hydropower facility installed on a qualifying nonhydroelectirc dam only) Placed in Service - the following documentation must be provided, as applicable, to demonstrate that the property is placed in service: Commissioning report (required for all properties placed in service). A report provided by the project engineer, or the equipment vendor, or an independent third party that certifies that the equipment has been installed, tested, and is ready and capable of being used for its intended purpose.

15 | P a g e

Interconnection agreement (required only for properties placed in service that are interconnected with a utility). A formal document between the applicant and the local utility that establishes the terms and conditions under which the utility agrees to interconnect with the applicant’s system. Applicants must also submit any subsequent documentation to demonstrate that the interconnection agreement has been placed in effect. Under Construction but not yet Placed in Service - the following documentation must be provided, as applicable, to demonstrate that construction has begun on the property: Paid invoices and/or other financial documents demonstrating that physical work of a significant nature has begun on the property as described in Section IV.C. If beginning of construction is based on the safe harbor, these documents must demonstrate that more than 5 percent of the total cost of the property has been incurred or paid by the applicant. Binding contract (required for property not yet placed in service that is being manufactured, constructed or produced for the applicant by another person). The binding contract for the manufacture, construction or production of the property as described in section IV.C above. Leased Property - the following documentation must be provided where the applicant is the lessee of the property to demonstrate that the lessor and lessee have entered into the agreement required by section VI of this Guidance. The written agreement with the lessor described in Section VI of this Guidance. I. Types of Property Property eligible to receive Section 1603 payments is “specified energy property.” Specified energy property includes only tangible property (not including a building) that is an integral part of the facility. The tangible property is tangible personal property and other tangible property as defined in sections 1.48-1(c) and (d) of the Income Tax Regulations. Specified energy property is property for which depreciation (or amortization in lieu of depreciation) is allowable. Qualified property must be placed in service in 2009, 2010, or 2011, in the case of property placed in service after 2010 for which construction begins in 2009, 2010, or 2011, before the credit termination date. Property that satisfies this placed-in-service requirement may be qualified property even if it is an addition to or expansion of a qualified facility placed in service before 2009. Qualified property includes only tangible property that is an integral part of the qualified facility. Qualified property does not include a building but may include structural components of a building. Property is an integral part of a qualified facility if the property is used

16 | P a g e

directly in the qualified facility and is essential to the completeness of the activity performed in that facility. Roadways and paved parking areas located at the qualified facility and used for transport of material to be processed at the facility or equipment to be used in maintaining and operating the facility are integral to the activity preformed there, but roadways or paved parking lots that provide solely for employee and visitor vehicle traffic are not an integral part a qualified facility. Property is considered used as an integral part of a qualified facility if so used either by the owner of the property or by the lessee of the property. In the case of an open-loop biomass, closed-loop biomass, or municipal solid waste facility, an integral part of the qualified facility may include property used for unloading, transfer, storage, reclaiming from storage, or preparation (shredding, chopping, pulverizing, or screening) of the material to be processed at the plant. If the facility uses gas or liquid derived from open-loop biomass, closed-loop biomass, or municipal solid waste to produce electricity, equipment used to produce and process such gas or liquid may also be an integral part of the facility. However, equipment used to cultivate closed-loop biomass, equipment used to collect open-loop biomass, closed-loop biomass, or municipal solid waste, and trucks, railroad cars, barges and pipelines that transport open-loop biomass, closed-loop biomass, or municipal solid waste (or a gas or liquid produced from any of the foregoing) to a qualified facility or between noncontiguous parts of a qualified facility are not an integral part of the facility. Property that is integral to a geothermal facility includes equipment that transports geothermal steam or hot water from a geothermal deposit to the site of ultimate use. This includes components of a heating system, such as pipes and ductwork that distribute within a building the energy derived from the geothermal deposit and, if geothermal energy is used to generate electricity, includes equipment that transports hot water from the geothermal deposit to a power plant. For qualified property that generates electricity, qualified property includes storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items but does not include any electrical transmission equipment, such as transmission lines and towers, or any equipment beyond the electrical transmission stage, such as transformers and distribution lines. Specified energy property, within the meaning of Section 1603, consists of two broad categories of property - certain property that is part of a facility described in IRC section 45

17 | P a g e

(Qualified Facility Property) and certain other property described in IRC section 48. The following types of property are specified energy property within the meaning of Section 1603 1: Qualified Facility Property: Qualified Facility Property is property that is an integral part of a qualified facility described in IRC section 45(d)(1), (2), (3), (4), (6), (7), (9), or (11).Although this Guidance does not address the placed-in-service requirements of IRC section 45,Qualified Facility Property must be part of a facility that meets those requirements. Qualified Facility Property may, however, be a post-2008 addition to or modification of a facility placed in service before 2009 so long as the facility meets the placed-in-service requirements of section 45. In the case of a post2008 addition to or modification of a qualified facility described in section 45(d)(1), (2), (3), (4), (6), (7), (9), or (11) and placed in service before 2009, no credit is allowed with respect to such facility under section 45, or with respect to such property under section 48, in the taxable year a Section 1603 payment is made or in any subsequent year. Qualified Facilities described under IRC section 45: A qualified facility is a facility as described in IRC section 45(d)(1), (2), (3), (4), (6), (7), (9), or (11), but only if no credit has been allowed under section 45 for the facility. This guidance does not address the placed-in-service requirements of IRC section 45. Wind facility: A wind facility is a facility using wind to produce electricity (wind turbines 100kW or less may also qualify as qualified small wind energy property, but only one payment is allowed with respect to the property). Closed-loop biomass facility: A closed-loop biomass facility uses closed-loop biomass to produce electricity. Closed-loop biomass is any organic material from a plant that is planted exclusively for purposes of being used at a qualified facility to produce electricity. A closed loop biomass facility includes the modifications to a facility that was originally placed in service and modified to use closed-loop biomass to co-fire with coal, with other biomass, or with both, but only if the modification is approved under the Biomass Power for Rural Development

1

The property descriptions included in this Guidance are intended to assist applicants in determining if a property qualifies for funding. They are not intended to change the meaning of the terms as they are used in sections 45 or 48 of the IRC.

18 | P a g e

Programs or is part of a pilot project of the Commodity Credit Corporation as described in 65 Fed. Reg. 63052. Open-loop biomass facilities: An open-loop biomass facility uses open-loop biomass to produce electricity. Open-loop biomass is any agriculture livestock waste nutrients or any solid, nonhazardous, cellulosic waste material or any lignin material that is derived from qualified sources. • Agricultural livestock waste nutrients are agricultural livestock manure and litter, including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure. Agricultural livestock includes bovine, swine, poultry, and sheep. • The qualified sources from which solid, nonhazardous, cellulosic waste material or any lignin material must be derived are: 1. Any of the following forest-related resources: mill and harvesting residues, precommercial thinnings, slash, and brush; 2. Solid wood waste materials, including waste pallets, crates, dunnage, manufacturing and construction wood wastes (other than pressure-treated, chemically-treated, or painted wood wastes), landscape or right-of-way tree trimmings, but not including municipal solid waste, gas derived from the biodegradation of solid waste, or paper that is commonly recycled; and 3. Agriculture sources, including orchard tree crops, vineyard, grain, legumes, sugar, and other crop by-products or residues. An open-loop biomass facility does not include: • A facility that burns fossil fuel (co-firing) beyond such fossil fuel required for startup and flame stabilization; or • A facility using agricultural livestock waste nutrients that has a nameplate capacity rating of less than 150 kilowatts. Geothermal facility: A geothermal facility uses geothermal energy to produce electricity. Geothermal energy is energy derived from a geothermal deposit. A geothermal deposit is a geothermal reservoir consisting of natural heat that is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). Landfill gas facilities: A landfill gas facility is a facility producing electricity from gas derived from the biodegradation of municipal solid waste.

19 | P a g e

Trash facilities: A trash facility is a facility, other than a landfill gas facility, that uses municipal solid waste to produce electricity. In the case of a new unit placed in service in connection with a trash facility placed in service before October 23, 2004, only property related to the new unit can qualify as specified energy property that is eligible for a Section 1603 payment. Qualified hydropower facility: Incremental hydropower: A facility that produces incremental hydropower production described in IRC section 45(c)(8)(B). The percentage of incremental hydropower and baseline must be certified by the Federal Energy Regulatory Commission. The determination of incremental hydropower production shall not be based on any operational changes at such facility not directly associated with the efficiency improvements or additions of capacity. Only property related to the efficiency improvements and additions to capacity to which the incremental hydropower production is attributable can qualify as specified energy property that is eligible for a Section 1603 payment. Nonhydroelectric dam: Qualified hydropower facilities also include any hydropower producing facility described in IRC section 45(c)(8)(C) (relating to hydroelectric projects installed on a nonhydroelectric dams that were placed in service before August 8, 2004, and did not produce hydroelectric power on August 8, 2004). The hydroelectric project must be licensed by the Federal Energy Regulatory Commission and must meet all other applicable environmental, licensing, and regulatory requirements. The hydroelectric project must be operated so that the water surface elevation at any given location and time that would have occurred in the absence of the hydroelectric project is maintained, subject to any license requirements imposed under applicable law that change the water surface elevation for the purpose of improving environmental quality of the affected waterway. The Secretary of the Treasury, in consultation with the Federal Energy Regulatory Commission, shall certify that the hydroelectric project licensed at a nonhydroelectric dam meets these criteria. Only property related to the turbines or other generating devices added to the facility to produce hydroelectric power can qualify as specified energy property that is eligible for a Section 1603 payment. Marine and hydrokinetic renewable energy facilities: A marine or hydrokinetic renewable energy facility is a facility that produces electricity from marine and hydrokinetic renewable energy and has a nameplate capacity rating of at least 150 kilowatts. Marine and hydrokinetic renewable energy is energy derived from: • Waves, tides, and currents in oceans, estuaries, and tidal areas, free flowing water in rivers, lakes, and streams;

20 | P a g e

• Free flowing water in an irrigation system, canal, or other man-made channel, including projects that utilize nonmechanical structures to accelerate the flow of water for electric power production purposes; or • Differentials in ocean temperature (ocean thermal energy conversion). Marine and hydrokinetic renewable energy does not include any energy that is derived from any source that utilizes a dam, diversionary structure (except as provided above for man-made projects), or impoundment for electric power production purposes. Energy property described under IRC section 48: Specified energy property for purposes of Section 1603 includes, in addition to qualified property that is part of a qualified facility, any other energy property described under IRC section 48. Such energy property must meet performance and quality standards that are prescribed either in IRC section 48 or in associated Treasury Regulations and that are in effect at the time of the acquisition of the property. Solar property: Equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting property used to generate energy for the purposes of heating a swimming pool; equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Geothermal property: Equipment used to produce, distribute, or use energy derived from a geothermal deposit, but only, in the case of electricity generated by geothermal power, up to (but not including) the electrical transmission stage. A geothermal deposit is a geothermal reservoir consisting of natural heat that is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). Qualified fuel cell property: Qualified fuel cell property is a fuel cell power plant that has a nameplate capacity of at least 0.5 kilowatt of electricity using an electrochemical process and has an electricity-only generation efficiency greater than 30%. A fuel cell power plant is an integrated system comprised of a fuel cell stack assembly and associated balance of plant components that converts a fuel into electricity using electrochemical means. Payments for qualified fuel cell property cannot exceed an amount equal to $1,500 for each 0.5 kilowatt of capacity of such property. Qualified microturbine property: Qualified microturbine property is a stationary microturbine power plant that has a nameplate capacity of less than 2,000 kilowatts and has an electricity-only generation efficiency of not less than 26% at International Standard Organization conditions. A stationary microturbine power plant is an integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a generator or alternator, and

21 | P a g e

associated balance of plant components which converts a fuel into electricity and thermal energy. The microturbine power plant also includes all secondary components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, such as voltage, frequency, and power factors. Payments for qualified microturbine property cannot exceed an amount equal to $200 for each kilowatt of capacity of such property. Combined heat and power (CHP) system property: Combined heat and power system property is property comprising a system that meets the following requirements: • The system uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications). • The system-o Produces at least 20% of its total useful energy in the form of thermal energy that is not used to produce electrical or mechanical power (or combination thereof); and o Produces at least 20% of its total useful energy in the form of electrical or mechanical power (or combination thereof); and o Has a system energy efficiency percentage in excess of 60%. This requirement does not apply to a facility designed to use biomass [within the meaning of IRC section 45(c)(2) and (3) without regard to the last sentence of paragraph (3)(A)] for at least 90% of the energy source. (See IRC section 48(c)(3)(C) for calculation of the system energy efficiency percentage and IRC section 48(c)(3)(D) for the reduction in payment for biomass systems with an energy efficiency of less than 60%.) o Does not have a capacity in excess of 50 megawatts or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities. CHP system property does not include property used to transport the energy source to the facility or to distribute energy produced by the facility. Qualified small wind energy property: Qualified small wind energy property is property that uses a qualifying small wind turbine to generate electricity. A qualifying small wind turbine is a wind turbine that has a nameplate capacity of not more than 100 kilowatts. Geothermal Heat Pump Property: Equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.

22 | P a g e

V. Eligible Basis The basis of property is determined in accordance with the general rules for determining the basis of property for federal income tax purposes. Thus, the basis of property generally is its cost (IRC section 1012), unreduced by any other adjustment to basis, such as that for depreciation, and includes all items properly included by the taxpayer in the depreciable basis of the property, such as installation costs and the cost for freight incurred in construction of the specified energy property. If property is acquired in exchange for cash and other property in a transaction described in IRC section 1031, in which no gain or loss is recognized, the basis of the newly acquired property is equal to the adjusted basis of the other property plus the cash paid. Costs that will be deducted for federal income tax purposes in the year in which they are paid or incurred are not includible in the basis on which the payment is determined. For example, if the applicant will take the IRC section 179 deduction for all or part of the cost of the property, then no payment is allowed for the portion of the cost of the property for which the IRC section 179 deduction will be taken. For geothermal property, if intangible drilling and development expenses will be deducted by the applicant, no payment will be allowed on the costs that will be deducted as intangible drilling and development expenses. If the applicant will capitalize intangible drilling and development expenses, only those costs that may be recovered through depreciation are includible in the basis on which the payment is allowed. However, if the applicant will elect under IRC § 59(e) to deduct intangible drilling and development costs over 60 months, the payment is based on the amount for which the election under § 59(e) applies because the effect of § 59(e) is to treat these costs as amortizable. Only the cost basis of property placed in service after 2008 is eligible for a Section 1603 payment. Thus, if property is placed in service in 2009 at a qualified facility that was placed in service in an earlier year, only the basis of the property placed in service in 2009 is eligible for a Section 1603 payment. Limitation on eligible basis. The eligible basis of a qualified facility does not include the portion of the cost of the facility that is attributable to a non qualifying activity. For example, for a biomass facility that burns fuel other than open-loop biomass or closed-loop biomass, the eligible cost basis is the percentage of total eligible costs that is equal to the percentage of the electricity produced at the facility that is attributable to the open-loop biomass and closed-loop biomass. In the case of costs that relate to both a nonqualifying activity and a qualifying activity, the costs must be reasonably allocated between the nonqualifying and qualifying activities. For example, if combustion equipment burns both qualifying biomass and other fuel, the equipment’s eligible cost basis is limited to the percentage of its otherwise eligible cost corresponding to the percentage of the equipment’s electricity production that is attributable to the qualifying biomass. Similarly, the eligible basis of a qualified hydropower facility producing incremental hydropower includes the entire costs of the modification even though only a portion of the power produced from the modification is attributable to the modification.

23 | P a g e

Applicants must submit with their application for a Section 1603 payment documentation to support the cost basis claimed for the property. Supporting documentation includes a detailed breakdown of all costs included in the basis. Other supporting documentation, such as contracts, copies of invoices, and proof of payment must be retained by the applicant and made available to Treasury upon request. For properties that have a cost basis in excess of $500,000 applicants must submit an independent accountant’s certification attesting to the accuracy of all costs claimed as part of the basis of the property. VI. Leased Property A lessor who is eligible to receive a Section 1603 payment with respect to a property may elect to pass-through the Section 1603 payment to a lessee. The election may only be made with respect to property that would be eligible for the Section 1603 payment if owned by the lessee. Such an election will treat the lessee as having acquired the property for an amount equal to the independently assessed fair market value of the property on the date the property is transferred to the lessee and will generally follow the rules in the IRC and Treasury regulations governing elections to allow lessees to receive energy tax credits. The lessor and lessee must agree that the lessor waives all right to a Section 1603 payment or a production or investment tax credit with respect to the eligible property, before the lessee may apply for a Section 1603 payment with respect to such property. The lessee must agree to include ratably in gross income over the five year recapture period an amount equal to 50 % of the amount of the Section 1603 payment. In order to make this election, both the lessor and the lessee must be persons eligible to receive a payment under Section 1603. Additionally, this election may not be made by a lessor that is a mutual savings bank or similar financial organization, a regulated investment company or a real estate investment trust. The election of a lessor to allow the lessee to receive a Section 1603 payment may be made with respect to each property leased by the lessor to the lessee. The lessee's written consent is required. The lessor’s election is made by a written agreement with the lessee that contains the following information: • A waiver of the lessor’s right to receive any payment under Section 1603 with respect to the property, as well as a waiver of the lessor’s right to claim a production or investment tax credit under sections 45 and 48 of the IRC with respect to the same property for the taxable year of the payment or subsequent years; • All information necessary to determine the amount of lessee’s Section 1603 payment; • The name, address, and employer identification number of the lessor and the lessee;

24 | P a g e

• A description of each property with respect to which the election in being made; • The date on which possession of the property is transferred to the lessee; and • The lessee’s consent to the election. A copy of this agreement must be included in the lessee’s application for the Section 1603 payment. This election is irrevocable. Special Rule for Sale-leaseback Transaction In a sale-leaseback transaction, the lessee, who is not the owner of the property, may claim the Section 1603 payment, if three conditions are satisfied: • First, the lessee must be the person who originally placed the property in service. • Second, the property must be sold and leased back by the lessee, or must be leased to the lessee, within three months after the date the property was originally placed in service. • Third, the lessee and lessor must not make an election to preclude application of the sale-leaseback rules. VII. Recapture If the applicant disposes of the property to a disqualified person or the property ceases to qualify as a specified energy property within five years from the date the property is placed in service (hereinafter “disqualifying event”), the Section 1603 payment must be repaid to the Treasury as follows: 100% of the payment must be repaid if the disqualifying event takes place within one year from the date placed in service; 80% of the payment must be repaid if the disqualifying event takes place after one year but before two years from the date placed in service; 60% of the payment must be repaid if the disqualifying event takes place after two years but before three years from the date placed in service; 40% of the payment must be repaid if the disqualifying event takes place after three years but before four years from the date placed in service; and 20% of the payment must be repaid if the disqualifying event takes place after four years but before five years from the date placed in service. Property is considered to have been disposed of to a disqualified person if any interest in the property or in the applicant or in any partnership or pass-thru entity that is a direct or indirect owner of an interest in the applicant is sold to: any Federal, state or local government, including any political subdivision, agency or instrumentality thereof; any organization that is described in section 501(c) of the IRC and is exempt from tax under section 501(a) of the IRC; any entity referred to in paragraph (4) of section 54(j) of the IRC; or any partnership or other pass-thru entity any partner (or other holder of an equity or profits interest) of which is a Federal,

25 | P a g e

state or local government, including any political subdivision, agency or instrumentality thereof; an organization that is described in section 501(c) of the IRC and is exempt from tax under section 501(a) of the IRC; or an entity referred to in paragraph (4) of section 54(j) of the IRC. A taxable corporation some or all of whose shareholders are disqualified persons is not a disqualified person and such a corporation’s ownership of an interest in a partnership or other pass-thru entity will not cause the partnership or other entity to be treated as a disqualified person. Property ceases to qualify as a specified energy property if the use of the property changes so that it no longer qualifies as specified energy property. For example, use of property predominantly outside the United States in a year will result in recapture. Temporary cessation of energy production will not result in recapture provided the owner of the property intends to resume production at the time production ceases. Permanent cessation of production will result in recapture. Permanent cessation of production due to natural disaster will not result in recapture unless the property is replaced with property for which a Section 1603 payment is allowed. Replacement would be treated as occurring if the applicant uses IRC section 1033 to avoid gain recognition. For a hydropower property where incremental hydropower production has been licensed by FERC, recapture will not take place if actual incremental increases in energy production do not occur that year due to environmental and/or regulatory factors. Recapture for a hydropower facility installed on a nonhydroelectric dam will occur if the Federal Energy Regulatory Commission license is surrendered or repealed based on significant changes in water surface elevation caused by operation of the facility. If the amount of the Section 1603 payment depends on the percentage of electricity produced from biomass (in the case of closed-loop and open-loop biomass facilities) or the energy efficiency percentage (in the case of combined heat and power system property using biomass) and the percentage is reduced, a proportionate percentage of the property ceases to qualify as specified energy property. The applicable percentages will be determined on an annual basis for the year beginning on the date the property is placed in service and for each succeeding year within the recapture period. No additional grant will be allowed in a subsequent year in which the percentage increases. Selling or otherwise disposing of the property to an entity other than a disqualified person does not result in recapture provided the property continues to qualify as a specified energy property and provided the purchaser of the property agrees to be jointly liable with the applicant for any recapture. Recapture would occur in the event the property is resold to a disqualified person or ceases to qualify as a specified energy property. The applicant remains jointly liable to the Treasury for the recapture amount even if the applicant no longer has control over the property.

