Minneapolis tax attorney and former bank president Bob Olson has an idea he believes could transform renewable energy financing by using a mix of tax breaks that result in nonprofits or even government agencies eventually owning projects.
The first project that could happen involves a proposed Red Lake Nation solar installation that would be financed by a Fortune 500 bank based in Minneapolis, as well as at least one other investor.
The bank, or collection of investors, would then “make a charitable contribution” of the solar project to the tribe after five years and walk away debt free and with a total outlay, after tax breaks, of near nothing – and with a 15 to 20 percent return on their money.
The chief goal is more renewable energy. “I hope this expands solar and wind energy across the United States,” he said. “It allows tax exempt non-profit entities to create solar and wind projects of unlimited size, with investors and contributors making very good returns on their investments.”
The attorney dubs his approach “The Olson Plan” and said he has attracted interest from the Red Lake Nation, the University of Minnesota, a regional development agency, several Fortune 500 companies and one national bank.
Many deals will begin to reach fruition in the spring of next year, he believes. The sales’ cycle is long, said Olson, because the idea of projects ending in charitable donations is a relatively new concept and requires a new way of thinking.
The founder of Olson Energy Corporation has signed confidential non-disclosure agreements with five solar developers and several Fortune 500s. The tax law involving every aspect of the deals has been vetted over a number of years.
The devil is in the details. “These deals are complex and take months for all the parties to understand,” he said. “It’s complicated but it works.”
The approach is not without precedent, Olson said. Business magnate James Cargill built $38 million worth of student housing at the University of Minnesota and then donated it in 2008 through the school’s foundation.
Ralph Jacobson, founder of Innovative Power Systems, is working with Olson on the Red Lake Nation project. He believes once the first deal is done more will follow as investors warm up to what is a novel approach involving a contribution.
“It’s a little outside the box,” he said.
Olson has offered a proposal to Region Five Development Commission in north central Minnesota, which wants to build a solar installation to benefit eight area schools. Executive director Cheryal Lee Hills sees great promise in the Olson Plan, although financing for the project has not been decided.
“When you’re trying to achieve public good this is a really interesting approach to maximizing the benefits in that space,” she said. “If this would be used only for private sector gain there would be less of an appetite on behalf of organizations like mine, which is looking for ways to stabilize energy costs for organizations which are struggling, like our school districts. It’s a public good.”
Norm Jones, a well-known tax attorney with Winthrop & Weinstine, has analyzed the Olson Plan and sees no reason why it cannot work. The one caveat is that the tax bill after the donation is deferred to the nonprofit recipients, though if they never sell the solar installations they will never pay taxes on it.
The challenge will be to secure secondary investors who are “okay doing this charitable contribution and okay with taking just tax losses and no credits,” he said. “It’s not a perfect market out there – not every good idea that has value is instantly successful because not every financial product has a ready and willing audience – even if it’s a good financial product.”
Olson will have to create a charitable contribution market that does not exist, but once he lands one or two clients he should be able to put together a portfolio of projects, Jones said.
“I think he’s a great advocate for it,” said Jones. “I think (solar) developers who have heard about it see it as a value add. Developers seem to be liking it, and willing to incorporate it…No one else knows how to explain the program well enough to do that job for Bob. It’s up to him to be the advocate and I think he will be successful.”
The art of the deal
So how does a typical deal work and how does Olson ingeniously use the tax code to give investors a free ride?
Keep in mind the financing is no different than for any other solar project except for the charitable contribution portion.
Now let’s consider a $10 million solar project for, say, the eventual benefit of a university. A corporation first will be formed to finance the solar facility. A power purchase agreement would be created to sell power to the university.
Then the Olson Plan would enlist two investors, one to take the 30 percent tax credit and a portion of the depreciation; the other to take the rest of the depreciation and the charitable contribution deduction.
They are two different kinds of investors and one rarely ventures into the other’s territory. And the second investor needs to be a major company or a financier, one with a large enough tax bill to be looking for millions of dollars of deductions.
