Title: Navigating Complexities in Tax Equity Transactions
Speakers: Carl Bivens, Kyle Kohler, and Nick Guttman
Carl Bivens (00:08):
Kyle and Nick, it’s great to see you guys. Thanks for sitting down with me to talk about our most recent transactions we’ve worked on and some war stories and issues that have come up.
So, Kyle, why don’t you go first and tell me something that’s happened on one of the transactions you’ve worked on recently.
Kyle Kohler (00:25):
Yeah, so we were actually representing a tax equity investor in a portfolio of solar projects throughout the country. As part of our typical due diligence work, we of course ran title and reviewed the survey. As part of that, we always request that the survey include an overlay of the solar improvements — the solar panels and other facilities for the project.
In reviewing the ALTA survey with the overlay for one of the projects, we realized that there were actually solar panels located not only on the lease property where the developer had rights to install and build them, but also across a property border on an adjacent property owner for which they had no rights to construct the project.
Carl Bivens (01:07):
Somebody that wasn’t part of the project at all?
Kyle Kohler (01:09):
Correct. Yeah, it was just an unrelated third party that happened to own land right next to the project.
Carl Bivens (01:13):
I can’t wait to hear how that was resolved. What about you, Nick? Do you have any war stories you can tell us about?
Nick Guttman (01:19):
Yeah, so we were recently representing a client who was acquiring three energy projects — two in Texas and one in California. When the title search came back and we were reviewing the title commitment, we located a deed to the project company that was not found anywhere in the deal diligence materials, but was actually just an exception document in the title commitment.
When we discovered this, we asked the seller if they knew why they owned the land and if they still owned the land. They had no idea that they owned the land. We confirmed that they did in fact own the land, and that if our client acquired the project company, they would be acquiring that land too without knowing it.
Carl Bivens (02:04):
Because it was an M&A transaction.
Nick Guttman (02:06):
Because it was an M&A transaction. The client was acquiring the project company.
Carl Bivens (02:10):
Acquiring everything that the company owned.
Nick Guttman (02:11):
Right.
Carl Bivens (02:13):
Wow. We’ll have to dive back into that and see how that was resolved.
Kyle Kohler (02:17):
How about you, Carl? Any recent matter or transaction you worked on where an issue popped up?
Carl Bivens (02:22):
Well, just recently we worked on a matter where a client was acquiring a piece of property next to a potential data center development. They were going to put battery storage on the property for that data center development. The data center developer actually terminated an access easement right before closing, so we were scrambling to figure out what to do with respect to that. I’ll have to tell you more about that as we go on, but let’s go back to you, Kyle, and your issue with the solar panels built on somebody else’s property. What did you do to fix that?
Kyle Kohler (03:06):
Well, I want to go back to how we discovered the issue as well. This was part of a tax equity transaction, and there had actually already been debt financing. The lender and their counsel had already done title, survey, and other due diligence. Because that lender and their counsel did not request an overlay of the proposed improvements on the survey, they didn’t see that issue.
That’s definitely something to keep in mind when representing clients in both debt financing and tax equity — making sure you get that ALTA overlay, because it shows where the improvements are going to be located and potential title and survey issues with existing easements and other matters of record.
In this situation, we were actually able to work with the developer — who was the borrower — the landowner who owned the land where the lease premises for the project was located, the adjacent landowner where the panels had been built, and the local jurisdiction, to coordinate having a boundary line adjustment recorded that actually moved the boundary line so that all the improvements were located on the lease premises where the project was located.
Carl Bivens (04:13):
I would imagine that adjacent property owner had a bit of leverage there.
Kyle Kohler (04:17):
They did, yeah. But luckily it was a much easier process than you may think, and the local jurisdiction was on board — I think because they supported the project. At the end of the day, we were able to get to an acceptable solution for everyone involved.
Carl Bivens (04:33):
Well, a boundary line adjustment is a lot easier than having to do a subdivision, correct?
Kyle Kohler (04:37):
Yeah, correct.
Carl Bivens (04:39):
The reason you have the overlay of the site plan on the survey — one is to catch this kind of issue, but two is to get your title endorsements right?
Karl Kohler (04:50):
Correct. Yeah, so in order to get the energy endorsements that we typically look for, the surveyor needs to actually plot where the proposed improvements are, and then once the project is actually built, to the as-built location for the improvements.
Carl Bivens (05:04):
And the endorsement is one where the title company says they will ensure your ability to build the project on the land.
Karl Kohler (05:13):
As it’s shown on the survey with the overlay.
Carl Bivens (05:15):
Right, exactly. And without that, this issue wouldn’t have been found — no telling what would have happened.
Kyle Kohler (05:21):
Who knows what would have happened. But at that point, our client, the tax equity investor, would have had money and skin in the game. So it was good to find this issue before the underlying agreements had been entered into.
Carl Bivens (05:31):
Well, good job working it out.