26 | P a g e

Where a lessor elects to pass through the Section 1603 payment to a lessee, if the lessor sells the property to a disqualified person, the lessee is liable to the Treasury for the recapture amount even if the lessee maintains control over the property. If the lease is terminated and possession of the property is transferred by the lessee to the lessor or any other person, the lessee is liable to the Treasury for the recapture amount if the use of the property changes during the recapture period so that it no longer qualifies as specified energy property. Applicants are not required to post a bond as a condition of receiving payment under the section 1603 program and receipt of payment does not create a lien on the property in favor of the United States. However, funds that must be repaid to the Treasury under these rules are considered debts owed to the United States and if not paid when due, will be collected by all available means against any assets of the applicant, including enforcement by the United States Department of Justice. Debts arising under these rules are not considered tax liabilities. VIII. Miscellaneous Provisions A. Assignment of Payment Applicants may submit, along with their request for payment, a Notice of Assignment, assigning the payment to a third party provided the requirements of the Federal Assignment of Claims Act (31 U.S.C. 3727) are met. The Notice of Assignment will include the DUNS number for the third party. The third party will be required to register in CCR. B. National Environmental Protection Act (NEPA) A Section 1603 payment with respect to specified energy property does not make the property subject to the requirements of NEPA and similar laws. C. Davis- Bacon A 1603 payment with respect to specified energy property does not make the property subject to the requirements of the Davis-Bacon Act. D. Treatment of Payments as Taxable Income Except as described in Section IV of this Guidance with respect to leased property, a Section 1603 payment with respect to specified energy property is not includible in the gross income of the applicant. The basis of the property is reduced by an amount equal to 50% of the payment. E. Real Estate Investment Trusts

27 | P a g e

A Real Estate Investment Trust (REIT) will be eligible to receive Section 1603 payments only to the extent allowed by section 50 of the IRC. IRC section 50(d)(1) specifies that rules similar to the rules of former IRC section 46(e) will apply. IRC section 46(e)(1)(B) provides that, in general, in the case of a REIT, qualified investment is limited to the REIT’s ratable share of such qualified investment. The ratable share is a ratio, the numerator of which is its taxable income and the denominator of which is its taxable income computed without regard to the deduction for dividends paid (provided by IRC section 857(b)(2)(B)). For this purpose, the REIT’s taxable income is determined without regard to any deduction for capital gains dividends and by excluding any net capital gain. F. Applicability of Normalization Rules Payments received under the Section 1603 program must be normalized. See former IRC Section 46(f). G. Reporting Applicants will be required to provide reports, as required by Treasury, including an annual performance report as set forth in the Terms and Conditions.

28 | P a g e

B.

Start of Construction FAQs

Payments for Specified Energy Property in Lieu of Tax Credits Under the American Recovery and Reinvestment Act of 2009 FREQUENTLY ASKED QUESTIONS AND ANSWERS “BEGINNING OF CONSTRUCTION” Q1. How does an applicant demonstrate that construction has begun on a project in 2009 or 2010? A1. There are two ways to show that construction has begun. One is to begin physical work of a significant nature. The other is to meet a 5% safe harbor. Physical Work of a Significant Nature Q2. What does it mean to begin physical work of a significant nature? A2. This means that physical work on the specified energy property has started. Physical work of a significant nature includes any physical work on the specified energy property at the site. Physical work of a significant nature also includes physical work that has taken place under a binding written contract for the manufacture, construction, or production of specified energy property for use by the applicant’s facility provided the contract is entered into prior to the work taking place. Q3. What is included in specified energy property in the case of a qualified facility described in section 45 of the Internal Revenue Code? A3. In the case of a qualified facility described in section 45, specified energy property is limited to tangible personal property and other tangible property used as an integral part of the activity performed by the qualified facility and located at the site the qualified facility. For such a facility, specified energy property includes property integral to the production of electricity, but does not include property used for electrical transmission. Thus, physical work on a transmission tower located at the site is not physical work of a significant nature because the transmission tower is not part of the qualified facility. However, physical work on a transformer that steps up the voltage of electricity produced at the facility to the voltage needed for transmission is physical work of a significant nature because power conditioning equipment is part of the qualified facility. Q4. How much physical work is required? Is laying the foundation for one wind turbine that is part of a larger wind farm sufficient?

29 | P a g e

A4. In general any physical work on the specified energy property will be treated as the beginning of construction even if such work relates to only a small part of the facility, but see Q5/A5 below. Q5. Once physical work has begun, must physical work on the project be continuous to satisfy the requirement that construction has begun? For example, if a single foundation for a wind turbine is laid in 2010 but no other physical work on a 50 turbine project takes place until 2012, has the requirement been met? A5. Treasury will closely scrutinize any construction activity that does not involve a continuous program of construction or a contractual obligation to undertake and complete within a reasonable time, a continuous program of construction. Disruptions in the work schedule that are beyond the applicant’s control (for example, unusual weather or a site at which work can only be performed during certain seasons) will be taken into account in determining whether or not an applicant has undertaken a continuous program of construction. Q6. Is starting work on roads physical work of a significant nature? A6. Only work on specified energy property is physical work of a significant nature for purposes of showing that construction has begun. In the case of a qualified facility described in section 45, roads on the site that are integral to the qualified facility are specified energy property; these include onsite roads that are used for moving materials to be processed (for example, biomass) and roads for equipment to operate and maintain the qualified facility. Starting construction on these roads constitutes the beginning of construction. Roads for access to the site, or roads used solely for employee or visitor vehicles are not specified energy property; starting construction on these roads is not starting physical work of a significant nature on specified energy property. Q7. Is preliminary work such as clearing land, obtaining permits or putting up fencing physical work of a significant nature? A7. Preliminary work such as clearing land and obtaining permits is not physical work of a significant nature on specified energy property. Erecting a fence (or beginning to erect a fence) is not the beginning of physical work of a significant nature because, generally, fencing is not an integral part of the qualified facility. Q8. An applicant plans to build a new facility for the production of electricity from wind power. The facility will be constructed on an existing wind facility site. In order to construct the new wind facility, the existing facility will be dismantled and removed. If an applicant begins to remove portions of the existing facility has physical work of a significant nature commenced?

30 | P a g e

A8. No. Generally, the cost of removal is associated with the property being removed or is capitalized to non-depreciable land. Removal of the existing turbines and towers is preliminary work and, therefore, does not constitute physical work of a significant nature on specified energy property. Q9. Is the construction at the site of a building that will be used for operations and maintenance physical work of a significant nature? A9. Because a building is not specified energy property, construction of a building is not physical work of a significant nature. However, the following structures are not treated as buildings for this purpose: (1) a structure that is essentially an item of machinery or equipment, or (2) a structure that houses property used as an integral part of a qualified activity if the use of the structure is so closely related to the use of the housed property that the structure clearly can be expected to be replaced when the property it initially houses is replaced. See Treas. Regs.§ 1.48-1(e)(1). Q10. Is test drilling of a geothermal deposit considered physical work of a significant nature? A10. Test drilling for a geothermal deposit is a preliminary activity and is not physical work of a significant nature. Q11. When is a contract binding? A11. To be binding, a contract must be enforceable under state law. Additionally, the contract terms cannot limit damages in the event of a breach to less than 5% of the total contract price. Q12. What is included in work performed under a binding written contract? A12. Work performed under the contract includes only work that takes place after the binding written contract is entered into. The work is treated as physical work of a significant nature only if it is work on property that will become specified energy property of the applicant. For example, if a contractor is manufacturing solar panels specifically for the applicant under a binding written contract, any physical work on those panels is physical work of a significant nature on specified energy property of the applicant. If an applicant has a binding written contract with a contractor who is manufacturing solar panels for a number of customers, physical work on the panels would only be considered work performed under the applicant’s binding written contract if the contractor can reasonably demonstrate that physical work has started on panels that will become specified energy property of the applicant. The contractor may use any reasonable, consistent method to allocate work it performs among its customers. Whether a method is reasonable depends on all the relevant facts and circumstances.

31 | P a g e

Q13. If an applicant purchases components or other parts from the inventory of a vendor under a binding written contract entered into before January 1, 2011, has physical work of a significant nature begun? A13. No. Work performed under a contract does not include work to produce components or parts that are in existing inventory or are normally held in inventory by a manufacturer. Q14. If physical work takes place pursuant to a binding written contract on property manufactured, constructed or produced for the applicant’s project but the specific site for the project will not be identified prior to the deadline for submitting initial applications (or the site changes after an initial application is submitted), has physical work of a significant nature begun? A14. If the work performed otherwise meets the requirements for physical work of a significant nature and work on the project is continuous (see Q5/A5), the fact that the specific site of the project has not been identified at the time of the initial application (or changes after the initial application) does not impact whether or not construction has begun. 5% Safe Harbor Q15. How is the 5% safe harbor met? A15. An applicant meets the 5% safe harbor if the applicant pays or incurs 5.00% or more of the total cost of the specified energy property before the end of 2010. Q16. What does “paid or incurred” mean? A16. The term “paid or incurred” generally means paid or incurred within the meaning of Treas. Regs. §1.461-1(a)(1) and (2). That is, costs are taken into account when cashmethod taxpayers “pay” them and when accrual-method taxpayers “incur” them. A cost is generally “incurred” for tax purposes when 1) the fact of the liability is fixed, 2) the amount of the liability is determinable with reasonable accuracy, and 3) the economic performance test (see Treas. Regs. §1.461-4) has been met with respect to such cost. Although the specific reference to the §461(h) economic performance rules was deleted in the revised Program Guidance, the economic performance rules continue to apply in determining whether costs have been incurred. The 5% safe harbor contained in the Program Guidance includes a single exception to the general principles that are used to determine when amounts are “incurred.” Under general rules for property manufactured, constructed, or produced for the applicant by another person under a binding written contract that is entered into prior to the manufacture, construction, or production of the property, the cost of such property is treated as “incurred” when the property is provided to the applicant. The exception is that for periods before the property is provided to the

32 | P a g e

applicant, costs incurred with respect to the property by such other person are treated as costs of the property that are incurred by the applicant when the costs are incurred by such other person. Q16A: When are costs paid or incurred by the person providing the property to the applicant under a binding contract? A16A: Costs are paid or incurred by the person providing property to the applicant as that person pays or incurs costs in connection with providing property to the applicant. For example: In 2010, accrual-method taxpayer W enters a binding written contract to provide a wind turbine to A in June 2012. In 2010, W, pursuant to a contract with Y, pays Y to provide parts in May 2012 for use in the wind turbine. W’s employees provide W with services necessary to design and plan for the production of the wind turbine in 2010 and with services to manufacture (assemble) the wind turbine in 2012. W incurs the cost to design and plan for the production of the turbine assembly in 2010, incurs the costs for the parts in May 2012 when Y delivers the parts to W, and incurs the costs for W’s employees to assemble the wind turbine in 2012. See § 1.461-4(d)(4), § 1.446-1(c)(1)(ii), and Example 3 of § 1.461-4(d)(7) of the Income Tax Regulations. For purposes of determining whether A has met the 5% safe harbor, A may only include the costs incurred by W to pay its employees to plan and design the turbine in 2010. Q17. If title to the property has passed to the applicant, but the property remains in storage at the manufacturer’s site, has the property been provided to the applicant? A17. Property is provided to the applicant either when title to the property passes to the applicant or when it is delivered to or accepted by the applicant, depending on the applicant’s method of accounting. In addition, property that the applicant reasonably expects to be provided within 3-1/2 months of the date of payment will be considered to be provided on the payment date. See, generally, Treas. Regs. §1.461-4(d)(6). Q18. In the case of property manufactured, constructed, or produced for the applicant by another person (the supplier) under a binding written contract that is entered into prior to the manufacture, construction, or production of the property, how does the applicant determine what costs have been paid or incurred on its behalf by the supplier? (Note that this Question and Question 19 assume that the supplier uses the accrual method of accounting) A18. The applicant may rely on a statement by the supplier as to the amount incurred by the supplier with respect to the property to be manufactured, constructed, or produced for the applicant under the binding written contract. The supplier may use any reasonable, consistent method to allocate the costs incurred by the supplier among the units of property to be manufactured, constructed, or produced by the supplier. Only costs incurred by the supplier after the binding written contract is entered may be reasonably allocated to the property manufactured, constructed, or produced under that contract. The economic performance rules apply to determine when costs have been incurred by the supplier. The exception described

33 | P a g e

in Q16/A16 does not apply in determining when costs are incurred by the supplier. Thus, if components are manufactured for the supplier by a subcontractor, the cost of those components is incurred only when the components are provided to the supplier and not as the subcontractor pays or incurs the costs of manufacturing the components. Q19. An applicant may enter into a binding written contract for multiple units of property to be manufactured, constructed, or produced for the applicant by another person under a binding written contract that is entered into prior to the manufacture, construction, or production of the property. How does the applicant allocate the costs paid or incurred with respect to the contract to the units of property acquired pursuant to the contract? A19. Costs incurred when property is delivered to the applicant are allocated to such property. Costs that are treated under Q16/A16 as incurred when incurred by the supplier with respect to the property are allocated to the property with respect to which the supplier incurred the costs. The supplier may use any reasonable method to allocate the costs it incurs among the units of property manufactured, constructed or produced by the supplier and to allocate the units of property it produces among its customers. Whether a method is reasonable depends on all the relevant facts and circumstances. In addition, property that the supplier reasonably expects to receive from a subcontractor within 3-1/2 months of the date of the supplier’s payment to the subcontractor is considered to be provided by the payment date. See, generally, Treas. Regs. §1.461-4(d)(6). Q20. A developer may enter into a binding written contract for multiple units of property to be manufactured, constructed, or produced for the developer by another person under a binding written contract (a “master contract”) that is entered into prior to the manufacture, construction, or production of the property. The developer may then assign its rights to certain units of property to an affiliated special purpose vehicle (generally, a limited liability company) that will own the project for which such property is to be used and will apply for the payment. Such assignment typically is represented by a new contract (the “project contract”) between the special purpose vehicle and the person manufacturing, constructing, or producing the property. An adjustment is then made to the master contract between the developer and the person manufacturing, constructing, or producing the property to reflect the assignment. Assume costs paid or incurred with respect to the master contract between the developer and the person manufacturing, constructing, or producing the property are considered to have been paid or incurred in 2009 or 2010 for purposes of determining whether construction has started. For purposes of determining whether construction has started, may these costs then be allocated to the special purpose vehicle if its project contract and the master contract, as adjusted, both reflect this assignment? A20. Costs that are allocated to the property under the principles of Q19/A19 are treated as costs of the property notwithstanding the substitution of the project contract with respect to such property.

34 | P a g e

Q21. What happens if the project’s costs are more than expected? Is it sufficient to show that an applicant reasonably expected costs paid or incurred before the end of 2010 to be 5% of the project costs? A21. No. To satisfy the 5% safe harbor applicants must demonstrate that costs paid or incurred before the end of 2010 are equal to or greater than 5% of the actual total costs of the specified energy property. However, if the applicant’s project includes multiple units of specified energy property, an applicant can opt to apply for a payment based on some, but not all, units of property. For example, if an applicant incurs $25,000 in costs in 2010 for specified energy property in a 5 turbine wind farm anticipating total costs for specified energy property of $500,000 but the actual total costs of specified energy property amount to $600,000, the safe harbor would not be satisfied. However, the applicant can opt to apply for a payment based on the costs of 3 turbines and would satisfy the safe harbor if the $25,000 of costs incurred in 2010 relates to the 3 turbines and their total cost does not exceed $500,000. Q22. An applicant demonstrates that the applicant meets the 5% safe harbor as of December 31, 2010, with respect to a facility. The facility will not be placed in service until 2012. Must the applicant continue to work at the site in 2011 in order to qualify for payment in 2012? A22. No. Process Q23. Under what circumstances and when is an applicant required to submit an application demonstrating that construction has begun? A23. All applications must be submitted before the statutory deadline of October 1, 2011. For property that has been or will be placed in service in 2009 or 2010, an application demonstrating that construction has begun is not required. For property that is placed in service after December 31, 2010, but before October 1, 2011, applicants need only submit a single application, before October 1, 2011, demonstrating both that construction began on the property in 2009 or 2010 and that the property has been placed in service. For property that is placed in service on or after October 1, 2011, applicants must submit a preliminary application before October 1, 2011, demonstrating that construction on the property began in 2009 or 2010. Such applications must then be supplemented at the time the property is placed in service. Q24. If an applicant submits an application demonstrating that construction has begun, will the applicant receive a response? A24. Yes. Although we cannot provide assurance that an applicant meets all the requirements for a payment until all facts and circumstances are known (at time the facility is

35 | P a g e

placed in service), we will tell the applicant whether or not the work performed is physical work of a significant nature or, for applicants relying on the safe harbor, whether qualifying costs have been paid or incurred. Q25. What documentation is required? A25. For projects relying on “physical work of a significant nature” applicants must document the physical work. For example, to demonstrate that physical work of a significant nature has commenced at the site, applicants should submit a written report from the project engineer or installer, signed under penalties of perjury, describing the project’s eligibility; including a detailed construction schedule; estimated budget for the project and a description of the work that has commenced including any invoices for the work performed. For projects with an anticipated cost basis of $1 million or more, the report must be from an independent engineer. To demonstrate that physical work of a significant nature has commenced under a binding written contract, applicants should submit a copy of the binding written contract and a statement from the contractor, signed under penalties of perjury, describing the work that has commenced and certifying that the work commenced pursuant to the binding written contract. For projects relying on the 5% safe harbor, applicants must submit a statement from an authorized representative of the applicant signed under penalties of perjury, or for projects with an estimated eligible cost basis of $1 million or more, from an independent accountant, attesting to the method of accounting used by the applicant for federal tax purposes (cash or accrual). For applicants that use the cash method of accounting, the statement should state the amount that has been paid before the end of 2010; a detailed description of the costs that have been paid; and an estimate of the total cost of the specified energy property and must include evidence of payment such as invoices or other financial records. For applicants that use the accrual method of accounting, the statement should state the amount that has been incurred before the end of 2010; a detailed description of the costs incurred; and an estimate of the total cost of the specified energy property and must include evidence of the costs incurred such as invoices or other financial records. If an applicant is relying on costs paid or incurred by a contractor, a copy of the binding written contract and a statement from the contractor, signed under penalty of perjury, of costs paid or incurred and allocated to applicant’s project must be included. Additional documentation may also be required depending on the facts and circumstances. If additional documentation is required applicants will be notified.

36 | P a g e

C.

Start of Construction Checklist Treasury 1603: Begun Construction Applicant Checklist

Thank you for registering with Section 1603. Please take time to print and fill out this checklist prior to submitting your application. This checklist is designed to assist you in submitting a complete application. While this checklist does not address all possible scenarios for a complete application, most applicants should find that completing this checklist will make the review process more efficient and expedite determination. This checklist is for the documents being uploaded in Section 6A of the application. For Applicants Electing 5% Safe Harbor – All applicants must document the costs paid/incurred. Required documentation includes:  A statement from an authorized representative of the applicant signed under penalties of perjury attesting to the method of accounting by the applicant for federal tax purposes and the amount paid (for cash method applicants) or incurred (for accrual method applicants) before the end of 2010;  Evidence of the costs paid/incurred such as invoices or other financial records;  Detailed description of the costs paid/incurred including delineation of eligible and ineligible costs;  For projects with an estimated cost basis of $1 million or more, an independent accountant’s report that includes all of the above information. Applicants should go here to view the requirements for the independent accountant’s report. Applicants Reliant on Costs Paid or Incurred by a Contractor Must Also Submit  A copy of the binding written contract;  Statement from the contractor, signed under penalty of perjury, of costs paid/incurred and allocated to applicant’s project;  Evidence of the costs paid/incurred by the contractor such as invoices or other financial records. For Applicants Electing “Physical Work of a Significant Nature” – All applicants must document the physical work. Required documentation includes:

37 | P a g e

 A written report from the project engineer or installer signed under penalties of perjury describing the project’s eligibility and the work that has commenced;  Detailed construction schedule;  Evidence that eligible work has commenced including invoices for work performed;  Photographs of the physical work (optional, but may be helpful in the review process).  For projects with an estimated cost basis of $1 million or more, a written report from an independent engineer describing the project’s eligibility and the work that has commenced. Applicants Relying on Physical Work Commencing Under a Contract Must Also Submit  A copy of the binding written contract;  Statement from the contractor, signed under penalty of perjury, describing the work that has commenced and certifying that the work commenced pursuant to the binding written contract and is on eligible property for the applicant’s project. This must include a detailed description of both the nature of the work in total, as well as what work has taken place. This checklist is for applicant use only and does not address all possible scenarios for a complete application. Please do not upload the checklist. Ultimately, IRS rules and Treasury 1603 requirements apply. See Program Guidance here: http://www.ustreas.gov/recovery/docs/guidance.pdf.

