Challenge
Global investment and advisory firm Babcock & Brown sought to build a new wind farm in eastern New Mexico. The Australian company had previously developed a wind farm on a mesa near Pastura, N.M. The 90 megawatt Aragonne Mesa Wind Project went online in 2007, and its success prompted Babcock & Brown to evaluate a second phase. a proposed 130 megawatt turbine development, on adjacent property.
The New Mexico Constitution prohibits state and local governments from directly contributing money to private project developers. The State of New Mexico, however, strongly supports the development of renewable energy sources—particularly wind and solar—with a series of generous tax incentives. To make phases one and two of the Aragonne Mesa Project competitive with other types of electric generation, Babcock & Brown needed a tax advantaged way to purchase equipment and a reprieve from property taxes. In addition, Babcock & Brown required legal assistance with issues related to tax, contracts, development, construction and general corporate matters.
Solution
Members of the Brownstein Hyatt Farber Schreck Tax and Public Finance groups counseled Babcock & Brown on the New Mexico state tax consequences of their project. Based in the firm’s Albuquerque office, Senior Counsel Tim Van Valen possesses perhaps the most significant experience in New Mexico related to renewable energy tax issues. Van Valen has been involved in every major renewable energy project constructed in the state to date. He and Public Finance group Shareholder Eduardo Duffy immediately began advising Babcock & Brown on its options for maximizing state tax incentives, including use of industrial revenue bonds and New Mexico's Renewable Energy Production Tax Credit.
Industrial revenue bonds provide New Mexico gross receipts and property tax benefits to project developers. The developer builds a facility as an agent for the county or municipality issuing an industrial revenue bond. During the term of bonded indebtedness, typically 20-30 years, the developer leases the facility from the governmental entity but operates it free from control by the bond issuing body. Because a county or municipality issuing an industrial revenue bond holds the legal title to the facility during the bond term, the developer can take advantage of tax benefits typically afforded to a governmental entity. This allows the developer to purchase equipment for the facility free from New Mexico gross receipts and compensating taxes, similar in some ways to sales and use taxes in other states. In addition, because the governmental body technically owns the facility, there are no property taxes for as long as the bonds are in effect, typically between 20 and 30 years. However, in many cases, municipalities and counties require developers to make a payment to the county or municipality partially in lieu of the property taxes. These "payments in lieu of taxes" are significantly less than the property taxes that would have been payable by the developer absent the issuance of the industrial revenue bond, but still provide some revenue for the municipality or county and school districts potentially affected. At the end of the bond term, the developer can buy the facility from the governmental entity for a nominal sum.
Brownstein is one of only two firms in New Mexico with a substantial industrial revenue bond practice. Duffy advised Babcock & Brown in Guadalupe County's issuance of industrial revenue bonds in phase one and is advising the company in connection with the proposed industrial revenue bond issuance for phase two. The bonds allow Babcock & Brown to purchase expensive wind turbine equipment free of gross receipts and compensating tax, and with no property tax for more than 20 years. Van Valen helped Babcock & Brown draft its various contracts with vendors and construction contractors to minimize the gross receipts and compensating tax burden.
The Aragonne Mesa facility also qualifies for the New Mexico Renewable Energy Production Tax Credit. The credit against personal and corporate income tax is similar to the federal renewable energy production tax credit, which is based upon the amount of electricity generated by a renewable energy facility. The New Mexico credit, however, is more flexible than the federal credit due to state legislative amendments, which Van Valen successfully lobbied for on behalf of Babcock & Brown during the previous development of another facility.
Babcock & Brown set up the Aragonne Mesa Wind Project as a limited liability company (LLC). After the construction of the wind farm, the LLC operates the plant. Brownstein attorneys have assisted with Aragonne Mesa’s construction law, tax and contract issues, and provided general corporate counsel related to the project.
Upon completion of phase two of the Aragonne Mesa Wind Project, the clean-functioning wind turbines would generate up to an additional 130 megawatts of power that can be transmitted throughout the Southwestern United States. The project signals a new age in renewable energy for New Mexico and the entire United States. As other market sectors sputter in an uncertain Wall Street environment, renewable energy has the potential to bring a new age of prosperity to America. Brownstein is on the forefront of ushering in this new age. The firm supports important projects in solar, wind and clean natural gas production with a multidisciplinary suite of corporate, tax, real estate, construction, government relations and natural resources law services. |