So what about you, Nick? How did you resolve your issue?
Nick Guttman (05:38):
So we had to research the land and review the title. We had to update the title commitment to include that land, confirm that the project company actually did own the land, and make sure that the land didn’t cause any future liabilities to the project company that our client would undertake when it acquired it in the M&A transaction.
We actually determined that the land should have been conveyed to a third party back when the project was constructed, and the deed was just never given to the third party. For all intents and purposes, the project company still owned this land that they weren’t supposed to own.
Prior to closing on the transaction, we ensured that as a condition to closing, the recording of that deed and the giving of that deed to the third party was done.
Carl Bivens (06:33):
So your client, when they acquired the membership interest, you made sure that the property was conveyed out so you didn’t have to run due diligence on that property and make sure there was no environmental contamination or any other issue associated with owning it?
Nick Guttman (06:50):
That’s exactly right. We did review just to make sure there weren’t any tail obligations that could potentially arise from owning the land at any point in time. The client, out of an abundance of caution, did run a Phase I just in case to make sure they weren’t picking up any circle of liability. But we did make sure that land was conveyed out and didn’t present any future liability to the project company.
Carl Bivens (07:15):
And we’re not environmental counsel — we’re real estate counsel — but we do do some environmental work. With respect to circle of liability, can you explain that a little bit? Are you saying that anybody who has owned property can always have liability with respect to environmental contamination?
Nick Guttman (07:33):
Not necessarily always, but the safe harbor is to perform a Phase I assessment on a property before you take ownership of it, to ensure that you avail yourself of the protections under CERCLA. And while we’re not environmental counsel, real estate and environmental are often intertwined in their scope. So we work very closely with environmental counsel on a lot of our transactions to make sure our clients are protected from any future environmental liability.
Kyle Kohler(08:05):
Fair enough. How about you, Carl? I’m interested to learn how you figured out this access issue.
Carl Bivens (08:10):
Well, our client actually received a notice letter from the data center developer saying that they had terminated the access easement, and sent a copy of the document they recorded to purport to vacate the access easement.
We then had to research and look into whether or not that vacation of the access easement was valid — first of all, because they said they were terminating it based on the doctrine of merger, because they owned, say for instance, Parcel A and Parcel B, but we were Parcel C. So they really couldn’t terminate it as to Parcel C.
But as we dove into it a little more, the grant of the easement to Parcel C was really granted from Parcel B, and we needed it to flow over Parcel A as well. We explained to the client that the original grant of the easement may not have been valid, and there arguably was an earlier grant of the easement, and the closing was imminent.
The client decided to close without that access easement, but was able to obtain an option to access a different public right-of-way to protect its access to the property, and then fight the battle with the data center developer at another time. They decided not to get an access endorsement in their title policy when they closed, and we may obtain an updated title policy that includes the access endorsement. They have a good relationship with the data center developer and are hoping to enter into an agreement with them for the storage of energy for the data center project. So they decided to go ahead and move forward with that known risk.
Nick Guttman (10:16):
It seems like with these projects, a lot of the diligence can raise issues, but if we’re able to identify them, we can use pragmatism to work around them — as long as we know about them.
Carl Bivens (10:28):
That’s right. And my project was really a real estate-driven project, since the battery storage company was acquiring that property. But it sounds like your projects were more part of a larger transaction — part of tax equity financing — and yours was an M&A transaction. Is that right?
Nick Guttman (10:49):
That’s right.
Kyle Kohler (10:50):
Yeah, for sure. And so this was just one of many issues in the overall transaction, since it was a portfolio of numerous solar projects. I think there’s a necessity for working closely with experts in other sectors — like environmental, corporate, and various other areas — to make sure that, as a whole, your client is comfortable with what they’re acquiring, not only from a real estate perspective, but from every other perspective as well.
Carl Bivens (11:17):
Yeah, and I’ve found that the attorneys at Troutman on the corporate side do a really good job of bringing us on and keeping us involved from the very beginning — with respect to negotiating the reps and warranties, the conditions to closing, and those types of transactions — and getting us involved early so that they have our expertise and we can point out any red flag issues to the client before it gets too far down the road.
Yeah, which is really important, because — and I think you’ve said this to me before, Nick — without the dirt, you really don’t have an energy project, and it’s really important.
Kyle Kohler (12:02):
And a lot of times, at least in my experience, when you’re dealing with investors, they may not have a real estate expert in-house and instead look to us to provide that guidance and expertise. I think they do rely on us, and that makes it all the more important to make sure we’re doing the title, survey, and other due diligence necessary to ensure that they’re buying a viable project.
Carl Bivens (12:25):
Great. Well, this has been great. I’ve really enjoyed talking to you guys about your war stories and things that have happened in your practice. Hearing your war stories really educates me about things to do and lessons learned, and I really appreciate it.
Kyle Kohler (12:48):
Yeah, thanks.
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