The primary investor receives a 30 percent “investment tax credit” worth $3 million, said Olson. After two years the secondary investor could take more than 70 percent of the depreciation available.
The depreciation eventually brings in another $4 million in tax savings. “In the first three years of this project you can have $7 million in tax savings,” Olson said.
In the sixth year of operation the investor, through the corporation, would “sell” the project to the university. The stock from the corporation would transfer to the university after it paid a share of the project’s fair market value.
If the solar installation was still worth $10 million, the tax code allows a nonprofit to take ownership for a little as five percent, or $500,000. The university would then own the solar facility and the power it generates.
This last act of kindness results in an additional slice of pie for the investors – a $4 million tax benefit for the donation. That means the tax benefits are, in effect, greater than the cost of the original project.
And during those first five years of service the solar panels offer the investor cash flow and a solid return, he said.
Under the tax code there are a variety of entities that can accept such a donation. Universities, tribes, governments and even municipally owned power agencies could conceivably become owners of solar and wind projects, Olson said.
The question of donating something to the government is unusual. “Generally speaking people don’t give charitable contributions to the government,” he said with a laugh. “I’ve spent my professional life making sure that clients don’t accidentally give the government more money than they need to. But the Olson Plan allows for this kind of donation.”
As to the criticism that the plan is simply a tax dodge, Olson reluctantly agrees but points out fossil fuel interests have used the tax code to allow for many more tax credits and subsidies than the renewable energy sector.
A recent report by Oil Change International and Overseas Development Institute pointed out that despite a clarion call by President Obama to end fossil fuel subsidies, they still total $20 billion in the U.S. annually.
Red Lake Nation has realized the problem of mercury polluting their tribal water bodies is a direct result of electricity purchased from coal-based power sources, said Jacobson. The recognition led tribal leaders to consider renewable energy to power its three casinos and other infrastructure, he noted.
It’s a significant endeavor, with 10 to 15 megawatts (MW) planned on land owned by the tribe and on the casino and tribally owned building rooftops. The effort includes at least 2 MW of electric storage.
A major bank is close to underwriting part of the project involving the depreciation and donation part of the deal, Jacobson said, and the search is on for a tax credit partner.
He thinks that if major financiers with an interest in green energy – Warren Buffett, Bill Gates and T. Boone Pickens come to mind – were to get involved, the number of deals would skyrocket.
Region Five was selected for an Xcel Energy Renewable Development Fund grant of nearly $2 million for a 1.5 MW project that would collect solar energy for distribution to seven K-12 schools and Leech Lake Tribal College.
Some solar would be on rooftops while the rest would be located at two major sites, and would offset roughly 15 percent of the schools’ energy use, said Hill, of Region Five. It’s a complex project because four school districts are involved, in addition to the college.
The schools and the college “fully appreciate this is a high risk, high reward approach to our project, given that the model has not been proven in the field,” she said. “That creates some anxiety on our part but it also creates quite a bit of excitement around trying to figure out new ways to benefit organizations using tax dollars.”
It’s not just about saving money on energy bills, either. STEM students at the college and schools can see how solar works and learn about how it is financed, Hill said. She hopes apprentices and interns from local programs may get a chance to help with installing the panels.
“We hope to utilize projects like this to advance a qualified workforce,” Hill said. “That’s the added benefit to workforce development.”
Olson, 70, has had a storied career. The former Bethel University football coach chaired the St. Stephen State Bank in St. Cloud from 1986 to 2001. He ran as the endorsed Democrat for Congress in the state’s third congressional district in 1994. In 2008 he vied twice and failed to win endorsement for federal Senate and House races.
For five years, from 2002 to 2007, Olson served as chairman of the American Sustainable Energy Council. He sees the Olson Plan as his legacy.
“I believe this has the opportunity of spreading clean energy across the United States using accepted, well defined tax law,” he said. “This is so important for our children and our children’s children. We need to stop our dependency on fossil fuels.”
(Clarification: An earlier version indicated Region Five Development Commission was working with Olson but the organization has not yet made a decision on a financing partner.)