Various tax credits and incentives are available for equipment leasing and finance companies assisting customers with acquiring equipment that ultimately reduces dependence on fossil fuels and supports energy conservation. This article will focus on purchasing subsidies that offer financial support for customers who purchase or lease electric vehicles (EVs) and infrastructure, as well as important reminders when engaging in transactions that involve incentives.
Before delving into issues around incentives, it is important to set the stage by discussing general information about leasing and financing EVs. Due to new technologies inherent in EVs, many customers elect to lease instead of finance them. The battery can represent as much as 30% of the equipment cost, which contributes to uncertainty around residual values. For operating leases, lessors may need to update their lease documentation to address return conditions and maintenance obligations unique to EVs. Also, lessors should consider document revisions based on other aspects of the product, including insurance requirements and service agreements, as well as potential updates to underlying vendor and dealer agreements.
On the other hand, for charging infrastructure, financing is common. Depending on the type of charger, lenders should consider nuances around security perfection, charging station software and payment processing, and issues and taxes related to reselling electricity. For example, fixture filings may be appropriate in some jurisdictions, and lenders may wish to consider landlord/mortgagee lien waivers. The time required to order, build and install certain charging infrastructure projects may require interim funding arrangements or bridge loans to finance these opportunities.
Federal Tax Credits
Billed as the largest climate legislation in U.S. history, the federal government rolled out the Inflation Reduction Act (IRA) in 2022, which included tax provisions related to renewable energy projects. The IRA offers cost reduction incentives to business and government organizations through tax credits and other incentives and supports the November 2021 Infrastructure Investment and Jobs Act. With respect to commercial EVs, the tax credits are $40,000 or 30% of replacement vehicles, and for charging infrastructure, the tax credits can be as much as $100,000 depending on certain census tract criteria and complying with prevailing wage requirements. Equipment lessors can take the tax credits if they acquire the equipment in connection with a finance lease under UCC 2A-103. Those tax credits can be built into the structure of the lease in a manner that benefits the customer. The typical indemnification provisions of a lease will contain provisions related to tax benefits, pricing and depreciation, but lessors should consider whether their indemnification language is sufficient in the event the equipment is ever deemed ineligible for the tax credits. Applicable vesting periods for tax credits should also be considered in structuring the deal.
State Incentives
Several states have implemented purchase subsidies to reduce the entry costs of EVs, most notably California. Although a complete survey is beyond the scope of this article, equipment leasing and finance companies should carefully review any program requirements, as well as obligations that extend to the customer, supplier and lender/lessor. California provides various tax credits to qualifying buyers and lessors of, among other trucks, EVs. The tax credits also provide stimulation to businesses to install EV chargers. To reach goals related to the sale of EVs, California requires that the sales of medium and heavy-duty trucks by any California truck dealer consist of 50% EVs by the year 2035.
As an incentive in this regard, effective Aug. 29, 2023, California implemented a partnership between the California Air Resources Board (CARB) and grantees. The solicited grantees (e.g., a small air district) implement and administer the Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (HVIP). HVIP provides grant vouchers to purchasers of eligible EVs.
Lessee Obligations
If a lessor provides a lease structure to a customer that incorporates purchase subsidy incentives such as HVIP, payment of the voucher may not align with the delivery of the equipment. In this case, an assignment of proceeds may be prudent to ensure that the incentive amounts are part of the lessor’s security. Further, if the lessor offers revolving credit to vendors or dealers that apply for subsidies on behalf of customers, an assignment of proceeds may be necessary if delayed payment of the voucher will conflict with the payment terms of the revolving credit agreement. The structure of transactions will vary between lessors, but the common denominator is managing the risk over time and as the volume of open balances increases in concentration.
Additionally, the customer incentive may be reflected as a capitalized cost reduction on the lease agreement, but what if the grant does not come through? Although most leases have strong language around payment of rents and other costs incurred by lessor, consider whether revisions or an addendum may be appropriate to ensure any unpaid incentives are part of the lessee’s obligations. Finally, the lessee could face insolvency or bankruptcy prior to the lessor receiving the incentive payment, and the transaction structure should consider this risk and appropriate changes to leases or guaranty agreements.
Lessor Obligations
Incentive programs generally permit the grantmaking agency to conduct audits to safeguard the public interest in amounts paid pursuant to such programs. Lessors should consider the consequences of an unfavorable audit of the lessee, as well as the administrative burden and cost of any audit of the lessor.
Moreover, certain incentive programs place requirements on the lessor in the event of a lessee default. This may include finding a lessee who meets all lessor credit criteria and who agrees to take assignment of and assume the defaulted lease (sometimes known as a “re-seat”), something that most finance lessors are not equipped to do, or repaying pro rata grant amounts on repossessed assets. Although lessors can still pursue the customer for a deficiency, they should consider vendor agreement changes that would offer reasonable assistance to facilitate the resolution of any lessee default. Although it goes without saying that equipment lessors who choose to take tax credits or other incentives are subject to all related terms and conditions of the applicable program, lessors should consider crafting an internal review checklist and add an item to review the program for any “trigger” clauses that could require a lessor to return any or all realized amounts following a default by the lessee under the lease or otherwise. This will assist in guiding action plans relating to, among other things, end-of-lease responsibilities and remarketing strategies.
Conclusion
Purchase subsidies such as incentives and tax credits may help promote the adoption of EVs and investment in charging infrastructure, but they also present risks and nuances for lessors and lenders. The customer can acquire equipment at a much more affordable price, but hidden risks should be addressed to ensure these programs benefit all parties to the transaction.