38 | P a g e

D.

General FAQs.

Payments for Specified Energy Property in Lieu of Tax Credits Under the American Recovery and Reinvestment Act of 2009 FREQUENTLY ASKED QUESTIONS AND ANSWERS Application Procedures Q1. Question: Must an applicant submit all of the required documentation at the same time the application is submitted? A1. An applicant should submit all of the required documentation at the same time the application is submitted. Not doing so will delay payment. An application will not be considered complete until all required documentation has been submitted. Q2. What documentation must be submitted with an application? A2. All applicants must submit documentation demonstrating that (1) the property is eligible; (2) the property has been placed in service; and (3) the amount requested is accurate. To show eligibility, design plans stamped by a licensed professional engineer are required for all properties. To establish that a property has been placed in service, a commissioning report is required. For properties interconnected with a utility, an interconnection agreement must be provided. To establish that the amount requested is accurate, a detailed breakdown of all costs included in the cost basis is required. For properties with a cost basis of more than $500,000 an Independent accountant’s certification is required. Applicants may also be asked to submit documentation beyond what is listed here to fully demonstrate eligibility. Examples include, but are not limited to, power purchase agreements, equipment lease agreements, and certain invoices. If such additional documentation is required applicants will be notified. See also, Q3 and Q4 below. Q3. What additional documentation must be submitted with an application for property that is placed in service after December 31, 2010?

39 | P a g e

A3. If the property is placed in service after December 31, 2010, the documentation must show that construction began in 2009 or 2010. Paid invoices and/or other financial documents demonstrating that physical work of a significant nature had begun on the property during 2009 or 2010 are required. Q4. Is any other documentation required? A4. Additional documentation is required in certain cases as follows: Property that has a minimum or maximum nameplate capacity requirement: (applies to openloop biomass facility using livestock waste nutrients, marine and hydrokinetic renewable energy facility, fuel cell property, microturbine property, combined heat and power system property, and small wind energy property) documentation demonstrating nameplate capacity is required. Other specific types of property: please refer to Page 9 of the Program Guidance (page 16 of this book) for information on additional documentation requirements for fuel cell property; microturbine property; combined heat and power; closed-loop biomass facility modified to use closed-loop biomass to co-fire with coal, other biomass or both; incremental hydropower production projects; and hydropower facilities installed on a nonhydroelectric dam. Lessees: applicants that are lessees of the property must submit a written agreement with the lessor that meets the requirements described on page 17 (page 25 of this book) of the program guidance. Applicants who select “Other” in section 1A of the Application: must submit documentation explaining the business structure of the applicant Applications and Terms and Conditions signed by a person who is not an officer or employee of the applicant: must include documentation evidencing the person’s authority to legally bind the applicant. Q5. Who can sign the Application and Terms and Conditions? A5. Applications and Terms and Conditions must be signed by an authorized representative of the applicant entity. If the person signing both documents is not an officer or employee of the applicant entity, the application must include evidence of the person’s authority to bind the applicant entity. Q6. Can a vendor of energy property, for example a company that sells solar energy systems, sign the application on behalf of its customer, the entity applying for payment?

40 | P a g e

A6. Only if the vendor submits written evidence of its authority to bind the applicant. If this authority does not exist, the application must be signed by an officer or employee of the applicant entity. Q7. When should an application be submitted if the property has not yet been placed in service but construction has begun? A7. The purpose of submitting an application for a property that is not yet placed in service and will not be placed in service in 2009 or 2010 is to demonstrate that construction has begun during the required time period of 2009 or 2010. If the eligible property will be placed in service before the end of 2010, submitting an application after construction has begun but before the property is placed in service will not accelerate payment and is not recommended. If the property will not be placed in service by the end of 2010, the applicant should submit the application after construction has begun but no later than September 30, 2011. See Question #8 for property placed in service on or after October 1, 2011. Q8. When does supplemental information need to be submitted for properties not yet placed in service? A8. For properties that are placed in service on or after October 1, 2011, applicants have 90 days after the property is placed in service to provide Treasury with supplemental information necessary to make a determination. Q9. Will an applicant receive a response if the application is submitted prior to the property being placed in service? A9. Yes, the applicant will be informed that it has or has not sufficiently demonstrated that construction began. Q10. Can applications for multiple properties be submitted on a single application? For example, may a company that leases solar panels to hundreds of different properties, consolidate these properties into a single application? A10. No. Because key information for each property, such as property location and placed in service date is likely to differ and design plans and other documentation are likely to be unique for each property, applications for multiple properties cannot be consolidated. However, if documentation submitted to support one application applies to other applications submitted by the same applicant, an applicant need not re-submit the documentation with each application. Instead, the applicant can cross-reference the application that includes the documentation. Q11. Are payments to successful applicants made by Fedwire®?

41 | P a g e

A11. No. Payments to successful applicants are made through the Automated Clearing House (ACH). Applicants must ensure that the bank account into which they direct their payment is able to accept ACH payments. Q12. Can payments be assigned to entities other than financial institutions? A12. Assignments of payments must comply with the Federal Assignment of Claims Act which only permits assignments to banks, trust companies or other financing institutions. In general this means that assignments may only be made to entities that are in the business of providing financing. Q13. Are decisions on applications final? What options are available to an applicant whose application is denied? A13. While we will make every effort to work with an applicant during the review process to ensure that the applicant has the opportunity to address any deficiencies in its application, once a determination is made, that determination is final. No administrative appeal is available. Q14. May an application be withdrawn? If so, can an application that has been withdrawn be resubmitted? A14. Yes, an application may be withdrawn at any time prior to a final determination. If an application is withdrawn it can be re-submitted. Q15. If an applicant does not know its final costs at the time an application is submitted may a supplemental application be submitted once those costs are known? A15. Applicants should not submit an application until all costs are known and final. Q16. Is there a cap on funds available to a specific project or applicant? A.16. No, funding for the program has no overall cap. The amount payable to any applicant for a qualifying project or projects is not limited. However, the maximum amount payable for any project is limited to 30% or 10% of the eligible costs depending on the type of project. The payment may not exceed a specified amount for each kilowatt of capacity for qualified fuel cell property and qualified microturbine property. Applicant Eligibility Q17. Are schools, colleges or universities eligible applicants? A17. Schools, colleges or universities that are agencies or instrumentalities of a Federal, State or Local government are not eligible for payment. Additionally, schools, colleges or universities

42 | P a g e

that are organizations described in section 501(c) of the Internal Revenue Code and exempt from taxation under section 501(a) of the Internal Revenue Code are not eligible for payment. Q18. Are manufacturers of specified energy property eligible applicants? A18. Payments are only available to entities that place specified energy property into service. An entity that manufacturers specified energy property but does not own the property at the time it is placed in service is not eligible for payment. If a manufacturer continues to own the property once it is placed in service (for example, a manufacturer who leases rather than sells its property), it may be eligible. Q19. Do builders or contractors who install solar systems on residential properties qualify for payment? A19. No, unless they continue to own the solar property. Q20. Is an applicant who has received a prior USDA or other federal or state-funded grant for the same property eligible? A20. Yes, receipt of other federal or state grants does not impact an applicant’s eligibility. However, receipt of other federal grants, state grants, or rebates may have an impact on the eligible cost basis of the property. If the rebate or grant is includable in taxable income of the applicant, the basis on which the payment is computed is not reduced. If the rebate or grant is not includable in the income of the applicant, a basis reduction may be required. Q21. Is an applicant who owns eligible energy property eligible to receive payment if the energy property is leased to a non-profit or otherwise ineligible entity? A21. Yes. If the owner of the energy property is the applicant and is otherwise eligible, the fact that the property is being leased to an ineligible entity does not impact the eligibility of the owner/applicant provided it is a true lease and not a disguised sale. Q22. If the owner of the property is an LLC that is disregarded for federal tax purposes, is the proper applicant the disregarded LLC or its parent? A22. The proper applicant is the owner of the property which would be the disregarded LLC. Q23. If an applicant is not one of the entities listed in Section 1A of the application is the applicant ineligible? A23. Not necessarily. If the applicant is an entity that is not listed in Section 1A of the application it may still be eligible as long as it is not an entity that is expressly excluded from eligibility (see Program Guidance page 4)(pages 8 and 9 of this book). The applicant should

43 | P a g e

select “Other” and provide an explanation and supporting documentation sufficient to establish that it is not ineligible. Q24. Can a lessee of eligible property receive payment? A24. Yes, if the lessor/owner of the property waives its right to payment and elects to pass it on to the lessee and the property would be eligible if owned by the lessee. See Question 4 for documentation that must be submitted if the applicant is the lessee of the property. Q25. Is a partnership that has a foreign entity as a partner eligible? A25. Having as a partner a foreign entity does not make an entity ineligible, unless the foreign entity is tax-exempt. Q26. Can a taxable corporation that is wholly-owned by an ineligible entity be eligible? A26. A taxable corporation can be an eligible applicant even if wholly owned by an ineligible entity. Property Eligibility Q27. Is energy property that is used at a residence eligible? A27. Generally no, but energy property used at a residence may be eligible in some circumstances. Property used in a building that is used for residential purposes may be eligible if it is subject to depreciation or amortization in lieu of depreciation by its owner. This means that the property must be used in a trade or business or for the production of income. For example, if the applicant is a business that installed an otherwise eligible solar energy system on the roof of a residence that the business rents out for the production of income, the property would be eligible. If, however, the applicant is a homeowner who installed a solar energy system on the roof of his/her home and uses the solar energy property for personal purposes, the property would not be subject to depreciation and therefore would not be eligible. Q28. If a business receives a section 1603 payment for energy property used at a residential rental property, and subsequently sells the residential property to the tenant within five years, will the business be required to return all or part of the section 1603 payment? A28. Yes. The property ceases to be specified energy property when it is sold to a person who cannot depreciate the property because that person will use the property for personal purposes. Q29. What about energy property that is part of a building used for both business and residential purposes? For example, can a solar energy system installed on a building that is used both as a residence and a place of business be eligible?

44 | P a g e

A29. A solar energy system installed on a building that is used as both a residence and a place of business may be eligible for a section 1603 payment based on the portion of the basis of the solar energy property used for business purposes. The portion that is used for business purposes must be demonstrated by either a separate meter, an allocation based on square footage or other reasonable means. Q30. Can a property that is located in Puerto Rico be eligible? A30. Generally, to be eligible, the property must be used predominantly in the United States. An exception to this general rule is property described in the Internal Revenue Code, section 168(g)(4) which includes property owned by a domestic corporation or U.S. citizen that is used predominantly in a U.S. possession. The corporation must not have an election in effect under section 936 of the Internal Revenue Code and the U.S. citizen must not be entitled to the benefits of section 931 or section 933 of the Internal Revenue Code. Q31. Can property that contains “used” or “refurbished” parts qualify for the Section 1603 program? A31. For a property to be eligible, the original use of the property must begin with the applicant. If the cost of any used parts in a facility is less than 20% of the total cost of the facility, the property will not be considered “used” for purposes of determining original use. Q32. Can dead and diseased trees resulting from pine beetle infestation qualify as open-loop biomass? A32. Yes, provided the trees have no commercial value other than use in producing energy from biomass. For this purpose, infested trees from which lumber or pulp could be recovered with appropriate processing may, nevertheless, have no commercial value if they are located in an area without milling or pulping facilities or if they are in excess of the area’s milling and pulping capacity. Q33. Can a facility that produces electricity from pyrolysis oil derived from open-loop biomass qualify as an open-loop biomass facility? A33. Yes. Open-loop biomass facilities include, in addition to facilities that burn open-loop biomass, facilities that burn gases or liquids derived from open-loop biomass. Q34. In the case of a qualified facility that produces electricity by burning gases or liquids derived from a qualified energy resource such as open-loop biomass or municipal solid waste, can the equipment used to convert the qualified energy resource into a gas or liquid qualify for a Section 1603 payment?

45 | P a g e

A34. Yes, but only if the equipment used to produce the gas or liquid (the conversion equipment) is an integral part of the qualified facility. In general, conversion equipment that is owned by the same person and located at the same site as the qualified facility will be treated as an integral part of the facility. In addition, the conversion equipment may be treated as an integral part of the qualified facility, even if under different ownership or at a different site, if it is established that the conversion equipment is integrated into the facility. Factors that may be relevant in determining whether the conversion equipment is integrated into the facility include whether the conversion equipment and the facility are placed in service simultaneously, the extent to which the gas or liquid produced is dedicated to the facility (for example, under an exclusive long-term supply contract), and the dependence of the facility on the gas or liquid produced by the conversion equipment. Conversion equipment generally will not be treated as an integral part of a qualified facility if less than 75 percent of the gas or liquid produced is dedicated to the facility. In addition, if conversion equipment is treated as an integral part of a qualified facility but not all the gas or liquid produced is dedicated to that facility, the conversion equipment’s eligible cost basis is limited to the percentage of its otherwise eligible cost corresponding to the percentage of its production that is dedicated to the qualified facility. Q35. If components of a facility are owned by different persons, must each owner submit a separate application for a Section 1603 payment? A35. Yes, a separate application must be submitted for each part of the facility with a different ownership structure. For example, if an open-loop biomass facility consists of conversion equipment owned by corporation X and generation equipment owned by corporation Y, X and Y must submit separate applications to receive Section 1603 payments for their portions of the facility. All owners of the facility (including owners of portions of the facility that are not eligible for a Section 1603 payment) must join in each separate application for the Section 1603 payment and agree to the terms and conditions, including the waiver of the right to claim a credit under section 45 with respect to the facility. In any such case, the application and the terms and conditions will be appropriately modified to reflect the participation of persons other than the claimant. Q36. Can conversion equipment that is an integral part of a qualified facility qualify for a Section 1603 payment if the combustion equipment included in the facility was placed in service before 2009? A36. Only if, for purposes of determining depreciation with respect to the conversion equipment, it is placed in service in 2009, 2010, or 2011 or (for equipment on which construction begins in 2009, 2010, or 2011) in 2012 or 2013. Conversion equipment placed in service at a later date than the original facility may, nevertheless, be an integral part of the facility if, for example, the facility was not initially dependent on the conversion equipment because an alternative source of biomass fuel was available when the combustion equipment was placed in service. In that case, the combustion equipment and the conversion equipment are not treated as

46 | P a g e

a single unit of property for purposes of determining the beginning of construction or the date property is placed in service. Q37. Is the eligible cost basis of the conversion equipment reduced if the qualifying facility of which it is a part burns fuel other than fuel that the conversion facility produces from qualified energy resources? A37. No, not if all fuel produced by the conversion equipment is used by the qualifying facility in the production of electricity. Use of Awarded Funds Q38. Do the “Buy American” provisions in the American Recovery and Reinvestment Act of 2009 apply to the Section 1603 program? A38. No. Q39. Does the Davis-Bacon Act apply to the Section 1603 program? A39. Answer: Receipt of funds under Section 1603 does not trigger the requirements of the Davis-Bacon Act. Eligible Basis Q40. What costs qualify for a Section 1603 payment? A40. The amount of the Section 1603 payment is a percentage of the eligible basis of the property. The basis of property generally is its cost (IRC section 1012), unreduced by any other adjustment to basis, such as that for depreciation, and includes all items properly included by the taxpayer in the depreciable basis of the property, such as installation costs and the cost for freight incurred in construction of the specified energy property. Q41. If an applicant has received another federal or state grant or a rebate for the same property, must the basis be reduced? A41. If the rebate or grant is includable in taxable income of the applicant, the basis on which the payment is computed is not reduced. If the rebate or grant is not includable in the income of the applicant, a basis reduction may be required. ______________________________________________________________________________ Helpful Links

47 | P a g e

Department of Energy: http://www.energy.gov/taxbreaks.htm; http://www.energy.gov/recovery/48C.htm Energy Star: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index DSIRE: http://www.dsireusa.org/ U.S. Department of Agriculture: http://www.rurdev.usda.gov/ IRS: http://www.irs.gov/newsroom/article/0,,id=204335,00.html?portlet=6 Department of Housing & Urban Development: www.hud.gov

48 | P a g e

E.

Final Application Checklist.

Treasury 1603: Applicant Checklist for Energy Properties Placed in Service Thank you for registering with Section 1603. Please take time to print and fill out this checklist prior to submitting your application. This checklist is designed to assist you in submitting a complete application. While this checklist does not address all possible scenarios for a complete application, most applicants should find that completing this checklist will make the review process more efficient and expedite payment. This checklist is for the documents being uploaded in Section 6A of the application. □ Design Plans to support eligibility of energy property ‐ All applicants must submit as‐built, legible design plans stamped by a professional engineer (PE). For solar electric property, submit a one‐line diagram and site/array layout. If a PE stamp was not required, submit a letter explaining why the seal was not required. □ Signed and dated commissioning report – All applicants must submit a statement from the installer or engineer stating that the property has been placed in service. The statement should provide the date the energy property was placed in service and as‐built capacity. A local agency inspection is not acceptable as a commissioning report. □ Detailed cost breakdown to support cost basis – All applicants must submit a detailed breakdown of eligible costs in table format. This includes all costs and components related to the cost basis. □ Independent Accountant’s Certification – If the energy property cost basis is $500,000 or more, applicant must submit an independent accountant’s certification. This certification should include a detailed cost breakdown or cost segregation report for the review team to see both eligible and non‐qualifying costs. Be sure to include the method of allocation for indirect costs allocated between eligible and ineligible costs. □ Permission to Operate – If the project is connected to the electrical grid, applicant must provide correspondence with the utility that the interconnection agreement is placed in effect. This may be a signed letter or utility email giving permission to the applicant to energize (commission, connect, operate) the energy property. □ Authorized Signatory – If the application is being prepared by someone other than the owner, the application must include a notarized authorization from the owner granting permission to the preparer to represent the owner for purposes of the 1603 program. □ Lease Waiver – If an eligible lessor elects to pass‐through the payment to the lessee, the lessee and lessor must agree that the lessor waives all right to the 1603 payment. Submit an

49 | P a g e

executed written agreement between the lessor and lessee of the energy property. See page [18] of the Guidance (page 26 of this book) for the required contents of the agreement. □ Demonstrate Applicant Eligibility – If you are a limited liability company (LLC), select “other” and identify the LLC name and State that the LLC is organized in. If the LLC is not directly taxed as a corporation, please provide an organization chart and/or narrative that clearly explains ownership, including holding companies and affiliates, demonstrating the applicant’s eligibility as a taxpaying business entity. □ Business Website – If you have a business website, please provide the website in Section 3A of the application. □ Registered in CCR – All applicants must make sure the DUNS number provided on the application is active and registered in the CCR. Treasury is unable to make a payment without these. □ Sign the Terms & Conditions – The Terms & Conditions will appear after you submit the application. The application is incomplete until they have been signed. This checklist is for applicant use only and does not address all possible scenarios for a complete application. Please do not upload the checklist. Ultimately, IRS rules and Treasury 1603 requirements apply (link to Treasury Program Guidance).

50 | P a g e

F.

Accountant's Certification.

PAYMENTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITSINDEPENDENT ACCOUNTANT REQUIREMENTS Applicants requesting payments of $ 1 Million or more for a specified property shall submit an independent accountants’ examination opinion attesting to the accuracy of costs claimed as part of the basis of the property. The examination is to be conducted in accordance with AT Section 101, Attest Engagements (Statements on Standards for Attestation Engagements 10, as amended) established by the American Institute of Certified Public Accountants (AICPA). Attachment A is the required examination report and an illustrative report of management asserting their compliance. Applicants requesting payments of less than $ 1 Million and whose eligible cost basis is more than $ 500,000 for a specified property may submit, in lieu of an examination report, with their application, a report of Agreed Upon Procedures (AUP) prepared by an independent accountant in accordance with AT Section 201, Agreed Upon Procedure Engagements (Statements on Standards for Attestation Engagements 10, as amended) of the AICPA. The Department of the Treasury’s objective in having the AUP performed is to obtain independent procedures and findings as to whether the project costs and the eligibility of the costs are in accordance with the general rules for determining the basis of property for federal income taxes as further described in Section V of the “Program Guidance for the Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009”. Attachment B has the procedures to be performed by the independent accountant and an illustrative AUP report. ATTACHMENT A [Applicants requesting payments of $ 1 Million or more] [CPA LETTERHEAD] INDEPENDENT ACCOUNTANTS’ REPORT Blank Company [City, State] We have examined management’s assertion, included in the accompanying Report of Management on Eligible Cost Basis, that the eligible cost basis for the qualified property relating to [identify asset] of Blank Company in the amount of $XX,XXX,XXX has been determined in accordance with the general rules for determining the basis of property for federal income tax purposes, as further described in Section V of the Program Guidance for the Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and

51 | P a g e

Reinvestment Act of 2009. Blank Company’s management is responsible for the assertion. Our responsibility is to express an opinion based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence supporting management’s assertion and performing such other procedures as we considered necessary in the circumstances.We believe that our examination provides a reasonable basis for our opinion. [Additional paragraph(s) may be added to emphasize certain matters relating to the attest engagement, the assertion or the subject matter.] In our opinion, management’s assertion referred to above is fairly stated, in all material respects based on the general rules for determining the basis of property for federal income tax purposes, as further described in Section V of the Program Guidance for the Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009. [This report is intended solely for the information and use of the management [and the audit committee] of the Company and the Department of Treasury and is not intended to be and should not be used by anyone other than these specified parties.] [Signature of CPA firm] [License number and State if report is signed by an individual CPA rather than a firm] [Date] REPORT OF MANAGEMENT ON ELIGIBLE COST BASIS [Month] XX, 20XX Department of the Treasury Management of [XYZ Company] (the “Company”) is responsible for establishing and maintaining adequate internal controls to provide reasonable assurance to the Company’s management and [insert parties charged with governance, such as the Board of Directors or the Managing Member] that the accounting records supporting the eligible cost basis for qualified property are valid, complete and accurate, and that the costs included in the eligible cost basis of such assets have been determined in accordance with the criteria set forth below. The cost basis of property eligible for the Payments for Specified Energy Property in Lieu of Tax Credits pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009 (the

52 | P a g e

"ARRA") relating to the construction of the [specify asset type; e.g., wind energy facility] (the “qualified property”) of the Company at [project name] in the amount of $XX,XXX,XXX has been determined in accordance with the general rules for determining the basis of property for federal income tax purposes as further described in Section V of the Program Guidance for Specified Energy Property in Lieu of Tax Credits under the ARRA [and in the paragraph[s] below]. [Additional description of the property or cost basis, including any significant interpretations, necessary for understanding the qualified property] [Name and title of chief executive officer] [Name and title of chief financial officer] [Name and title of chief compliance officer] ATTACHMENT B [Alternative Agreed Upon Procedures report for entities requesting payments of less than $ 1 Million and whose eligible cost basis is more than $ 500,000] [CPA LETTERHEAD] Independent Accountants’ Report on Applying the Agreed-Upon Procedures For Payments for Specified Energy Property in Lieu of Tax Credits Under the American Recovery and Reinvestment Act of 2009 (Applicant Name) and United States Department of the Treasury We have performed the procedures enumerated in the appendix attached, which were agreed upon by (insert applicant name) and the United States Department of the Treasury to assist you in evaluating the specified property costs and the eligible cost basis for the payment requested under Section 1603, Division B, of the American Recovery and Reinvestment Act of 2009. The management of (the applicant/company name) is responsible for the accuracy of the reported costs and determining the eligible basis for the property. This agreed-upon procedures engagement was conducted in accordance with AT Section 201, Agreed Upon Procedure Engagements (Statements on Standards for Attestation Engagements 10, as amended) of the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. Our procedures, and the results of those procedures, are set forth in the attached appendix to this report.

53 | P a g e

We were not engaged to, and did not conduct an examination of the specified property costs and the eligible cost basis, the objective of which would be the expression of an opinion. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters may have come to our attention that would have been reported to you. This report is intended solely for the information and use of (Applicant name) and the United States Department of the Treasury, and is not intended to be and should not be used by anyone other than these specified parties. (Signature) CPA License number and State Date Payments for Specified Energy Property in Lieu of Tax Credits Under the AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 Independent Accountant Report on Agreed Upon Procedures Principal Information Requests: While not intended to be a complete listing of all information that may be requested by the independent accountant, the applicant should provide the independent accountant with the following information: 1. A copy of all documentation to be submitted in support of the application. 2. A listing of all invoices and associated purchase orders, contracts and payment advices as considered relevant to the cost basis [if not provided in (1) above]. The listing should also indicate the nature of costs associated with each invoice, for example, purchase of solar panels, payment for construction labor, etc. and dates incurred. 3. A detailed calculation of cost basis linked to actual accounting records [if not provided in (1) above]. Agreed Upon Procedures (“AUP”) to be performed by the Independent Accountant Section 1: Testing Cost Eligibility 1. From the information obtained (request 1), determine the location and definition of the specified property.

54 | P a g e

2. From the information obtained, review the classification of costs to determine whether the costs are related to the specified property. 3. Review management’s detailed calculationof costs (information request 3) to determine that such costs are in accordance with the requirements of Section 1603, specifically consider the following areas as explained in the program guidance: (a) Used Parts. (b) Costs are for tangible property (not including a building) which is an integral part of the facility. (c) Only specified energy property is taken into account. (d) Qualified property that generates electricity excluding any electrical transmission equipment (e) Specific property requirements. (f) Lessee and Lessee in a Sale-Leaseback. 4. Review the detailed calculation of costs (information request 3) to determine that such costs are in accordance with IRC Section 1012. Determine if there are any adjustments to basis which may need to be disallowed such as depreciation. Also determine if all depreciable basis costs such as installation costs and freight costs were included in the cost basis. 5. Inquire of management if there are any federal grants, state grants or rebates that reduce cost basis. They reduce the cost basis only if they are not taxable income to the applicant. Obtain a management representation. Section 2: Testing Costs 6. Accuracy Testing –From the detailed listing of costs (information request 2), select a sample of costs representing at least 30% of the total costs listed and at least 15% of the total number of invoices. From the samples selected, agree the descriptions and costs to actual invoices, POs, contracts and payment advices to determine the accuracy of the listing and whether such costs were actually incurred for the specified property. 7. Completeness Testing - Perform a two-way check as follows: (a) From the sample tested above, trace all permitted items to the detailed calculation of cost basis (information request 3). (b) Identify any individual material costs in the detailed calculation of cost basis that were

55 | P a g e

not sampled and trace such costs to the detailed listing. Determine whether such costs actually exist and are permissible. 8. Inquire of management to determine that accrual basis of accounting was considered to identify all costs associated with the cost basis. 9. Reasonableness Testing –Taking into consideration all of the information obtained and procedures performed, consider whether the detailed calculation of cost basis appears to be reasonable. Section 3: Conclusion 10. If the accountant became aware of any potential discrepancies, request management to investigate and, if appropriate, correct such discrepancies to the accountant’s satisfaction. 11. Obtain a representation letter from management regarding the information obtained and oral representations made throughout the engagement Prepare an Agreed Upon Procedures Report and attach the accountant’s procedures and findings.

56 | P a g e

G.

Accountant Guidance (Agreed-Upon Procedures)

PAYMENTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS INDEPENDENT ACCOUNTANT REQUIREMENTS Under Section 1603 of the American Recovery and Reinvestment Act of 2009 (Section 1603), the United States Department of the Treasury (Treasury) makes payments to eligible persons who place in service specified energy property and apply for such payments. The purpose of the payment is to reimburse eligible applicants for a portion of the expense of such property. For property not placed in service in 2009 or 2010 but for which construction began in 2009 or 2010, applications for payment must be submitted after construction commences but before October 1, 2011. There are two ways to show that construction has begun. One way is to meet a 5% safe harbor. An applicant meets the 5% safe harbor if the applicant pays or incurs 5.00% or more of the costs included in the eligible basis of the specified energy property before the end of 2010. To satisfy the 5% safe harbor applicants must demonstrate that costs paid or incurred before the end of 2010 are equal to or greater than 5% of the actual total eligible basis of the specified energy property. For projects relying on the 5% safe harbor with an estimated eligible cost basis of $1 million or more, applicants must submit a report from an independent accountant by October 1, 2011 on the eligible costs of the specified energy property paid or incurred by December 31, 2010. This report may be in the form of an Agreed-Upon Procedures (AUP) report prepared by an independent accountant in accordance with AT Section 201, “Agreed-Upon Procedure Engagements,” or an examination report on the schedule of eligible costs paid or incurred by December 31, 2010 in accordance with AT Section 101, “Attest Engagements” (Statements on Standards for Attestation Engagements 10, as amended) of the AICPA. The accountant is advised to consult Treasury’s frequently asked questions and answers document about the 1603 program prior to commencing the engagement. http://www.treas.gov/recovery/1603.shtml Attachment A has the procedures and illustrative report to be performed by the independent accountant. Instructions to the Agreed Upon Procedures 1. Request from management of the applicant the following:

57 | P a g e

a. A copy of the applicant’s Federal Income Tax Return for the most recently completed year or other evidence setting forth the tax method (e.g. cash or accrual basis) used by the applicant. [Note – The applicant’s method of accounting for Federal Income Tax purposes is important because the term “paid or incurred” generally means paid or incurred within the meaning of Treas. Regs. §1.461-1(a)(1) and (2). That is, costs are taken into account when cashmethod taxpayers “pay” them and when accrual-method taxpayers “incur” them. A cost is generally “incurred” for tax purposes when 1) the fact of the liability is fixed, 2) the amount of the liability is determinable with reasonable accuracy, and 3) the economic performance test (see Treas. Regs. §1.461-4) has been met with respect to such cost. Although the specific reference to the §461(h) economic performance rules was deleted in the revised Program Guidance, the economic performance rules continue to apply in determining whether costs have been incurred. b. An estimate of the applicant’s total expected eligible cost basis of the specified energy project. c. A detailed schedule setting forth those costs from b. above that are actually paid or incurred by December 31, 2010. [Note – This schedule should be prepared consistent with the method of accounting used by the applicant for Federal Income Tax purposes, see Note above.] 2. If the accountant becomes aware of any exceptions that would result in a change in the amount of eligible costs of the specified energy property that has been paid or incurred by December 31, 2010, request management to investigate, and if applicable, correct such exceptions to the accountant’s satisfaction. 3. Obtain a representation letter from management regarding the information obtained and verbal representations made throughout the engagement. ATTACHMENT A [Agreed Upon Procedures report for entities with an estimated eligible cost basis of $1 million or more and who elect the 5% safe harbor rules] [CPA LETTERHEAD] INDEPENDENT ACCOUNTANTS’ REPORT ON APPLYING AGREED UPON PROCEDURES To (Applicant Name) and United States Department of the Treasury

58 | P a g e

We have performed the procedures enumerated below, which were agreed to by [insert applicant name] and the United States Department of the Treasury solely to assist you in evaluating whether 5% or more of the total eligible costs of the specified energy property relating to [identify asset] of [applicant name] have been [paid][incurred] by December 31, 2010 and are in accordance with the general rules for determining the basis of property for federal income tax purposes, as further described in Section V of the Program Guidance for Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009. The management of [the applicant name] is responsible for the schedule of eligible costs of the specified energy property and for determining that those costs have been [paid][incurred] by December 31, 2010. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. [Include paragraphs to enumerate the procedures performed (or reference thereto) and related findings] We were not engaged to, and did not conduct an examination, the objective of which would be the expression of an opinion on the schedule of eligible costs. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters may have come to our attention that would have been reported to you. This report is intended solely for the information and use of (applicant name) and the United States Department of the Treasury, and is not intended to be and should not be used by anyone other than these specified parties. CPA Firm Signature City, State Date Independent Accountant’s Report on Agreed Upon Procedures and Results Agreed Upon Procedures (“AUP”) to be performed by the Independent Accountant

59 | P a g e

1. Inquire of management as to the tax method (i.e. cash or accrual basis) applied by the applicant in their most recent Federal Income Tax Return. Example Finding: Management stated that the [applicant name]’s Federal Income Tax Return was prepared on the accrual basis. 2. Inquire of management as to whether the detailed schedule of eligible costs paid or incurred by December 31, 2010 has been prepared on the basis of accounting (i.e., cash or accrual basis) consistent with the applicant’s Federal Income Tax method of accounting. Example Finding: Management stated that the detailed schedule of eligible costs was prepared on an accrual basis consistent with [applicant name]’s Federal Income Tax method of accounting. 3. Compare management’s stated basis of accounting to the basis indicated on the applicant’s most recent Federal Income Tax Return. Example Finding: We compared management’s stated basis of accounting, the accrual method, to the basis indicated on [applicant name]’s most recent Federal Income Tax Return and noted that they are consistent. 4. Sum the detailed schedule of eligible costs paid or incurred by December 31, 2010 and compare the summed amount to the total on the detailed schedule. Example Finding: We summed the individual cost amounts on the detailed schedule of eligible costs incurred by December 31, 2010 and found that the summed amount agreed to the total on the detailed schedule. 5. From the detailed schedule of eligible costs paid or incurred by December 31, 2010, select the largest individual items until the total of sample selections equals or exceeds 5% of the amount of the applicant’s estimate of total expected eligible cost basis of the Specified Energy Property and list those items in an attachment. Example Finding: From [applicant name]’s detailed schedule of eligible costs paid or incurred by December 31, 2010 included in Appendix A, we selected the largest individual items until the total of sample selections equaled or exceeded 5% of the amount of [applicant name]’s estimate of total expected eligible cost basis of the Specified Energy Property of $xxx,xxx,xxx and listed those items selected in Appendix B.

60 | P a g e

6. For those selected items listed in the attachment perform the following procedures: a. Compare the listed cost amount and the date such cost was incurred or paid to supporting documents such as purchase orders, paid checks, vendors’ invoices, purchase contracts, lease agreements, etc. i. For constructed property and construction in progress, compare the listed cost amount and the date such cost was incurred or paid to appropriate supporting documents such as contracts, work orders, job status reports, etc. Example Finding: We compared the listed cost amount of the selected cost items listed in Appendix B to the vendor invoices and the date such costs were paid [or incurred] and found that the amounts and dates were in agreement. ii. If the entity is relying on the exception to the 5% safe harbor, compare the nature of the selected cost item to the executed binding written contract, and compare the listed cost amount and the date such cost was incurred or paid to a written statement of the amount of eligible costs that such other parties have paid or incurred by December 31, 2010 on behalf of the applicant, as obtained from such other parties signed under penalty of perjury. Example Finding: We compared the nature of the selected cost items listed in Appendix B to the executed binding contract dated Month xx, 200x between [applicant name] and JKL Co and found that the nature of the costs incurred by JKL Co were contemplated in the contract. We compared the listed cost amounts and the listed dates that such costs were incurred to a signed written statement from JKL Co. of the amount of eligible costs that JKL Co. had incurred by December 31, 2010 on behalf of [applicant name] and found that the listed cost amounts and listed dates such costs were incurred agreed to the signed written statement from JKL Co. b. Compare the nature of the selected cost item to the description of permitted costs in the general rules for determining the basis of property for federal income tax purposes, as further described in Section V of the Program Guidance for Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009. Example Finding: We compared the nature of the selected cost items to the description in the general rules for determining the basis of property for federal income tax purposes, as further described in Section V of the Program Guidance for Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009 and found that the nature of the selected cost items were listed as eligible costs.

61 | P a g e

Example Appendix A DETAILED SCHEDULE OF ELIGIBLE COSTS INCURRED BY DECEMBER 31, 2010 Vendor ABC Co. DEF Co. GHI Co. JKL Co. Description Environmental Study Title Survey and Turbine siting Turbine foundations Turbine Supply Agreement: JKL Design Costs incurred JKL Parts Costs incurred Date Incurred Feb-April 2010 June 2010 June-Dec 2010 Jan-Dec 2010 Dec 2010 Eligible Cost $ 500,000 $ 500,000 $2,000,000 $2,500,000 $3,000,000 $8,500,000 $100,000,000

TOTAL ELIGIBLE COSTS INCURRED BY DECEMBER 31, 2010 TOTAL EXPECTED ELIGIBLE COSTS Example Appendix B SELECTED ELIGIBLE COST ITEMS Vendor JKL Co. Description Turbine Supply Agreement: JKL Design Costs incurred JKL Parts Costs incurred Date Incurred

Eligible Cost

Jan-Dec 2010 Dec 2010

$2,500,000 $3,000,000 $5,500,000

62 | P a g e

H.

Evaluating Cost Basis for Solar Photovoltaic Properties

The review of applications for payment under the Section 1603 program includes a determination as to whether the applicant has properly represented and calculated its cost basis. Each application is evaluated to determine whether the cost basis includes only eligible items and that it represents the applicant’s actual costs or, in certain cases, fair market value for the eligible property. This document, intended to assist with preparing Section 1603 applications, outlines the process used by the Section 1603 team to evaluate basis and the principles that guide this process. These principles are consistent with tax concepts used to determine basis for federal tax purposes. Basis As described in various Internal Revenue Service (IRS) publications, basis is the amount of a business’ investment in property for tax purposes. Basis is generally the cost of the property and may also include the capitalized portion of certain other costs related to buying or producing the property (e.g. permitting, engineering, and interest during construction). However, as described in Bryant v. Commissioner of Internal Revenue (790 F.2d 1463), “the courts have determined that in certain circumstances, a taxpayer's stated cost for an asset does not reflect the true economic cost of that asset to the taxpayer and will be ignored for purposes of determining the basis of the asset.” For example, a stated cost may be inconsistent with the eligible property’s true basis “where a transaction is not conducted at arm's-length by two economically self-interested parties or where a transaction is based upon ‘peculiar circumstances’ which influence the purchaser to agree to a price in excess of the property's fair market value.” In order to ensure that a Section 1603 applicant’s claimed cost basis reflects the eligible property’s fair market value, basis is more closely scrutinized in cases involving related parties, related transactions, or other unusual circumstances. Similar to the authority of the IRS in the context of investment tax credits, in making cash payments under Section 1603, the Treasury Department has authority to decide that “an applicant has miscalculated or misrepresented the basis of its property.” The first step the review team takes to evaluate the claimed basis for solar photovoltaic (PV) properties is to compare the claimed basis to certain benchmarks. The benchmarks used by the review team for solar PV cost basis are predicated on an open-market, arm’s-length transaction between two entirely unrelated parties with adverse economic interests, specifically with respect to setting the eligible property’s price.

63 | P a g e

Benchmarks considered by the 1603 review team are continuously updated (as warranted) drawing on relevant publicly available information and analyses by various experts, data from existing 1603 applications and other confidential sources, and the 1603 review team’s experience with solar PV properties. As of the first quarter of 2011, benchmark solar PV market expectations are as follows: Residential Residential/Small Commercial Commercial Large Commercial/Utility

Size Range Typical Size Turnkey Price per W

< 10 kW 5 kW +/- $7

10 - 100 kW 25 kW +/- $6

100 – 1000 kW 250 kW +/- $5

> 1 MW 2 MW +/- $4

These prices reflect a high quality of equipment (modules, inverters, racking) installed by reputable companies across the United States and include profit. The review team understands that each system is different. Technology choice affects cost, as do regional market differences and differences in size within the above categories. A property may have specific characteristics that increase (or decrease) eligible costs. Such factors are considered in evaluating how a given application’s basis compares with benchmark prices. If claimed basis is deemed consistent with benchmark prices, the review team typically focuses the remainder of its cost review on examining line items provided in the detailed cost breakdown to ensure that only eligible items have been included and that no costs have been inappropriately attributed to the property. If there are no ineligible items, the basis reflects only items appropriately attributable to the eligible property, and there is adequate documentation to support that the costs reflect actual costs, the cost basis is accepted. The review team may ask the applicant to provide additional detail if a cost breakdown line item is defined too generally. If ineligible items are identified, they are removed, and the payment is based on the corrected amount. For example, although a project may necessitate a fence for security or a building for operations and maintenance, such costs are not eligible.

