How to maximize Clean Communities Investment Accelerator funding

The Clean Communities Investment Accelerator (CCIA) program seeks to increase community lenders’ clean energy financing capacity working in low-income and disadvantaged communities (LIDAC) so that underinvested communities have the capital they need to finance and deploy clean energy projects.

CCIA funding intends to bridge gaps in a project's capital stack, making mobilizing private capital a critical eligibility requirement for supported projects. Private capital sources may include traditional bank financing, borrower or developer equity, philanthropic grants, utility incentives and tax credit equity, such as those offered under the Inflation Reduction Act (IRA). These other sources of capital are used to augment CCIA funds for projects, defray project “soft costs” and potentially serve as bridge financing for tax credits that may be sold/transferred or eligible for direct pay under the IRA, where applicable.

Before a community lender decides to fund a project, the details of the project’s capital structure must be designed. The capital stack for a submitted project should include a combination of CCIA funding and other funding sources, as it is reasonable to expect that projects exhibiting a higher capital mobilization factor (i.e., ratio of private capital sources to CCIA funding) will be prioritized by community lenders for funding. Additionally, many CCIA awardees will tailor private capital requirements based on the maturity of the participating community development financial institutions’ (CDFIs) clean energy lending programs. For example, CDFIs with lower maturity levels will face reduced private capital contribution requirements within the project’s capital stack. Therefore, project sponsors should thoroughly assess the landscape of potential funding sources and the associated considerations to develop an optimal capital structure for their projects.

Integrating potential funding sources

Understanding the landscape of potential clean energy funding sources involves research, networking and strategic planning. An organization may initiate this task by identifying clean energy funding opportunities and incentives that may provide a complementary accelerant for a CCIA funded clean energy project. From there, one may take an iterative approach to optimizing the capital stack for a CCIA eligible project. Steps should include:

1. Identify applicable funding sources

• Public funding: Explore federal, state and local government programs, such as clean energy grants and loan programs (e.g., Department of Energy or state clean energy funds).
• Tax credits and incentives: Determine if the project is eligible for potential federal, state and local tax incentives, such as the IRA investment tax credit. The value of IRA tax credits on a project can be anywhere from 6% to 70%, depending on various factors. Therefore, having a foundational understanding of how to maximize these credits for projects should be the bedrock of any project’s capital stacking plan. It is recommended that project sponsors consult with tax professionals to understand eligible project costs that can be claimed for the credit, as well as their ability to consume or transfer the credit.
• Private capital: Research financing from banks, credit unions, private equity, venture capital or specialized green financing institutions.
• Philanthropic sources: Investigate grants from foundations and nonprofits focused on sustainability and clean energy.
• Utility incentives: Check utility companies for rebate programs, performance incentives or potential partnerships.

2. Model key funding-specific attributes

• Project-specific needs: Optimize funding sources with your project's overall cost, type, and desired outcomes. For example, a project utilizing onsite solar may explore bridge financing to leverage the investment tax credit (ITC) to reduce upfront construction capital. A project financial model should account for short-term interest or fees associated with this method until the tax credit is realized.
• Eligibility conditions: Incorporate any rules tied to funding sources, such as prevailing wage mandates, Build America Buy America (BABA) Act rules or greenhouse gas emissions standards.
• Stackability: Understand each funding source's impact on the others. For example, the value of a federal ITC may be reduced for projects utilizing tax-exempt bond financing. Conversely, a federal ITC for an eligible clean energy project will not reduce the eligible basis for low-income housing tax credits (LIHTC).
• Compliance costs: Quantify the costs of meeting regulatory requirements associated with funding sources, including but not limited to incremental labor costs, reporting expenses and compliance audits.
• Timing of approvals: The model should also account for the time required to secure permits, environmental reviews or other regulatory approvals, as delays could impact project timelines and budgets.

3. Engage professional assistance

• Work with technical assistance providers specializing in clean energy project finance to assess a project’s eligibility for complex funding structures and incentives. Experts may also navigate complex compliance requirements associated with various funding streams and incorporate them into your project plan.

Ensuring compliance with federal funding

Pursuing state and federal funding sources, such as IRA clean energy tax credits, LIHTCs, new markets tax credits (NMTC), grants, or CCIA program loans, often involves navigating complex regulatory requirements. These obligations can sometimes render such incentives financially unfeasible without a thorough understanding of compliance demands. Successfully leveraging these funding opportunities requires a detailed approach to integrating multiple sources, timing their delivery, and aligning them with the financial models of clean energy projects.

To optimize these funding mechanisms, project sponsors must identify and address the specific compliance requirements tied to applicable regulations. This includes determining the data elements required for reporting, establishing standards and pinpointing reliable sources for this data. By ensuring a robust understanding of these components, project sponsors can effectively model funding sources within their projects while maintaining the necessary compliance to unlock the financial benefits of these incentives.

Pursuing these funding sources involves meeting a range of specific regulatory requirements. For instance, projects seeking IRA clean energy tax credits may be required to meet prevailing wage standards and apprenticeship requirements to receive the 5x multiplier on a 6% base credit. LIHTC projects must comply with income eligibility rules, rent restrictions and annual certification requirements to ensure continued program eligibility. Projects utilizing NMTC funding may be required to report community impact metrics, while CCIA proceeds may come with emissions reporting and other LIDAC community benefits reporting requirements. Each funding source brings its own set of compliance obligations, emphasizing the need for meticulous planning and proactive management to align project development with regulatory standards.

Example net-zero affordable housing project

To understand how all these credits can come together, below is an example of how a net-zero affordable housing project can take advantage of CCIA funding and available tax credits. This example project leverages ITC bridge financing associated with a rooftop solar array and geothermal heating and cooling system, 9% federal LIHTCs and low-interest CCIA financing to significantly reduce developer capital requirements for the project.

Traditional affordable housing project capital stacks often rely heavily on debt financing, supplemented by equity generated from LIHTC proceeds. The tables below illustrate the capital stack and associated uses of funds for a low-income housing project without net-zero upgrades, which does not incorporate any benefits from CCIA funding.

The capital stack for the same affordable housing project, enhanced with an additional $2 million in incremental costs associated with net-zero building upgrades, can be strategically optimized by integrating CCIA debt financing with other federal funding sources. These upgrades also expand the project's eligible LIHTC basis, providing additional equity opportunities. This approach results in an over 20% offset of total project costs through CCIA funding and available tax credits while reducing the need for debt financing by over $3 million. The bottom line is that the appropriate use of low-interest CCIA financing may lead to a lower cost of capital, higher debt service coverage and increased returns on your project.

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Baker Tilly’s CCIA specialists have extensive knowledge of developing comprehensive capital structures for clean energy projects, including those leveraging federal, state, and local tax credits and incentives, traditional lending programs and nontraditional capital sources. We help clients enhance overall returns by optimizing the capital stack with tax credits, negotiated incentives and other loan programs.

Reach out to a CCIA specialist today to explore how your project can benefit from affordable capital and technical support. Together, we can build cleaner, healthier communities.