Transacting tax credits requires lots of paperwork, regardless of how much money is at play.
In fact, it’s a common refrain in the sector to say that it will take a similar amount of work to do a million-dollar transaction and a $50-million one. While that’s a slight exaggeration — larger transactions definitely have more complexity and more risk that need to be factored in — Jason Prince, founder and CEO of Giraffe Financial, a tax credit marketplace specializing in small and mid-market tax credits, said the due diligence and compliance checklist is exhaustive no matter what.
This has led to a consolidation of the market towards larger tax credits, which appeal to corporations with big tax liabilities, and for which it makes sense to pay hundreds of thousands of dollars in legal reimbursements. There’s a whole sector of lawyers and consultants set up to push these deals through.
Meanwhile, there’s been less liquidity for credits under $10 million, as Liz Pearce, chief revenue officer at marketplace Ever.green told Latitude Media, noting that they represent “an amount of tax relief that is not going to get larger corporations excited.”
But those credits are important for financing smaller distributed energy projects, such as community-scale storage or solar. These are the projects that most often struggle to find financing, despite being faster to build and increasingly higher in demand.
And, while most deep-pocketed companies might not be interested in them, there are some who are. Tao Mantaras, co-founder and COO of Concentro, another marketplace specializing in the small- to-mid-market explains that these buyers tend to be corporations “dipping their toe in for the first time.” Other small credit buyers are international companies with a limited U.S. tax liability; seasoned buyers that are just looking to “top off” their larger tax liability with a couple of smaller transactions; family offices; and high net worth individuals.
This group might not be as large or ready to invest as the one transacting in large tax credits, but marketplaces and other service providers such as Giraffe and Concentro are working to make their transactions as efficient and seamless as possible, betting on the fact that market interest will increase as people become more familiar with how they work.
Handholding and standardization
The due diligence process for tax credits is daunting partly because of control.
The buyer has little oversight of whether the seller is doing everything that’s required to keep the credit valid, and yet they’re the one exposed if something goes wrong, Prince explained. The risk is particularly sharp when it comes to investment tax credits, which, unlike production tax credits, can be recaptured by the IRS if the project has issues.
It’s a mechanism that’s bound to make buyers nervous. “The counterparties oftentimes are very new and transacting for the first time, so there’s a lot of hand-holding that needs to occur, which makes [everything] much more manual,” Mantaras said.
According to both Mantaras and Prince, the time-consuming educational aspect of the job needs to be compensated for by a streamlining of the due diligence process where possible.
The Inflation Reduction Act introduced the ability to transfer tax credits, effectively creating the market as it exists today. (The GOP’s One Big Beautiful Bill preserved transferability but has resulted in a split in the market: growth on the one hand due to renewed certainty that both the credits themselves and the ability to transfer them would endure, and turbulence on the other that has caused especially smaller firms to either pivot or go under.)
However, these tax credits haven’t yet become fully commoditized, at least in the short term. Standardization would move things along more quickly. “If the market continues to operate in a way where every single credit is a unique, special snowflake, it’s going to be really hard to scale this smaller side of the market,” Prince said.
At Giraffe, for example, the diligence process is standardized. “We force every credit through the same underwriting policy, and create the same standard diligence report,” Prince said. The goal is to create a template that the industry can conform to, similar to what the Y Combinator’s SAFE note, which can help startups raise capital on a standard set of terms, did for venture capital.
Concentro, on the other hand, uses an AI underwriting tool to categorize and cross-check documents, which does “80% of the actual heavy lifting” of the due diligence process, Mantaras said.
Insurance as a ‘blanket’
Another issue with smaller tax credits is insurance, which Prince describes as a “warm blanket” that comforts nervous buyers, but which is expensive and can impact the cost-effectiveness of the transaction.
“If you’re doing a million-dollar credit and insurance can be up to 7% to 8% of the credit’s value, it’s a very significant cost,” Prince said. “It’s also hard to get insurance to pay attention.”
At Giraffe, Prince has been trying to circumvent the problem first by establishing relationships with the insurers, and getting them comfortable with the company’s underwriting process in order to reduce fees, and then by structuring “umbrella policies” covering multiple credits at once.
“Instead of getting a tax credit insurance policy for a $1-million credit, we’ll get an umbrella policy for $10 million, and we’ll put 10 different $1-million credits on the same policy,” he said.
Similarly, Concentro has been aggregating many small projects, sometimes across different sponsors, under a single policy to spread the cost. Mantaras believes Concentro was among the first marketplaces to bundle projects for insurance this way, even if he notes that the increase in insurance prices has made it harder to pull off.
But Prince also stresses that insurance might not always be necessary. If, for smaller deals, the seller doesn’t want to mitigate the risk by absorbing the insurance premium, Giraffe can still mitigate it through guarantees, such as a parent-company guarantee or a personal guarantee, which, backed by a strong enough balance sheet, is enough to meet the company’s underwriting metrics.
“A lot of buyers are probably more comfortable with a strong guarantee versus having to go through a process with insurance,” he said.