64 | P a g e

Applications with a claimed basis that is materially higher than benchmarks will receive closer scrutiny. In addition to ensuring that only eligible costs are included, the review team looks at whether there are related party considerations, or other unusual circumstances, such as where the transaction determining basis may be influenced by other related transactions. One example of related transactions would be a case in which the benefits of a power purchase agreement are acquired at the same time the Section 1603 eligible property is acquired. Common examples of related party or other unusual circumstances include: 1. Owner/applicant is related to the developer, installer, or supplier (collectively referred to as the “developer”). The developer may be a separate, legally-organized business, but there is common ownership/control. 2. Owner/applicant is a party to one or more related transactions with the developer such that economic interests in the specific transaction determining basis may not be adverse. For example, the owner/applicant purchased the energy property from the developer and leased the property back to the developer. Where such circumstances are present, the review team evaluates whether the claimed basis is consistent with the property’s fair market value. As one aspect of this evaluation, where related transactions or other unusual circumstances are present, the review team will consider the applicant’s allocation of the cost to the eligible property, relative to other ineligible assets, rights, or contracts that may have been explicitly or implicitly conveyed in the transaction(s). In this context, the owner/applicant may be asked to submit a more detailed cost breakdown. Specifically, original manufacturer’s invoices/costs to the developer should be provided for major equipment, subsequent markups by the developer should be enumerated, and any markups by the owner identified. The owner may also submit a detailed and credible third-party appraisal (discussed below) demonstrating that the claimed basis is consistent with a market transaction between unrelated parties with adverse economic interests. Ultimately, the review team determines whether or not the claimed basis was properly calculated and/or properly represented fair market value, taking into account market expectations, the specifics of the application in question, and supporting documentation provided by the applicant. If the review team determines that the basis was not properly calculated or represented, the review team may adjust the basis on which a 1603 payment is made to a level consistent with the review team’s view of the property’s true cost, as informed by documentation provided by the applicant and other relevant information and analysis. This is no different than what might take place upon examination by the IRS if the applicant elected the Section 48 tax credit rather than the Section 1603 payment. Fair Market Value

65 | P a g e

The IRS generally defines fair market value (FMV) as “the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.” The review team does not prepare appraisals for energy property. Rather, the review team evaluates appraisals provided by applicants and prepared by independent, certified appraisers with expertise in solar PV properties. There are three broad and interrelated methods that are used in valuation efforts: the cost approach, market approach, and income approach. Cost Approach Based on the actual cost to build the property. This approach should clearly show the cost buildup, including hard costs, soft costs, and profit. Because the 1603 program only applies to energy property placed in service after December 2008, properties are new, and the actual costs should be readily available. Because cost data for PV systems is increasingly timely and available, this approach tends to be the most concrete and supportable analysis and is favored by the review team. The Section 1603 review team will accept a cost approach that includes only eligible property and a markup that is consistent with industry standards and with the scope of work for which the markup is received. While appropriate markups are case-specific and can depend on the ultimate transaction price, the 1603 review team has found that appropriate markups typically fall in the range of 10 to 20 percent. A cost approach that includes a markup should explicitly address the appropriateness of the selected markup in light of the activity, capital investment, and risk for which that markup is compensating. Market Approach Based on sales of comparable properties. Thousands of solar PV properties have been installed in the last two years, and market data are readily available. However, consideration must be given to ensuring that the prices of chosen comparables reflect only the value of eligible property. Income Approach Based on the discounted value of future cash flows generated by and appropriately allocable to the eligible property. Numerous assumptions must be made, including forecasts of all relevant project revenue and cost streams, cost of capital (debt and equity), rates of inflation and taxes, number of periods of income, and residual value. The review team has found this to be the least reliable method of valuation given the number of variables that are subject to speculation and open to debate.

66 | P a g e

Importantly, an income approach also often requires careful consideration of the appropriate allocation of value to the eligible energy property. In cases where the income approach yields a value that exceeds the cost to build the property by a significant margin, this raises a question of whether a portion of the claimed value should, in fact, be allocated to other ineligible assets, rights, or contracts associated with the production of income from the eligible property, such as a power purchase agreement. In such instances, applicants can accelerate reviews of their applications by ensuring that appraisals adequately address the issue of appropriate allocation of basis to the eligible property. For example, appraisals should address the FMV of the eligible property specifically, and not the “project” in which that property is being used. For purposes of Section 1603, a credible income approach to valuation will consist of a detailed spreadsheet model showing annual revenue and expenses over the term of the contract with a reasonable residual value at contract termination. Key Assumptions include: • • Inflation rates should be supported by credible sources. Discount rates should reflect an appropriate risk premium above the risk-free rate.

• Speculative revenue (i.e., revenue that is not specifically contracted and guaranteed by a credit-worthy customer) will be closely scrutinized and must be well-supported and documented. Projected revenue beyond contracted periods should be based on conservative, publicly-available data. • All expenses must be included, both annual ordinary operating expenses and major maintenance (e.g., inverter replacement). • model. These and all other assumptions should be well-reasoned and sufficiently documented, and should reflect market expectations. Moreover, the income approach should explicitly address the allocation of the estimated discounted cash flows to the eligible property. Questions related to cost basis may be directed to 1603questions@treasury.gov. All depreciation, taxes, and other considerations should be incorporated into the

67 | P a g e

I.

Assignment Conditions

ASSIGNMENT OF PAYMENTS MADE UNDER SECTION 1603 OF DIVISION B OF THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 I. Conditions on Assignment Recipients of payments made under the 1603 Program may assign the payment to a financial institution provided: (1) the payment is $1,000 or more (2) the payment is assigned to a bank, trust company or other financing institution, including any Federal lending agency; (3) The assignment covers all amounts payable and is not subject to further assignment except that any assignment may be made to one party acing as agent or trustee for two or more parties who are participating in the financing; (4) The assignee files a written Notice of Assignment of the payment together with a true copy of the instrument of assignment with Treasury (see instructions below) II. How to Accomplish the Assignment The assignee must provide to Treasury a Notice of Assignment (link to form) signed by the assignee and a true copy of the instrument of assignment. These documents must be submitted at the time the applicant completes an application for a property that has been placed in service. Documents may be submitted by email to: 1603Assignments@do.treas.gov. The Notice of Assignment must include the Treasury Application Number (TAN) provided to the applicant by Treasury at the time the application is submitted. Assignees who provide a valid Notice of Assignment along with a true copy of the instrument of assignment will receive an email notification from Treasury acknowledging receipt. Applicants must ensure, as a condition of any such assignment, that the assignee register in the Central Contractor Registry (CCR) www.ccr.gov. A payment cannot be issued to an assignee that is not registered in the CCR.

68 | P a g e

J.

Notice of Assignment. NOTICE OF ASSIGNMENT

This Notice refers to Treasury Application Number (TAN) ____________________ submitted by (name of applicant) _________________________________ to the United States Department of the Treasury for payment under Section 1603 of Division B of the American Recovery and Reinvestment Act of 2009. The payment due or to become due under the application described above has been assigned to the undersigned under the provisions of the Assignment of Claims Act of 1940, as amended, 31 U.S.C. 3727, 41 U.S.C. 15. A true copy of the instrument of assignment executed by the above named applicant on (date)______________ is attached. The payment due or to become due under the application described above should be made payable to the undersigned assignee, provided the undersigned is registered in the Central Contractor Registry. _________________________________________________ Name of Assignee _________________________________________________ DUNS number of Assignee _________________________________________________ Address of Assignee _________________________________________________ Signature of Authorized Representative of Assignee _________________________________________________ Title of Authorized Representative

69 | P a g e

K.

Annual Report Format. ANNUAL PERFORMANCE REPORT AND CERTIFICATION

The Annual Performance Report and Certification must be submitted annually, 21 calendar days after the date the property was placed in service, e.g. if the property was placed in service on January 10, 2009, the first report and certification are due January 31, 2010. The report covers a one-year period beginning on the placed in service date. Subsequent reports cover a one-year period beginning on the day after the last day covered by the prior year’s report. The Annual Performance Report and Certification is required on an annual basis for a period of five years after the property was placed in service. Failure to supply the Annual Performance Report and Certification as required by the Terms and Conditions signed under penalty of perjury will result in recapture of the funds received. *NOTE: Some of the information received was stored to the application to keep it current. This form contains historical information where noted. SECTION 1. Disposition of the Property 1.1. 1.2. Has the property been sold? Date of sale:

SECTION 2. Owner Information 2.1. Has any of the information for the applicant entity changed? Business Name Business Address Phone EIN: DUNS Number: Explain the change: 2.2. Has there been a change in the ownership of the applicant entity?

70 | P a g e

2.3. Has any of the information for the contact changed? NOTE: All correspondence will be sent to the new email address if changed. SECTION 3. Property Information 3.1. Has a tax credit (section 45 or 48 of the Internal Revenue Code) been claimed for this property? 3.2. Was the property located outside of the United States except as described in Section 168(g)(4) of the IRC? – If yes, list the amount of time that the specified energy property was located outside of the United States within the last year. (United States means the contiguous states, Alaska and Hawaii) 3.3. Has the name of the project changed? 3.4. Has the location of the project changed? SECTION 4. Property Description 4.1. Annual Production – List the actual annual production of the property in kilowatt hours, MMBTU’s or horsepower, as applicable. Electrical Annual Production: ________ Mechanical Annual Production: ________ Thermal Annual Production:_________ 4.2. Have there been any interruptions in production during the year? 4.3. Provide supporting documentation that provides evidence of annual production – Examples of supporting documentation are: a statement of the annual metered net electric energy generated during the year by the specified energy property, operation logs showing energy production, utility bills verifying energy production, a comparison with previous year’s electric bills, etc. 4.4. Number of jobs retained – List the number of jobs retained by the project. Include only jobs retained to maintain and operate the specified energy property (not periodic maintenance). Full-time (at least 35 hours/wk): Part-time (less than 35 hours/wk):

71 | P a g e

SECTION 5. Certification and Signature of Applicant/Preparer I certify, under penalty of perjury, that the property has not been disposed of to a disqualified person, that the property continues to qualify as specified energy property, and that a tax credit Section 45 or 48 of the Internal Revenue Code) has not been claimed and declare that all of the information provided is true, correct, and complete. 5.1. Are you the original signer of the Application and Terms of Conditions?

72 | P a g e

L.

Terms and Conditions

Payments for Specified Energy Property In Lieu of Tax Credits under the AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 TERMS AND CONDITIONS 1. Authority Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603) authorizes the United States Department of the Treasury (Treasury) to make payments to persons who place in service specified energy property provided certain conditions are met. 2. Eligibility a. The applicant is the owner or lessee of specified energy property that qualifies for funds under Section 1603 and is the original user of the property. b. Where the applicant is the lessee of the specified energy property, the owner of the specified energy property has agreed, in writing, to the lessee being the recipient of the Section 1603 payment and has waived, in writing, its right to receive any payment under Section 1603 as well as its right to claim a tax credit under section 45 and 48 of the Internal Revenue Code (IRC) with respect to the property. c. The applicant is not a federal, state or local government, or any political subdivision, agency or instrumentality thereof; an organization that is described in section 501(c) of the IRC and is exempt from tax under section 501(a) of the IRC; or an entity referred to in section 54(j)(4) of the IRC. d. The applicant is not a partnership or pass-thru entity that has a person described in section 2.c above as a direct or indirect partner (or other holder of an equity or profits interest) unless this person only owns an indirect interest in the applicant through a taxable C corporation. e. The applicant is not a foreign person or entity unless it is a foreign person or entity that qualifies for the exception in section 168(h)(2)(B) of the IRC. 3. Ongoing Representations and Obligations a. The applicant understands that Treasury is relying on the accuracy of the information contained in the application in making determinations with respect to the applicant’s eligibility for a Section 1603 payment. If the applicant determines that any information included on or with the application was materially inaccurate or incorrect, the applicant must immediately inform Treasury. If Treasury determines, as a result of this information, that the applicant does

73 | P a g e

not qualify for funds or that the applicant received funds in excess of the amount to which the applicant was entitled, the applicant must immediately return the funds to Treasury. b. The applicant understands that none of the applicant’s obligations herein terminate upon the sale or other disposition of the property to an eligible entity. 4. Production and Investment Tax Credit a. The applicant will not claim a tax credit under section 45 or section 48 of the IRC with respect to the property described in the application. 5. Reporting a. The applicant shall provide periodic reports as required by Treasury. A project performance report is required on an annual basis for a period of five years after the property was placed in service. Annual performance reports are due no later than 21 days following the end of the reporting period. The first reporting period begins on the date the property is placed in service. b. On an annual basis, the applicant must provide a project performance report including the following elements: • Name of applicant • Current owner of property • Treasury application number • Name of project • Location of project: city/county, State, zip code • Number of jobs retained • Annual production (in kilowatt hours, MMBTUs, or horsepower as applicable) • Installed nameplate capacity (in kilowatts, MMBTUs, or horsepower as applicable) c. The applicant shall submit any other reports that Treasury deems necessary to comply with American Recovery and Reinvestment Act guidance.

74 | P a g e

6. Recapture a. The applicant shall certify to Treasury on an annual basis for a period of five years from the date the property was placed in service that the property has not been disposed of to a disqualified person and that the property continues to qualify as specified energy property (as that term is used in Section 1603). Annual certifications shall be submitted at the same time as the performance report described in Section 5 above. b. If the property is disposed of to a disqualified person and/or ceases to qualify as a specified energy property (hereinafter “disqualifying event”) within five years from the date the property is placed in service the applicant must repay funds to the Treasury as follows: 100% of the funds must be repaid if the disqualifying event takes place within one year from the date the property is placed in service; 80% of the funds must be repaid if the disqualifying event takes place after one year but before two years from the date the property is placed in service; 60% of the funds must be repaid if the disqualifying event takes place after two years but before three years from the date the property is placed in service; 40% of the funds must be repaid if the disqualifying event takes place after three years but before four years from the date the property is placed in service; and 20% of the funds must be repaid if the disqualifying event takes place after four years but before five years from the date the property is placed in service. c. Any amount subject to recapture becomes a debt owed to the United States payable to the General Fund of the Treasury and enforceable by all available means including enforcement by the United States Department of Justice against any assets of the applicant entity. Debts arising under these rules are not considered tax liabilities. 7. Maintenance of and Access to Records a. The applicant must maintain project, financial, and accounting records sufficient to demonstrate that Section 1603 funds were properly obtained in accordance with the Section 1603 program and these Terms and Conditions. The Treasury, as the awarding office, the cognizant Treasury inspector general, and the Comptroller General of the United States, or any of their authorized representatives, shall have the right of physical access to the applicant’s facilities and to any pertinent books, documents, papers, or other records (electronic and otherwise) of the applicant and each partnership and pass-thru entity that directly or indirectly owns an interest in the applicant which are pertinent to the Section 1603 payment, in order to conduct audits, examinations, and evaluations. 8. Disallowance

75 | P a g e

a. If the applicant materially fails to comply with any term of the award, whether stated in a Federal statute or regulation, program guidance, these Terms and Conditions, or a notice of award, Treasury may take any remedial action that is legally available including disallowing all or a part of the Section 1603 payment. Any payment that is disallowed must be returned to the Treasury. b. In taking an enforcement action, Treasury will provide the applicant with the opportunity for a hearing, appeal, or other administrative proceeding to which the applicant is entitled under any statute or regulation applicable to the action involved. c. The applicant must immediately report any indication of fraud, waste, abuse, or potentially criminal activity pertaining to Section 1603 funds to Treasury and the cognizant Treasury inspector general. 9. Information Sharing a. The applicant agrees that any information provided to the Treasury in the application, attachments, supporting documents, reports or otherwise in connection with its application under Section 1603 may be shared with other federal agencies, including the Internal Revenue Service, as needed by those agencies to conduct official agency business. Notwithstanding the foregoing, bank account information and proprietary information will not be shared unless required by law. b. The applicant acknowledges that Treasury may publicly release the name of the applicant; the type, location, and description of the property that is the subject of the application; and the amount of funding provided. Signature Under penalties of perjury, I declare that I have examined these Terms and Conditions, agree to them, and will ensure that they will be followed. I declare that I am an authorized official of the applicant entity and am authorized to bind the applicant to these Terms and Conditions. Name Title Phone Email Signature Date signed

76 | P a g e

M.

Sample Start of Construction Application

Note: This is a sample application. All applications must be completed online. Application for Section 1603: Payments for Specified Renewable Energy Property in Lieu of Tax Credits (Property that is under construction) Applicant’s who have begun construction of a qualified property during 2009 or 2010 and have placed or will place the property in service after 2010, must submit only this application form before October 1, 2011 to demonstrate that construction began during 2009 or 2010. Once the qualified property is placed in service, the applicant must submit both an updated application form and the signed Terms and Conditions document, indicating the identification number that is issued by Treasury upon submission of this application. While there are directions in this application, they are not a substitute for reading and understanding the Program Guidance, Terms and Conditions, Section 1603 of the American Recovery and Reinvestment Tax Act of 2009, and Sections 45 and 48 of the Internal Revenue Code. *All fields are required unless otherwise noted. Fill out the form in order, as lower sections are affected by upper section choices. Allowed values are marked in italics, items in square brackets [] are optional. The numbering of questions in this application form is not sequential. Some numbers are skipped intentionally. Section 1: Applicant Eligibility 1A. Type of Applicant — indicate which choice best describes the applicant. Governments, 501(c) organizations, 54(j)(4) entities, partnership or pass-thru entities with any government /501(c)/54(j)(4) entity as a partner (or other holder of an equity or profits interest), and in some cases foreign persons and entities are not eligible for Section 1603 payments. Federal, State, or local government or any political subdivision, agency, or instrumentality thereof Organization described in section 501(c) of the Internal Revenue Code and exempt

77 | P a g e

from tax under section 501(a) of such Code Entity referred to in paragraph (4) of section 54(j) of the Internal Revenue Code Partnership or pass-thru entity with a government or any political subdivision, agency, or instrumentality thereof, 501(c) organization, or 54(j)(4) entity as a direct or indirect partner (or other direct or indirect holder of an equity or profits interest) (Note: If such entity only owns an indirect interest in the applicant through a taxable C corporation, do not choose this selection.) Foreign person or entity not qualifying for the exception in section 168(h)(2)(B) of the Internal Revenue Code with respect to the property Foreign person or entity qualifying for the exception in section 168(h)(2)(B) of the Internal Revenue Code with respect to the property Sole proprietorship Joint venture Partnership Domestic C corporation Domestic S corporation Cooperative organization described in section 1381 of the Internal Revenue Code Real Estate Investment Trust (REIT) Other

1B. Applicant's Interest in the Property — indicate the applicant's interest in the property. Applicant is owner of the property. Applicant is lessee of the property (include waiver from owner, as described in the Program Guidance and in Section 6 of this Application).

78 | P a g e

Applicant is not the owner or lessee of the property - do not continue with application

Section 2: Property Information 2A. Depreciation and Use of Property — indicate which choice best describes the property. Property is not depreciable or amortization is not allowed - do not continue with application Property is depreciable or amortization is allowed in lieu of depreciation. Property is both depreciable or amortization is allowed in lieu of depreciation and is a public utility property within the meaning of section 168(i)(10) of the Internal Revenue Code.

2B. Property Identification — enter information about the location of the property. *City or County required. Property is located outside the United States during more than 50% of the year - do not continue with application. (Note: If such property meets the requirements described in section 168(g)(4) of the IRC, do not choose this selection.) Property location is not known at this time. Property is located predominately within the United States.

Name: Street Address : *City: *County: State:

79 | P a g e

Zip Code: 00000[-0000] 2C is left Intentionally Blank 2D. Date Construction Began — for properties not placed in service by December 31, 2010, enter the date on which construction began. See Program Guidance for a definition of beginning of construction and the credit termination date by which time the project must be placed in service. o Construction of the property began on this date: _____________mm/dd/yyyy o Construction of the property has not begun - do not continue with this application. 2E. Expected Placed in Service Date — for properties not yet placed in service, enter the anticipated date when the property will be placed in service. See Program Guidance for dates by which specific properties must be placed in service to be eligible for Section 1603 funds. o Anticipated date property will be placed in service: ____________mm/dd/yyyy 2F. Requirements for a Property that is Under Construction (you must check at least one box) — Did you: o (a) incur or pay more than 5% of the estimated cost of the property? If yes, how much have you spent? $ o (b) begin significant work of a physical nature on the property? If you choose b, describe how you met the requirement. Section 3: Applicant Information 3A. Applicant — enter information about the entity that owns the property. Business name: Phone: Employer Identification Number (EIN): Do not enter a Social Security Street address 1: Street address 2 (optional): City:

80 | P a g e

number 000000000 DUNS Number: Website address (optional): State: Zip code:

3B. Contact Person — enter information for the person to be contacted about this application. First name: Organizational affiliation: Phone: Last name: E-mail address: Fax:

3C. Previous Applications —indicate whether an application has previously been submitted for Section 1603 payments for this property or property at this same location. o No applications submitted previously for Section 1603 payments for this property. o Application(s have) has been submitted previously for this property or property at this same location. Section 4: Property Description 4A. Specified Energy Property — indicate which choice best describes the type of specified energy property. See Program Guidance for a further explanation of each type. Specified properties eligible under section 45 of Internal Revenue Code o Wind facility — uses wind to produce electricity (wind turbines with capacity of 100kW or less may also qualify below as small wind energy property but only one payment is allowed with respect to the property). Closed-loop biomass facility (other than a facility described in the choice below) — uses organic material from a plant grown exclusively for purposes of being used to

81 | P a g e

generate electricity. If a portion of fuel is not closed-loop biomass, give the percentage of fuel, on an annual basis, that is closed-loop biomass: %. o Facility modified to use closed-loop biomass to co-fire with coal, other biomass, or both. Modification must be approved under the Biomass Power for Rural Development Program or be part of a pilot project of the Commodity Credit Corporation. Give the percentage of fuel, on an annual basis, that is closed-loop biomass: %. o Open-loop biomass facility (cellulosic waste material) — uses solid, nonhazardous, cellulosic waste material or any lignin material derived from qualified sources described in section 45(c)(3)(ii) of the Internal Revenue Code to produce electricity. If a portion of fuel is not open-loop biomass of this type, give the percentage of fuel, on an annual basis, that is open-loop biomass of this type: %. o Open-loop biomass facility (livestock waste nutrients) — uses agricultural livestock waste nutrients to produce electricity and has a nameplate capacity rating of not less than 150 kW. If a portion of fuel is not agricultural livestock waste nutrients, give the percentage of fuel, on an annual basis, that is agricultural livestock waste nutrients: %. o Geothermal facility — uses geothermal energy to produce electricity. o Landfill gas facility — uses gas derived from the biodegradation of municipal solid waste to produce electricity. o Trash facility — uses municipal solid waste to produce electricity and is not a landfill gas facility. o Hydropower facility (incremental hydropower) — produces incremental hydropower production as a result of efficiency improvements and additions to capacity to which the incremental hydropower production is attributable. The baseline and incremental increase in energy production must be certified by FERC. o Hydropower facility — hydropower producing facility installed on a qualifying nonhydroelectric dam. The property must be licensed by FERC and meet all other applicable environmental, licensing, and regulatory requirements.

82 | P a g e

o Marine and hydrokinetic renewable energy facility — uses marine and hydrokinetic renewable energy to o produce electricity and has a nameplate capacity rating of at least 150 kW. Specified properties eligible under section 48 of Internal Revenue Code o Solar electricity property — uses solar energy to generate electricity. o Solar thermal property — uses solar energy to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat (property used to generate energy for heating a swimming pool ineligible). o Solar lighting property — uses solar energy to illuminate the inside of a structure using fiber optic distributed sunlight. o Geothermal property — equipment used to produce, distribute, or use energy derived from a geothermal deposit. o Fuel cell property — fuel cell power plant that has a nameplate capacity of at least 0.5 kW of electricity using an electrochemical process and an electricityonly generation efficiency greater than 30%. o Microturbine property — stationary microturbine power plant that has a nameplate capacity of less than 2,000 kW and an electricity-only generation efficiency of not less than 26% at International Standard Organization conditions. o Combined heat and power system property — system that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other form of useful thermal energy and that meets all of the following requirements: 1. System produces at least 20% of total useful energy in the form of thermal energy which is not used for electrical or mechanical power (report thermal production in Section 4D of this application). 2. System produces at least 20% of total useful energy in the form of electrical or mechanical power (or combination) (report electrical and/or mechanical production in Section 4D of this application).

83 | P a g e

3. System energy efficiency percentage exceeds 60% [unless system uses openor closed-loop biomass (see Guidance) for at least 90% of the energy source]. Specify energy efficiency percentage: % and, if applicable, percentage of energy source from open- or closed-loop biomass: %. 4. System does not exceed 50 MW or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities (report system capacity in Section 4D of this application). o Small wind energy property — uses a turbine with nameplate capacity of not more than 100 kW to generate electricity. o Geothermal heat pump property — uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure. 4B. Narrative Description of Property — give a summary description of the property that is suitable for publication. Limit the summary to 2500 characters. If applying for multiple units of property that are being treated as a single, larger property, so indicate in the narrative. 4D. Energy Generated by the Property — fill in the appropriate column depending on whether the property generates electrical, mechanical, or thermal energy (or combination) for the capacity and production of the property. This section is not applicable to solar illumination properties and geothermal heat pump properties. Enter the estimated production. kW=kilowatt(s), kWh=kilowatt hour(s), MMBTU=one-million British Thermal Units, hp=horsepower. Installed nameplate capacity: _________________ Estimated annual production: _________________ Section 5. Anticipated Cost Basis 5A.Estimated Cost Basis and Applicable Percentage — enter the estimated qualified cost basis of the property and the applicable percentage to calculate the request for payment. The applicable percentage is either 10% or 30% depending on the type of energy property. See Program Guidance to determine the applicable percentage. Fuel cell property formula — if the applicable percentage times the qualified cost basis exceeds an amount equal to $1,500 for each 0.5 kW of capacity, maximum request for payment amount cannot exceed $1,500 times each 0.5 kW of capacity. Microturbine property formula — if the applicable percentage times the qualified cost basis exceeds an amount equal to $200 for each kW of

84 | P a g e

capacity, maximum request for payment cannot exceed $200 times the number of kW of capacity. Qualified cost basis (as shown in supporting documentation):

Applicable percentage: For fuel cell property: If property has less than kW of capacity, enter capacity here: If property has less than kW of capacity, enter capacity here:

For microturbine property:

5B. Estimated Request for Payment — from the calculation in 5A, the estimated amount of request for payment. Amount of request for payment: $____________ (Based on calculations in 5A.) Section 6. Documentation 6B. Documentation for Properties Not Yet Placed In Service — for properties not yet placed in service attach documentation to establish that construction has begun in 2009 or 2010 as claimed in Section 2F of this application. See Program Guidance and Frequently Asked Questions for information on acceptable documentation to establish that construction has begun. ACCEPTED FILE TYPES: Office (doc, docx, xls, xlsx), postscript (pdf), and plain text (txt) formats. Limit total size of all files to 100 MB or less. PLEASE READ THE BEGUN CONSTRUCTION CHECKLIST FOR ALL DOCUMENTATION REQUIREMENTS. Section 7. Signature of Applicant 7A. Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief, it is true, correct, and complete. I declare that I am the applicant or an authorized official for the cant. Further, I agree the information in this application can be disclosed to the Internal Revenue Service.

85 | P a g e

N.

Sample Final Application. Payments for Specified Renewable Energy Property in Lieu of Tax Credits

This is one of two parts of the application package for payment under the Section 1603 program. The other document is the signed Terms and Conditions. All applicants must submit this application form before October 1, 2011. Applicants who place a qualified property in service during 2009 or 2010 should submit the application form and the Terms and Conditions form at the same time after the property has been placed in service. Applicants who have begun construction of a qualified property during 2009 or 2010 and have not yet placed the property in service by the date of application, should submit only this application (not the Terms and Conditions) before October 1, 2011 to demonstrate that construction began during 2009 or 2010. Once the qualified property is placed in service, the applicant should submit both an updated application form and the signed Terms and Conditions document, indicating the identification number (issued by Treasury) of the applicant’s preliminary submission. While there are directions in this application, they are not a substitute for reading and understanding the Program Guidance, Terms and Conditions, Section 1603 of the American Recovery and Reinvestment Tax Act of 2009, and Sections 45 and 48 of the Internal Revenue Code. Section 1: Applicant Eligibility 1A. Type of Applicant – indicate which choice best describes the applicant. Governments, 501(c) organizations, 54(j)(4) entities, partnership or pass-thru entities with any government /501(c)/54(j)(4) entity as a partner (or other holder of an equity or profits interest), and in some cases foreign persons and entities are not eligible for Section 1603 payments. Federal, State, or local government or any political subdivision, agency, or instrumentality thereof Organization described in section 501(c) of the Internal Revenue Code and exempt from tax under section 501(a) of such Code Entity referred to in paragraph (4) of section 54(j) of the Internal Revenue Code Partnership or pass-thru entity with a government or any political subdivision, agency, or instrumentality thereof, 501(c) organization, or 54(j)(4) entity as a direct or indirect partner (or other direct or indirect holder of an equity or profits interest) (Note: If such entity only owns an indirect interest in the applicant through a taxable

86 | P a g e

C corporation, do not choose this selection.) Foreign person or entity not qualifying for the exception in section 168(h)(2)(B) of the Internal Revenue Code with respect to the property Foreign person or entity qualifying for the exception in section 168(h)(2)(B) of the Internal Revenue Code with respect to the property Sole proprietorship Joint venture Partnership Domestic C corporation Domestic S corporation Cooperative organization described in section 1381 of the Internal Revenue Code Real Estate Investment Trust (REIT) Other (specify here)

1B. Applicant’s Interest in the Property – check the appropriate box. Applicant is owner of the property. Applicant is lessee of the property (include waiver from owner as described in the Program Guidance and in Section 6 of this Application). Applicant is not the owner or lessee of the property – do not continue with application.

Section 2: Property Information 2A. Depreciation and Use of Property – check the box or boxes which describe the property.

87 | P a g e

Property is not depreciable or amortization is not allowed – do not continue with application. Property is depreciable or amortization is allowed in lieu of depreciation. Property is both depreciable or amortization is allowed in lieu of depreciation and is a public utility property within the meaning of section 168(i)(10) of the Internal Revenue Code.

2B. Property Identification – enter information about the location of the property. * Either a City or County is required. o Property is located outside of the United States during more than 50% of the year – do not continue with application. [Note: If such property meets the requirements described in section 168(g)(4) of the IRC, do not choose this selection] o Property is located predominately within the United States. Name: Street Address *City: *County: State Zip Code: 2C. Property Placed in Service – enter the date on which the property was placed in service. See Program Guidance for a definition of placed in service date. If applying for multiple units of property that the applicant is treating as a single, larger unit of property and the units have different placed in service dates, enter the date the first and last units were placed in service. If property is not yet placed in service, skip to Section 2D below. o Property has been placed in service – enter date(s) then skip to Section 3 below. Date (for multiple units, first property): ________________

88 | P a g e

Date (optional – for multiple units, last property): _______________ o Property has not yet been placed in service – skip to Section 2D below. 2D. Date Construction Began – for properties not yet placed in service, enter the date on which construction began. See Program Guidance for a definition of beginning of construction and the credit termination date by which time the project must be placed in service. o Construction of the property began on this date. ______________ o Construction of the property has not begun – do not continue with this application. 2E. Expected Placed in Service Date – for properties not yet placed in service, enter the anticipated date when the property will be placed in service. See Program Guidance for dates by which specific properties must be placed in service to be eligible for Section 1603 funds. Do not continue with this application if the property will be placed in service within 90 days; rather, return after the property is placed in service and choose “Property has been placed in service” under Section 2C. Anticipated date the property will be placed in service. _______________ 2F. Narrative Description of Beginning of Construction – for properties not yet placed in service, describe what construction activities have taken place. Limit to 2,500 characters. Section 3: Applicant Information 3A. Applicant – enter information about the entity that placed the property in service/began construction. If applicant did not or will not originally place the property in service do not continue with this application. Business name: Phone: Employer Identification Number (EIN): Do not enter a Social Security number 000000000 Street address 1: Street address 2 (optional): City:

89 | P a g e

DUNS Number: Website address (optional):

State: Zip code:

3B. Contact Person – enter information for the person to be contacted about this application. First name: Organizational affiliation: Phone: Last name: E-mail address: Fax:

3C. Previous Applications – check the box indicating whether an application has previously been submitted for Section 1603 payments for this property or property at this same location. o No application(s) submitted previously for Section 1603 payments for this property. o Application(s) has been submitted previously for this property or property at this same location; enter Treasury application number (TAN) from previously submitted any application(s). Section 4: Property Description 4A. Specified Energy Property – check the box or boxes which best describes the type of specified energy property. See Program Guidance for a further explanation of each type. Specified properties eligible under Section 45 of Internal Revenue Code o Wind facility – uses wind to produce electricity (wind turbines with capacity of 100kW or less may also qualify below as small wind energy property but only one payment is allowed with respect to the property). o Closed-loop biomass facility (other than a facility described in the box below) – uses organic material from a plant grown exclusively for purposes of being

90 | P a g e

used to generate electricity. If a portion of fuel is not closed-loop biomass, give the percentage of fuel, on an annual basis, that is closed-loop biomass: _________%. o Facility modified to use closed-loop biomass to co-fire with coal, other biomass, or both. Modification must be approved under the Biomass Power for Rural Development Program or be part of a pilot project of the Commodity Credit Corporation. Give the percentage of fuel, on an annual basis, that is closed-loop biomass: ________%. o Open-loop biomass facility (cellulosic waste material) – uses solid, nonhazardous, cellulosic waste material or any lignin material derived from qualified sources described in section 45(c)(3)(ii) of the Internal Revenue Code to produce electricity. If a portion of fuel is not open-loop biomass of this type, give the percentage of fuel, on an annual basis, that is open-loop biomass of this type: ________%. o Open-loop biomass facility (livestock waste nutrients) – uses agricultural livestock waste nutrients to produce electricity and has a nameplate capacity rating of not less than 150 kW. If a portion of fuel is not agricultural livestock waste nutrients, give the percentage of fuel, on an annual basis, that is agricultural livestock waste nutrients: _________%. o Geothermal facility – uses geothermal energy to produce electricity. o Landfill gas facility – uses gas derived from the biodegradation of municipal solid waste to produce electricity. o Trash facility – uses municipal solid waste to produce electricity and is not a landfill gas facility. o Hydropower facility (incremental hydropower) – produces incremental hydropower production as a result of efficiency improvements and additions to capacity to which the incremental hydropower production is attributable. The baseline and incremental increase in energy production must be certified by FERC. o Hydropower facility – hydropower producing facility installed on a qualifying nonhydroelectric dam. The property must be licensed by FERC and meet all other applicable environmental, licensing, and regulatory requirements.

91 | P a g e

o Marine and hydrokinetic renewable energy facility – uses marine and hydrokinetic renewable energy to produce electricity and has a nameplate capacity rating of at least 150 kW. Specified properties eligible under Section 48 of Internal Revenue Code o Solar electricity property – uses solar energy to generate electricity. o Solar thermal property – uses solar energy to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat (property used to generate energy for heating a swimming pool ineligible). o Solar lighting property – uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. o Geothermal property – equipment used to produce, distribute, or use energy derived from a geothermal deposit. o Fuel cell property – fuel cell power plant that has a nameplate capacity of at least 0.5 kW of electricity using an electrochemical process and an electricityonly generation efficiency greater than 30%. o Microturbine property – stationary microturbine power plant that has a nameplate capacity of less than 2,000 kW and an electricity-only generation efficiency of not less than 26% at International Standard Organization conditions o Combined heat and power system property – system that uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other form of useful thermal energy and that meets all of the following requirements: 1. System produces at least 20% of total useful energy in the form of thermal energy which is not used for electrical or mechanical power (report thermal production in section 4D of this application) 2. System produces at least 20% of total useful energy in the form of electrical or mechanical power (or combination) (report electrical and/or mechanical production in section 4D of this application). 3. System energy efficiency percentage exceeds 60% [unless system uses open or closed loop biomass (see Guidance) for at least 90% of the energy

92 | P a g e

source]. Specify energy efficiency percentage:______________% and, if applicable, percentage of energy source from open or closed loop biomass:______________%. 4. System does not exceed 50 MW or a mechanical energy capacity in excess of 67,000 horsepower or an equivalent combination of electrical and mechanical energy capacities (report system capacity in section 4D of this application). o Small wind energy property – uses a turbine with nameplate capacity of not more than 100 kW to generate electricity. o Geothermal heat pump property – uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure. 4B. Narrative Description of Property – give a summary description of the property that is suitable for publication. Limit the summary to 2,500 characters. If applying for multiple units of property that are being treated as a single, larger property, so indicate in the narrative. 4C. Use of Energy - enter information in one of the two boxes to describe how the energy produced is being/will be used. o Energy produced has been/will be sold. Enter the name and address of the buyer. Limit to 500 characters. o Energy produced has not been/will not be sold. Describe how it is/will be used. Limit to 2,500 characters. 4D. Energy Generated by the Property – fill in the appropriate column depending on whether the property generates electrical, mechanical, or thermal energy (or combination) for the capacity and production of the property. This section is not applicable to solar illumination properties and geothermal heat pump properties. For properties not yet placed in service or that have not operated for a full year, enter the estimated production. kW=kilowatt(s), kWh=kilowatt hour(s), MMBTU=one-million British Thermal Units, hp=horsepower. Installed nameplate capacity __________ Estimated annual production __________ 4E. Jobs Created/Retained by the Property – enter the estimated number of direct jobs created/retained by the property. Direct jobs are those created/retained in the project, not by suppliers who make the materials used in the project.

93 | P a g e

Construction stage Full-time jobs (at least 35 hours per week) Part-time jobs (less than 35 hours per week)

Operational stage

Section 5. Cost Basis and Request for Payment 5A. Cost Basis and Applicable Percentage – enter the qualified cost basis of the property and the applicable percentage to calculate the request for payment. The applicable percentage is either 10% or 30% depending on the type of energy property. See Program Guidance to determine the correct percentage to apply. For properties not yet placed in service, skip to Section 6B. Fuel cell property formula – if the applicable percentage times the qualified cost basis exceeds an amount equal to $1,500 for each 0.5 kW of capacity, enter an amount equal to $1,500 times each 0.5 kW of capacity. Microturbine property formula – if the applicable percentage times the qualified cost basis exceeds an amount equal to $200 for each kW of capacity, enter an amount equal to $200 times the number of kW of capacity Qualified cost basis (as shown in supporting documentation):

Applicable percentage: For fuel cell property: If property has less than kW of capacity, enter capacity here: If property has less than kW of capacity, enter capacity here:

For microturbine property:

5B. Request for Payment – from the calculation in 5A, enter the amount of request for payment. For properties not yet placed in service, skip to Section 6B.

94 | P a g e

Amount of request for payment _________________ 5C. Assignment – indicate if the 1603 payment has been assigned to a financial institution in accordance with Federal Assignment of Claims Act (31 U.S.C. 3727) o The 1603 payment has not been assigned to a financial institution. o The 1603 payment has been assigned to a financial institution. Section 6. Documentation 6A. Documentation for Properties Placed In Service – for properties placed in service attach documentation: to establish that the property has been placed in service as claimed in Section 2C of this application; to demonstrate that the property has met the requirements shown in Section 4 of this application; and to support costs claimed in Section 5 of this application. See Program Guidance for information on acceptable documentation to establish that a property is placed in service and meets the eligibility requirements and to support costs. If the applicant is a lessee (as indicated in Section 1B), attach a waiver, as described in the Program Guidance, from the owner. For properties not yet placed in service, skip to Section 6B. Note: An applicant may add additional documents or replace documents as needed using the “Add/modify supporting documentation” option in the main menu of the on-line application for up to 3 days after submitting the application. ACCEPTED FILE TYPES: Office (pre-2007 doc, xls), postscript (pdf), and plain text (txt) formats. Limit total size of all files to 100 MB or less. Supporting documents requested for properties placed in service (This is provided as guidance for all applicants. However, eligibility decisions by the Department of Treasury will be based ultimately on applicant’s eligibility under Section 45 or Section 48 of the US Tax Code.) ELIGIBLE PROPERTY: • Design plans – final engineering design documents, stamped by a licensed professional engineer. • Nameplate capacity – design plans, commissioning reports, or OEM/equipment vendor specification sheets demonstrating that the property meets the required minimum or maximum nameplate capacity (see Section 4A of the Application for properties with minimum or maximum nameplate capacity requirements).

95 | P a g e

PLACED IN SERVICE: • Commissioning report – report provided by the project engineer, equipment vendor, or independent third party that certifies that the equipment has been installed, tested, and is ready and capable of being used for its intended purpose. • Interconnection agreement – a formal document between the applicant and the local utility that establishes the terms and conditions under which the utility agrees to interconnect with the applicant’s system. Applicants must also submit any subsequent documentation to demonstrate that the interconnection agreement has been placed in effect. Systems not connected to a utility are required to submit additional documentation, including approval from a building department official or other local agency with jurisdiction. COST BASIS: • Detailed breakdown of all costs included in the cost basis – a detailed cost breakdown should separately itemize costs for equipment, labor, installation, engineering, permits, and other project cost items to be included as the eligible cost basis. • For properties that have a cost basis in excess of $500,000 attach the Independent Accountant Certification attesting to the accuracy of all costs claimed as part of the basis of the property. APPLICANT THAT IS A LESSEE: • If applicant is a lessee, attach the Owner’s Waiver containing all six elements described on page [17] of the Program Guidance (page 25 of this book). APPLICANT THAT IS A LESSEE, LLC, PARTNERSHIP, or PASSTHROUGH ENTITY: • If the applicant is a lessee, LLC of a parent company, partnership, or a pass-through entity, please attach supporting documentation indicating the applicant’s interest in the property which indicates the business structure as well as the applicant’s relationship to any other parties with a direct interest in the property (i.e., property owner or parent company). OTHER: • Please attach any additional documents to support your application. If you require more uploads than this form provides, supplement these with the “Add/Modify Supporting

96 | P a g e

Documentation” function under the Application Package Control Panel for this application when finished. Attached is documentation to support eligibility of the specified energy property is attached. Attached is documentation to support costs: Attached is documentation to establish that property is placed in service: US Treasury Department Attached is owner’s waiver, if applicant is a lessee (as indicated in Section 1B):

6B. Documentation for Properties Not Yet Placed In Service – for properties not yet placed in service attach documentation to establish that construction has begun. See Program Guidance for information on acceptable documentation to establish that construction has begun. ACCEPTED FILE TYPES: Office (pre-2007 doc, xls), postscript (pdf), and plain text (txt) formats. Limit total size of all files to 100 MB or less. Supporting documents requested for properties not yet placed in service (This is provided as guidance for all applicants. However, eligibility decisions by the Department of Treasury will be based ultimately on applicant’s eligibility under Section 45 or Section 48 of the US Tax Code.) UNDER CONSTRUCTION BUT NOT YET PLACED IN SERVICE: • Paid invoices and/or other financial documents demonstrating that physical work of a significant nature has begun on the property. • Binding contract for the manufacture, construction or production of the property as described in Section IV.C of the Program Guidance (required for property not yet placed in service that is being manufactured, constructed, or produced for the applicant by another person). • Safe harbor – if beginning construction is based on the safe harbor, the financial documents must demonstrate that more than 5 percent of the total cost of the property (excluding the cost of any land and preliminary activities such as planning, designing, securing financing, exploring, or researching) has been incurred or paid by the applicant.

97 | P a g e

OTHER: • Please attach any additional documents to support your application. If you require more uploads than this form provides, supplement these with the “Add/Modify Supporting Documentation” function under the Application Package Control Panel for this application when finished. Attached is documentation to establish that construction has begun. Section 7. Signature of Applicant Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief, it is true, correct, and complete. I declare that I am the applicant or an authorized official for the applicant. Further, I agree the information in this application can be disclosed to the Internal Revenue Service. First Name Last Name Title Phone Email Signature* *In the on-line application, entering the applicant’s password to the on-line application has the same legal effect as the applicant’s handwritten signature.

98 | P a g e

III.

Commentary. A. Special Update: More Subsidies for Energy Projects (Jan. 10, 2011) by Keith Martin and John Marciano, in the Washington office of Chadbourne &

Parke LLP Congress gave developers of US renewable energy projects in late December another year through December 2011 to get new projects under construction to qualify for cash grants from the US Treasury for 30% of the project cost. The fact that Congress waited until almost the end of 2010 to let developers know they have more time—the extension became official on December 17—made for a rush by developers to order equipment and get work under way at factories and project sites. The experience provided some useful practical lessons for what to do or not to do when a similar rush is expected in late 2011. The same bill that extended the deadline for cash grants also authorized a 100% “depreciation bonus” on new equipment put into service after September 8, 2010 through December 2011 or 2012, depending on the project. The bonus is a timing benefit. Instead of depreciating a project over the normal depreciation period, the entire cost can be deducted in the year the project goes into service. However, projects on which work started before 2008 may not qualify. Many developers are expected to have trouble using the bonus. There was already a 50% bonus during 2010, but many tax equity investors made developers opt out of the bonus because the investors were trying to conserve tax capacity to spread over a larger number of deals. A 100% depreciation bonus is worth roughly 4.45¢ per dollar of capital cost in additional subsidy on a wind, solar, geothermal or fuel cell project. It is worth more on other renewable energy projects and as much as 18¢ per dollar of capital cost on some transmission lines, power plants that use fossil fuels and some parts of certain biomass plants. Congress made other changes that will affect other parts of the project finance market in the same bill in late December. Cash Grants In early 2009, Congress directed the US Treasury Department to pay owners of new renewable energy projects that are completed in 2009 or 2010, or that start construction in 2009 or 2010, 30% of the project cost in cash as an economic stimulus measure. The grants are

99 | P a g e

sometimes referred to as the “section 1603 program.” Developers receiving grants must agree to forego tax credits that they would otherwise have received on the projects. The program paid $5.8 billion through the end of 2010. The three largest Treasury cash grants to date are $276 million paid on the Meadow Lake wind farm in Indiana, $222.9 million for the Penascal wind farm in Texas and $218.5 million for the Windy Flats wind farm in Washington state. It looked during most of 2010 that if the program were extended, it would be turned into a tax refund program in which the government would pretend that a project owner overpaid its income taxes by 30% of the project cost in the year the project is completed. The owner could then apply for the taxes back. This would have delayed grant payments compared to the current program and might have shifted administration of the program to the Internal Revenue Service. In the end, Congress simply changed a date. Grants will now be paid on projects that are completed or that start construction in 2009, 2010 or 2011. Projects that merely start construction must be completed by a deadline. The completion deadlines have not changed. They remain 2012 for wind farms, 2016 for solar and fuel cell projects, and 2013 for most other projects. Grants are paid on equipment that uses wind, sunlight, geothermal steam or fluid, biomass, municipal solid waste, landfill gas and, in some instances, water to generate electricity. They are also paid on fuel cells, combined heat and power projects (or what used to be called cogeneration facilities) of up to 50 megawatts in size, gas micro-turbines and geothermal wells and pipes. The grants on small cogeneration facilities and gas micro-turbines are only 10% of the project cost. The deadline to put them in service is 2016. The Treasury is not sure it will pay grants on geothermal wells and pipes that are put in service to serve an existing power plant. Developers should not assume that the cash grant program will be extended again by Congress. Republicans are now in control in the House and have more seats in the Senate. The Republican counsels to the House and Senate tax committees said at a wind industry forum in late November that their party is opposed to extending the program. They see it as part of the Obama stimulus measures against which the party voted en masse. Practical Lessons The fact that Congress waited until the last minute to extend the construction-start deadline acted as a stimulus as developers rushed to order equipment and start work at factories and on project sites before year end.

100 | P a g e

There were two key takeaways from that experience. Some important practical information also came out during discussions with the Treasury late in the year as the deadline was approaching. Start planning early in 2011 how to start construction by year end. Developers who waited until the fall 2010 to start planning found equipment manufacturers had already committed their production slots to others who had gotten in line earlier. It is better to try to incur more than 5% of the total project cost by year end than to rely solely on starting physical work at the site or a factory. Tax equity investors and lenders proved unwilling in some cases to assume that a project got underway in time if all the developer could point to was physical work at the site. Anyone relying solely on physical work must be able to prove that there was continuous construction work through completion. Some tax equity investors and lenders were unwilling to take the risk that the continuous work requirement would be met. There is no need for projects that incur more than 5% of the total project cost by December 2011 to show that the work after that point is continuous. There are two ways to start construction. One is to commence physical work of a significant nature on the project by December 2011. The work can take one of two forms. It can be work at the site on foundations, concrete pads for wind turbines, concrete pedestals for solar arrays or permanent roads that will be used to ferry spare parts once the project is in operation. It is also physical work of a significant nature for a turbine or module manufacturer with whom a developer has a binding contract to supply equipment to start physical assembly of the equipment at the factory. The other way to start construction is to “incur” more than 5% of the total project cost by December 2011. It is not enough merely to make a payment in 2011. Costs are not “incurred” until equipment or services ordered under a binding contract are delivered, with one exception. A payment in 2011 counts as a 2011 cost if there is delivery of the equipment ordered within 3 1/2 months of the payment date. A developer relying on the 5% test can add up the costs the developer incurs. It can also add costs that a contractor or equipment manufacturer with whom the developer has a binding contract incurs (without double counting). There is a debate within Treasury about whether pulling components out of inventory counts toward costs incurred at the equipment manufacturer or contractor level. Until the issue is settled, developers would be wise to require equipment manufacturers only to use components that are manufactured after a binding purchase order is in place.

101 | P a g e

Developers who plan to rely on the 3 1/2-month rule to count the cost of equipment delivered in early 2012 must link payments in late 2011 to the specific equipment that will be delivered in early 2012. It is not enough to make a general down payment or general milestone payment under a contract. The Treasury is unsure how the 3 1/2-month rule works for services. It has not decided whether services can be separately delivered from the equipment to which they relate in cases where the services are part of a larger equipment supply agreement. For example, design or engineering work may be embedded in the equipment and may not be delivered until the equipment is delivered. Private Equity Funds Developers who are owned partly by private equity funds cannot receive Treasury cash grants on their projects unless the funds hold their interests through “blocker corporations,” with one exception. The developer can benefit indirectly from a cash grant by selling the project to a tax equity investor and leasing it back. The tax equity investor can claim a full grant in that case, and the benefit is shared with the developer in the form of reduced rentfor use of the project. There had been talk at the staff level in the House tax committee about dropping the ban on cash grants for projects with private equity fund backing and moving instead to a “proportionate disallowance rule” where the grant would be lost to the extent of government and tax-exempt ownership of the project. Thus, for example, if state pension funds and university endowments own 10% of a private equity fund that owns 90% of a project indirectly through a developer, then only 9% of the grant would be lost. Municipal utilities and electric cooperatives were also pressing to be able to receive Treasury cash grants on their projects. The final bill was silent on these issues. In addition to changing the deadline to start construction, the bill also changed a deadline to apply for Treasury cash grants. Grants are not usually applied for until after a project is completed. However, anyone expecting a grant had to apply to the Treasury by September 30, 2011 as a way of letting the government know how many more claims there might be on the program. That deadline has now been pushed back to September 30, 2012. Depreciation Bonus Companies that place new equipment in service after September 8, 2010 through December 2011 or 2012 will be able to deduct the cost immediately as a “depreciation bonus.”

102 | P a g e

The bonus replaces the regular depreciation that the company would otherwise have claimed. However, only 85% of the cost can be deducted if a Treasury cash grant or investment credit is claimed. Equipment that is normally depreciated over five or seven years must be in service by December 2011 to qualify for a 100% bonus. Examples are wind, solar, geothermal, landfill gas and parts of biomass and waste-to-energy projects. Equipment at such projects still qualifies for a 50% bonus if placed in service in 2012. A 50% bonus means half the cost—or 42.5% of the cost for equipment on which a Treasury cash grant or investment credit is claimed—is deducted immediately. The remaining cost is deducted over the normal depreciation schedule. Equipment that is normally depreciated over 10 or more years qualifies for a 100% bonus if placed in service by December 2012 and a 50% bonus if placed in service by December 2013. Examples are transmission lines and power plants that use fossil fuels. For this long-lived property, both the 100% bonus and the 50% bonus can only be claimed on costs incurred through 2012. A company can opt out of the bonus, but it cannot choose to take a 50% bonus instead of a 100% bonus. Some careful tax lawyers have raised questions whether a Treasury cash grant can be claimed on projects on which a depreciation bonus is claimed. The Treasury cash grant program guidance says, “Costs that will be deducted for federal income tax purposes in the year in which they are paid or incurred are not includible in basis” for the cash grant. However, staff of the Joint Committee on Taxation said, after looking at the issue, that both the bonus and the grant are available on projects. Treasury confirmed this by email. The bonus can only be claimed on equipment as opposed to buildings, land and intangible assets like power contracts and interconnection agreements. About 93% to 97% of spending at a conventional power plant is usually for equipment as opposed to a building and other improvements to real property. The bonus can be claimed on projects in US possessions like Puerto Rico and the US Virgin Islands, provided they have US owners. There is no bonus for investing in an existing facility, with four exceptions. “Existing” means it was already in operation when the taxpayer made the investment. First, new improvements to an existing plant qualify. Second, a tax equity investor can buy an existing

103 | P a g e

project and lease it back to a developer up to three months after the developer put the project into service and claim a bonus. Third, the lessor in the sale leaseback has up to another three months after the sale-leaseback transaction closes to syndicate its position by offering interests in the lessor position to other investors. Fourth, a project developer can contribute an existing project to a partnership with a new investor at any time during the same tax year the project went into service, and the investor will get a share of the bonus. The IRS will require that the bonus be allocated between the project developer and the partnership based on the number of months that each owned the project during the year. Project Too Stale? Work on the project must not have started before 2008. Most projects should qualify for a bonus as long as work “of a significant nature” did not start at the site before 2008. Site clearing, test drilling and excavation to change the contour of the land are not considered the start of work at the site. Work “of a significant nature” is considered to commence at the site once work starts on the foundation. IRS regulations say that driving pilings into the ground counts as work on the foundation. They also provide a “safe harbor” under which work is not considered to have reached the threshold “of a significant nature” until the taxpayer has incurred more than 10% of the expected total cost of the project. Spending on “land and preliminary activities such as planning or designing, securing financing, exploring, or researching” designs is ignored: it is not counted in either the numerator or the denominator. Thus, if a project is expected to cost $300 million after backing out soft costs that are not allocated to the hard assets and after backing out the cost the land, design work and other preliminary activities, work is not considered to have reached the threshold “of a significant nature” until the taxpayer has incurred more than $30 million. The starting point for analyzing whether a project was too advanced before 2008 to qualify for a bonus is to decide whether the developer is “acquiring” the project or “self constructing” it. “Acquired” property qualifies for a bonus only if there was no “binding” contract to acquire it before 2008. “Self-constructed” property qualifies as long as work “of a significant nature” did not start at the site before 2008. Most infrastructure projects are considered self constructed. The IRS regulations have an unusually broad definition of “self constructed.” Property is considered self constructed as long as the developer signed a contract with the manufacturer or contractor to have the property built for him before physical assembly of the property started. A contract is not “binding” if it limits the damages the owner must pay for canceling the contract to less than 5% of the total

104 | P a g e

contract price. It is not a problem if the contract is silent about damages. There cannot be any conditions standing in the way of performance of the contract or the contract is not binding— unless the conditions are outside the control of the parties. It is generally not possible to create a bonus where the project developer could not have claimed one—for example, because the project developer got started on the project too early to qualify—by selling the project to someone else during the window period and leasing it back. The IRS regulations have an “anti-churning rule.” However, the anti-churning rule is not well drafted Some developers may have taken delivery of turbines or other equipment that they no longer need and have parked in warehouses. If another developer were to buy one of these turbines today and use it, then he could claim a bonus on the cost of it. That’s because the turbine was never put into service by anyone. Property is not considered used equipment until it has been in service. On the other hand, if a developer bought a used turbine from another developer to incorporate into a new power plant, a bonus could not be claimed on the cost of it. A bonus cannot be claimed on used equipment. This raises the question whether companies need meticulously to catalog whether used parts are used in the construction of their facilities. The answer is no. A company should determine whether parts that are large enough to qualify as separate “components” of a project are used property. The IRS does not define “component” in its regulations. Smaller parts are considered subsumed in a larger property, and unless more than 20% of its value is tied to the cost of used parts, the larger property is considered entirely new. Thus, for example, if a developer bought an older wind farm and rebuilt it using the latest generation of wind turbines, the entire project should qualify for a bonus—including the cost of acquiring the existing project—as long as the existing equipment does not account for more than 20% of the value of the wind farm after reconstruction. Project Sales Many power projects are expected to be put up for sale in 2011. Many of the projects sold will still be under development or construction. Anyone who buys a project before it is completed will qualify for a bonus, not only on the amount spent to complete the project but also on the amount paid to buy the work in progress to the extent the purchase price is allocated to equipment as opposed to other assets like a power contract or interconnection agreement. It does not matter that the original developer would not have qualified for a bonus had he kept the project.

105 | P a g e

Another common situation in infrastructure projects is where someone buys into a project—for example, as a partner—during the construction period. The analysis in such situations is more complicated than where a project that is still under construction is purchased outright. Someone buying into an existing partnership can claim a share of the bonus to which the partnership is entitled. However, he ordinarily cannot claim a bonus on any premium to buy into the project. (In other words, a bonus ordinarily cannot be claimed on a “section 754 stepup.”) A developer who places a new project in service and sells the entire project later the same year to someone else cannot claim any bonus. The bonus is lost. (An exception is where the project is sold in a sale leaseback within three months after the project went into service.) Some projects are owned by partnerships. A partnership “terminates” for tax purposes if at least a 50% interest in partnership capital and profits is sold. (The old partnership is considered to disappear and a new one to spring into being with the new partners.) If a project is put into service in a year and, later the same year, an interest in the partnership is sold causing the partnership to terminate, then the bonus is shared among the new partners—not the old ones. Calculating the Bonus The depreciation bonus is an acceleration of tax depreciation to which the owner of a project would have been entitled anyway. The owner gets a much larger depreciation deduction the first year and, in the case of a 50% bonus rather than a 100% bonus, smaller ones later. A faster writeoff can be a significant benefit. The benefit is greater the longer the normal depreciation period for an asset. A 50% depreciation bonus reduces the cost of assets that are depreciated over 20 years—for example, some transmission lines and coal- and combinedcycle gas-fired power plants—by 8.98%. It reduces the cost of gas pipelines and simple-cycle gas-fired power plants that are depreciated over 15 years by 7.54%. The cost of a generator that burns landfill gas is reduced by 3.61% (3.07% if a Treasury cash grant or investment tax credit is received on the project). Wind farms and biomass projects cost 2.61% less (2.22% for projects that receive Treasury cash grants or investment credits). These calculations only take into account federal tax savings from the depreciation bonus—not also the state tax savings—and they use a 10% discount rate. The tax savings from a 100% bonus are twice these figures. At least half of US states have “decoupled” from the depreciation bonus—they do not allow it to be claimed against state income taxes—and another group of states allows only a partial or delayed bonus.

106 | P a g e

A bonus cannot be claimed on property that is financed with tax-exempt bonds or that is leased to a government or tax-exempt entity or that is used predominantly outside the United States or US possessions. Other Changes Congress made a number of other changes in late December that will affect other energy projects. The bill opened the door to place additional facilities for making “refined coal” in service and qualify for 10 years of tax credits on the output. “Refined coal” is coal that is less polluting than the raw coal used to produce it. Facilities put into service by December 2011 will now qualify for such tax credits. It extended income and excise tax credits for ethanol, biodiesel, renewable diesel and alternative fuels at the existing rates, and the tariff on ethanol imports at the US border at the existing level, through December 2011. Projects on Indian reservations will qualify for faster depreciation—for example, three-year instead of five-year depreciation for wind farms and solar projects—provided they are completed by December 2011. The bill authorized another $5.3 billion in additional “new markets tax credits” in each of 2010 and 2011 as an inducement to make loans or equity investments in projects in census tracts with lower-than-average family incomes or poverty rates of at least 20%. It gave utilities more time through December 2011 to shed transmission assets to independent transmission companies or regional transmission organizations and spread the tax on any gain over eight years.

107 | P a g e

B.

Under Construction in Time for a Treasury Cash Grant?

by John Marciano and John Modzelewski, in Washington (reprinted from the Chadbourne & Parke NewsWire (Sept. 2010)) New renewable energy projects in the United States qualify for a cash payment from the US Treasury for 30% of the project cost if they are under construction by the end of this year. The projects must also be completed by a deadline. The deadline is 2012 for wind farms, 2016 for solar and fuel cell projects, and 2013 for other projects. There are two ways to show that a project is under construction in time. One is show that “physical work of a significant nature” started on the project by the end of this year. The other is to show that the developer “incurred” more than 5% of the project cost by the end of the year. It is not enough merely to have made payments in 2010. Once construction starts under the physical work test, it must be continuous. A developer starting work under the 5% test does not have to show the work is continuous. More detailed articles about strategies for starting construction can be found in earlier issues of the NewsWire (“Strategies for Starting Construction,” April 2010, at p. 1, “Cash Grant Update,” July 2010, at p. 9). [See below, at pages 117 and 111 of this book.] The Treasury cash grants were intended as a temporary economic stimulus measure. They are not available for projects on which construction started before 2009. Congress is considering extending the deadline to start construction, but it is unlikely to make a decision before a “lame-duck” session after the November elections. The following flow charts are a simple step-by-step way for a project developer to determine in the meantime whether he or she has started construction in time.

108 | P a g e

Chart A: Cash Grant Initial Decisions
“5% Test” or “Physical Work” Test? “5% Test” “Physical Work” Test Go to Chart E.

Do you perform physical work on-site? No Yes Go to Chart C. Go to Chart B.

109 | P a g e

Chart B: Physical Work On-Site
Is the work only planning or designing, securing financing, exploring, researching, cleaning a site, test drilling to determine soil condition or excavation or changing the contour of the land (other than excavation for footings or foundations?)

Yes

No

This work does not meet the physical work test.

Is the work performed with respect to property eligible for the grant? Yes Is the work continuous (disregarding unusual weather or seasonal work stoppages) No No This work does not meet the physical work test.

Yes Work should meet the physical work test.

Work will meet the physical work test if contracts signed with contractors requiring work to be completed in a reasonable time.

110 | P a g e

Chart C: Physical Work Off-Site
A binding contract must not: limit damages to less than 5% of total contract price provide for a full refund to buyer in case of breach have cancellation conditions within the control of either party

Is the work performed under a “binding written contract? Yes

Is the contractor related to you? Yes Outcome unknown. Treasury to provide additional rules.

No

Is the work performed with respect to eligible property (including equipment access roads and foundations)? Yes Does the work involve actual fabrication or assembly? Yes

Is the equipment new? Yes

This work does not meet the physical work test.

Go to Chart D.

111 | P a g e

Chart D: Physical Work Off-Site (cont’d)

Does the contract require the contractor to undertake and complete the work within a reasonable time? Yes No

Has the manufacturer given you a certificate under penalty of perjury, describing the work performed and described how the manufacturer determined that the work was performed specifically for your project? Yes No

Has the manufacturer given you a certificate under penalty of perjury, describing the work performed and described how the manufacturer determined that the work was performed specifically for your project? No Yes

This work should meet the physical work test.

This work does not meet the physical work test.

This work should meet the physical work test, but only if the work is continuous (disregarding unusual weather or seasonal work stoppages).

112 | P a g e

Chart E: 5% Test
Has 5% of the costs for grant eligible property been incurred?

Count costs that the Applicant incurs after a binding contract is signed and before Jan. 1, 2012:

Count costs that the Contractor incurs after a binding contract is signed and before Jan. 1, 2012:

Go to Chart F to determine when a cost is incurred.

113 | P a g e

Chart F: “Incur”
Have you received title to or delivery of the equipment or received services by Dec. 31, 2011 (consistent with tax treatment)?

Have you paid or are you obligated to pay for the equipment or services?

Have you made a nonrefundable payment for the equipment or services by Dec. 31, 2011?

Do you expect delivery with 3.5 months of payment? No Yes Was the expenditure made directly by the applicant? No

Cost not incurred.

Yes

Cost is incurred.

Is the contract with the contractor binding as described in Chart C? Yes

Open Question: It is not clear that you can have a binding written contract with a related party.

Is the subcontractor related to the contractor?

Yes

Were the contractor’s expenditures for new equipment (i.e., not from existing inventory)?

No

Yes Cost is incurred, but only look to subcontractor’s cost (as opposed to marked-up price charged to contractor). Cost is incurred.

Cost not incurred.

114 | P a g e

C.

Cash Grant Update by Keith Martin and John Marciano, in Washington (reprinted from the Chadbourne & Parke NewsWire (July 2010))

The US Treasury Department posted a series of questions and answers to its website in late June to help project developers understand what they must do by year end to be considered to have started construction of wind, solar and other renewable energy projects. Projects must be under construction by December to qualify for cash grants from the US Treasury for 30% of the project cost. The grants are part of an economic stimulus program that the Obama administration put through Congress in February 2009. The grants only apply to projects that are completed in 2009 or 2010 or that start construction in 2009 or 2010. There are two ways to prove a project is under construction. Many developers had been focusing on showing they started “physical work of a significant nature” during 2010. However, the latest guidance may shift attention back to trying to prove that the developer incurred more than 5% of the project cost by year end, the other way of proving that construction started this year. Continuous Construction The reason is the Treasury said that construction must be continuous once a developer claims he started construction by commencing physical work. There is no requirement for continuous construction under the 5% test. Before the latest guidance, many developers had soured on the 5% test after a disappointing meeting between wind turbine manufacturers and the Treasury on April 6 that suggested the 5% test would be tough to meet. The Treasury said: [it] will closely scrutinize construction activity that does not involve a continuous program of construction or a contractual obligation to undertake and complete within a reasonable time, a continuous program of construction. Disruptions in the work schedule that are beyond the applicant’s control (for example, unusual weather or a site at which work can only be performed during certain seasons) will be taken into account in determining whether or not an applicant has undertaken a continuous program of construction.

115 | P a g e

Lenders who have been making equity bridge loans against future Treasury cash grants will have to evaluate the additional risk that a grant will not be paid on grounds that construction was not continuous. A senior Treasury source said the intention was not to audit construction progress, but avoid criticism from Congress that a developer “could put down a slab” and then do nothing for another year. Chadbourne had expressed the view to Treasury that it is important for a developer to be able to meet any such requirement for continuous construction based on its reasonable expectation in 2010. The Treasury addressed this by suggesting it will look for “a continuous program of construction or a contractual obligation to undertake and complete within a reasonable time” (emphasis added). Ellen Neubauer, the cash grant program manager, confirmed that was the intention. If physical work begins under a contract, she said, it will meet the continuous construction requirement if the contract requires that the work be completed within a reasonable time and any disruptions or delays are beyond the control of the developer. Other Developments In other developments, the Treasury released a checklist in mid-June for developers to use when applying for cash grants. The Treasury is required by statute to pay grants within 60 days of receiving an application. It had been paying grants in as little as two to three weeks early in the year. However, by spring, grants were taking longer than 60 days. The checklist is supposed to help applicants avoid followup questions that delay payment. The National Renewable Energy Laboratory (NREL), which reviews the grant applications for the Treasury, has been asking more questions recently about the tax bases claimed by grant applicants. The grants are 30% of the “tax basis” that the owner has in the equipment at a project. NREL is not simply accepting the tax bases claimed and has been asking questions in at least two situations. One is where owners of solar photovoltaic equipment claim a higher cost or value for solar panels than the panels can be purchased from competitors. The other is where the amounts claimed as basis in any renewable energy project seem high in relation to the bases being claimed by other grant applicants. In the latter situation, NREL has probed to see whether the reason for the higher basis is impermissible mark ups on intercompany payments. For example, US tax regulations bar mark ups on equipment or services supplied by one corporation to another corporation in the same consolidated tax group. At least one solar company filed suit against the government in federal court charging that the Treasury refused illegally to pay it $2.33 million in cash grants after the company applied for the grants in August 2009. The company, Pure Power Development, mounts solar

116 | P a g e

panels on flat-bed trucks. Neither the complaint by the company nor the government’s response filed in late May sheds light on why the company ran into problems. An effort to extend the cash grant program by giving developers until 2012 to start construction came up short in the US Senate in June after a bill extending unemployment benefits to the long-term unemployed and a variety of expired tax benefits fell victim to a Republican filibuster. Senator Maria Cantwell (D.-Washington) had planned to try to amend the bill during Senate debate. The renewable energy trade associations are eyeing an energy bill that the Senate may take up as early as July as another possible vehicle for an extension. Most lobbyists give an extension a little better than a 50-50 chance. The tax-writing committee in the House favors an extension, but would convert the program into a tax refund program in order to avoid having to ask the spending committees for more money. The government would pretend that developers overpaid their taxes by 30% of the project cost. Developers could then apply for the money back. This would work like the current cash grant program, except that the tax refunds would not be paid until the year after a project is completed. The outlook in the Senate is less clear. The Cantwell amendment would have left the existing program intact by merely changing dates. Some members of Congress like the stimulative effect of having a year-end deadline, even if the program is extended later. None of the extension proposals would extend the existing deadlines to complete projects — only to start construction. The current deadlines to complete are 2012 for wind farms, 2013 for geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects, and 2016 for solar and fuel cell projects. One of several possible complications for the extension effort is the staff of the Joint Committee on Taxation is reassessing what the program costs the government. It estimated in 2009 when the original program was enacted that the grants would cost the government only $5 million, on the theory that they merely substitute for tax credits that would have been claimed otherwise. The committee staff is debating whether the program has caused more construction of renewable energy projects in the United States than would have occurred without the program. Proof of Construction Developers planning to claim grants on projects that were merely under construction by year end will have to submit proof. The Treasury said in late June that it will want statements

117 | P a g e

from contractors and independent engineers “under penalties of perjury” to confirm that construction started. Developers should be sure to write into contracts with vendors that they will require such statements. The Treasury said any developer relying on the physical work test for a project that will receive a cash grant of at least $300,000 must submit a report from “an independent engineer, signed under penalties of perjury, describing the project’s eligibility; including a detailed construction schedule; estimated budget for the project and a description of the work that has commenced including any invoices for the work performed.” If the physical work is done by a contractor — for example, a wind turbine or solar module supplier — the grant application must also include a copy of the contract and a “statement from the contractor, signed under penalties of perjury, describing the work that has commenced and certifying that the work commenced pursuant to the binding written contract.” A developer relying on the 5% test for a project that will receive a grant of at least $300,000 must submit a statement from an independent accountant confirming the method of accounting used (e.g., accrual) and stating “the amount that has been incurred before the end of 2010; a detailed description of the costs incurred; and an estimate of” expected eligible tax basis. The statement must also attach invoices or other financial records to prove the dollar amounts claimed. In addition, if some of the spending was by a contractor, the grant application must include a statement from the contractor, signed under penalties of perjury, attesting to the costs incurred on the project in 2010. Physical Work The Treasury said it is enough to start work in 2010 on even one wind turbine for a project as long as the turbine was ordered under a binding contract and the continuous construction requirement is met. Work on roads on the site counts as the start of physical work. However, the roads must be roads used to move fuel — for example, at a biomass project — or spare parts needed during the operating phase. Roads do not count if they merely provide access during construction or will be used solely by employees to get to and from work. Dismantling an existing facility to start work on a new one does not count. Putting up a tortoise fence at a solar project does not count.

118 | P a g e

A developer can count the start of physical assembly of turbines or solar modules at a factory even though the project site has not been identified yet. The site does not have to be identified even by October 1, 2011, which is the deadline for all remaining grant applications to be submitted for projects that are still under construction. The site, once designated, can change without losing the right to a grant. 5% Test The Treasury confirmed that costs do not count as “incurred” in 2010 until there is delivery of equipment or services or at least passage of title from the contractor to the developer. It is generally not enough merely to have paid for equipment. The Treasury said equipment — for example, a wind turbine — may be considered to have been delivered even though it remains in storage at the manufacturer’s factory. One of the answers posted to the Treasury website in June said, “Property is provided to the applicant either when title to the property passes to the applicant or when it is delivered to or accepted by the applicant, depending on the applicant’s method of accounting.” A senior Treasury source said the phrase “depending on the applicant’s method of accounting” means the developer must be consistent. If it has been treating costs as incurred for tax purposes on its past tax returns when title passes, then it must look to title. If it has focused in the past on delivery, then it must continue to do so. The source said a developer cannot choose passage of title or delivery, whichever occurs first. The Treasury confirmed that it is applying a 3 1/2 month rule. Costs are not incurred until title passage or delivery, with one exception. They are incurred when payment is made if delivery or title passage is expected within 3 1/2 months of payment. Some wind companies had asked that the 3 1/2 months be measured from December 31, 2010, so that payments any time during 2010 would count if delivery occurs by April 15, 2011. The Treasury said no. A turbine vendor or other equipment supplier cannot count the cost of components that it pulls out of inventory. The grant is supposed to stimulate new manufacturing. The developer can rely on a statement by the equipment supplier about the costs it incurred. The supplier must sign the statement under penalties of perjury. Other Issues Addressed Large wind companies sign frame agreements under which they order turbines for multiple projects. Later, when turbines are designated for use in a particular project, a “daughter”

119 | P a g e

contract is signed between the turbine supplier and the project company basically copying out terms from the frame agreement. The Treasury said that any grandfather rights established in a project under the frame agreement will carry over to the project company. A developer can apply for a grant after the developer believes it started construction without waiting for the project to be placed in service. The Treasury said it will respond whether it agrees that construction started, although the assurance may not stand up if new facts come to light that were not disclosed by the developer.

120 | P a g e

D.

Strategies for Starting Construction

by Keith Martin and John Marciano in Washington, and Eli Katz in New York (reprinted from the Chadbourne & Parke NewsWire (April 2010)) The race is on to get renewable energy projects in the United States under construction by year end to qualify for cash grants from the US Treasury. Developers are pursuing different strategies. It is not enough merely to have made a large down payment toward turbines, modules or other equipment for the project by year end. A senior Treasury source said the government is looking for economic activity during 2010. A developer must show work at the site or at the factory on equipment for the project during 2010. The grants are 30% of the project cost and are paid on new wind, solar, geothermal, biomass, landfill gas, waste-to-energy, ocean energy and fuel cell projects that are completed in 2009 or 2010 or that start construction in 2009 or 2010. Grants of up to 10% of project cost are also paid on small cogeneration facilities of up to 50 megawatts in size. Projects that merely start construction in 2010 must be completed by a deadline. The deadline is 2012 for wind farms, 2016 for solar, small cogeneration and fuel cell projects and 2013 for other types of projects. Congress may ultimately give companies more time. A bill in the House would give developers another two years through December 2012 to start construction without changing the deadlines to complete projects. However, the odds of such an extension at this point are probably a little better than 50%. Most developers are taking steps to start construction in case there is no extension. Two Ways The Treasury Department explained what it means to start construction in written guidance on March 15. The guidance left many unanswered questions. The Treasury answered some of the questions since then in private meetings and in public statements at industry conferences. There are two ways to show construction started. One is to show there was “physical work of a significant nature” on the project during 2010.

121 | P a g e

The Treasury said that “the beginning of excavation of the foundation, the setting of anchor bolts into the ground or the pouring of concrete pads of the foundation” at the site count as such work. It also counts if physical assembly of major components starts off site at a factory. However, the developer must have a “binding” contract in place before such work starts in order to count work done by an equipment supplier or other contractor. To be “binding,” the contract must be more than an option to choose equipment later. The Treasury said “the amount and design specification of the property to be purchased” must be clear from the contract. The contract should not limit damages if the developer walks away to less than 5% of the contract price. Any conditions to performance by a party must be outside the control of the parties. Thus, for example, if the developer must give a notice to proceed before the contractor will start work, the notice should be given before year end. It is not clear whether a contract between related parties can be “binding.” It is best to assume not. There is a risk that amending the contract after work starts could lead to loss of grandfather rights. The guidance suggests that it does, but the Treasury may still be thinking about this issue. The guidance said that any amendment must be “insubstantial.” Minor modifications in design are not a problem; an example is the later addition of a “cold weather package for wind turbines.” The IRS used a similar standard in 1986 after the investment tax credit was repealed. Projects that were under binding contract before the repeal to be built still qualified for an investment credit provided there was no “substantial modification” of the contract later. An amendment that increased the contract cost by more than 10% was considered substantial. Ellen Neubauer, the cash grant program manager, said at a wind industry finance conference in New York in early April that it is the start of physical work of a significant nature to construct roads on the project site. The roads must be used to transport equipment rather than solely to provide access for people working at the site. She said it is also the start of physical work for the developer to lay three concrete pads for a wind farm that will consist of 65 turbines or for the turbine vendor to commence physical assembly of at least one turbine for the project at the factory under a binding turbine supply agreement signed before physical assembly starts. It is not clear whether it matters if work starts in 2010 but then nothing is done for another year at the site or at the factory on the turbine order. Some senior Treasury staff are not bothered by such a delay; they stress that the Treasury guidance said all that is required in 2010 is the “beginning” of construction or else they view the deadline to complete the project as a check on how long a delay is possible. However, there may be a risk if the facts show with

122 | P a g e

hindsight that construction did not truly get underway. Developers who plan to rely on physical work to start construction plan to work steadily once construction starts, although possibly at a slower pace than normal. For example, a wind farm that might normally take six months to construct might take 12 to 18 months under an elongated construction schedule. There is an assumption in each of these cases that the developer will choose to treat all the turbines or solar arrays as a single “property” so that the work done in 2010 counts as the start of work on the entire project. The Treasury treats each turbine or solar array that can operate independently as a separate property. Therefore, work must start independently on each. However, a developer can choose to treat multiple turbines or solar arrays that are owned by the same company and are on the same site as a single project. 5% Test The other way to show that construction started is to “incur” more than 5% of the total project cost by December 2010. A developer does not have to satisfy both the physical work test and the 5% test; either is enough. Costs are considered “incurred” when the developer pays them, but only if he expects the equipment or services for which payment was made to be delivered within 3 1/2 months after payment. Otherwise, he must wait until delivery to count the costs. Thus, for example, a payment made on December 31, 2010 counts in 2010 as long as the equipment is reasonably expected to be delivered by April 15, 2011. Otherwise, the payment is treated as spending in 2011 after delivery in 2011. Delivery may include transfer of title to equipment that has been manufactured, but that the manufacturer is holding in storage at the site. The developer can look through any “binding” contracts with equipment suppliers or other contractors that are signed before manufacture of the equipment or other work starts and count spending by the contractor using the same principles. Thus, for example, the developer can count spending by a turbine vendor on components or services, but the spending counts at time of payment only if it is reasonable to expect delivery of the components or services to the turbine vendor within 3 1/2 months of payment. Otherwise, costs are incurred only as equipment or services are delivered to the vendor. This will require getting equipment suppliers to certify how much they spent toward manufacture by year end this year.

123 | P a g e

To show how this works, suppose a developer signs a binding turbine supply agreement in mid-2010 for turbines to be delivered in late 2011 and makes a 20% down payment. The turbine vendor then spend 15% on components for the turbines. The developer cannot count the 20% down payment in 2010, but can count the 15% spent by the turbine manufacturer provided the manufacturer expects delivery of the components within 3 1/2 months of payment. The manufacturer would also have to link the components to the turbines ordered under the contract. Two large wind turbine manufacturers told the Treasury at a meeting in early April that it is impossible to certify that components ordered this year are for particular turbines that will be manufactured next year or the year after. One said that components are ordered well in advance of use based on expected orders. Ninety-five percent of the components in a turbine are interchangeable across turbine types. The manufacturer said components are not assigned to a particular turbine until roughly a week before manufacture starts. Actual manufacture of the turbine takes five days. This has caused wind developers to take a harder look at starting physical work at the site or else requiring manufacturers to manufacture at least one turbine for each project in 2010 in order to commence construction under the physical work test. The developer must incur more than 5% of the actual project cost, not the expected cost in 2010. A developer would be wise to incur more to leave a margin for error. However, it may be possible if project costs spiral to fix the problem by choosing not to include one or more turbines or solar arrays as part of the project on which a cash grant is taken. For example, the developer has the option in a 65-turbine wind farm of treating 63 turbines as one project and two turbines as a separate project. Other Issues The Treasury is still thinking about several issues. They may be addressed in questions and answered posted to the Treasury website. Any such answers are unlikely to be posted before June. The Treasury has not sorted out how to deal with frame or master agreements that larger wind companies use to buy turbines for multiple projects. The agreement is usually signed by a parent company. Closer to the time turbines are manufactured, “daughter” contracts are signed with project companies essentially designating turbines for use in particular projects and copying over the terms from the master agreement into each standalone contract. Among the issues are whether spending by the parent company carries over to the subsidiary and by when turbines must be designated for use in particular projects.

124 | P a g e

The Treasury is looking for a way that it can confirm to developers that they started construction. A developer can apply for a grant after starting construction, but before the project is completed. The Treasury said last year that it planned to respond in such cases whether it agrees the project is under construction. However, it has not sent any such confirmations to date despite receiving more than 100 applications. In all the cases to date, the agency concluded that the projects would be completed by December 2010 so it was a moot issue when construction started. Whether it is able to send such confirmations in the future is a resource issue. It is looking into what is possible. Developers should ask equipment suppliers to certify to spending or the start of physical assembly as soon after the threshold for starting construction is reached in 2010, and then the developer should apply to Treasury for a grant. This may leave time to fix any problems before year end if the Treasury responds promptly. Even if the response is not received until early 2011, at least the issue whether construction started in time can be taken off the table. Geothermal companies that started drilling before 2009 for power plants that will not be completed until after 2010 received some relief in March. The Treasury said that it is not the start of physical work on a project to do “test drilling of a geothermal project.” It also said that a developer “may treat physical work of a significant nature as not having begun until more than 5 percent of the total cost of the property has been paid or incurred.” Senior Treasury staff told Chadbourne at the same time that it is the start of physical work on a geothermal power plant to drill a fully-functioning production well whose output will be dedicated to the power plant. An example of such a well is one drilled to production depth and diameter and for which permanent casing, a tree or other above-ground equipment and flow controls have been installed and tested.

125 | P a g e

Sign up to vote on this title
UsefulNot useful