Common use of Timing Requirements for Cash Grant Qualification Clause in Contracts

Timing Requirements for Cash Grant Qualification. To qualify for a cash grant, a solar project must be either placed in service in 2009, 2010 or 2011, or placed in service prior to 2017 if construction of such property began in 2009, 2010 or 2011. The Ivanpah projects are not expected to be placed in service before January 1, 2012. It is also clear that the projects did not commence construction before 2010 because no work was performed on site before October 2010 and no work was performed under a binding written contract prior to 2010. It is necessary, then, that construction commences with respect to the project’s solar generation assets in 2010 or 2011, in order for the project to qualify for a cash grant. A project will be considered to have started construction when “physical work of a significant nature” commences. See Treasury Guidance, at pg. 6. There are two ways to meet this test. First, an applicant may rely on a safe harbor that deems physical work of a significant nature to have begun when the applicant has incurred more than five percent of the total cost of the eligible property. An applicant may also demonstrate that physical work of a significant nature has commenced in 2010 or 2011 and qualify for a cash grant even if it does not satisfy the safe harbor requirements. This opinion letter analyzes whether the project companies are expected to satisfy the physical work test. Under the physical work test, construction is deemed to commence when physical work of a significant nature has commenced at the project site or, in some cases, at an offsite location. See id. The Treasury Guidance includes an example that says physical work of a significant nature begins at a wind farm with the beginning of the excavation of a turbine’s foundation, the setting of anchor bolts in the ground, or the pouring of concrete pads of the foundation. Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, researching, clearing a site, test drilling to determine soil condition or excavation to change the contour of the land. See id. Treasury expanded on this example in a set of frequently asked questions (“FAQs”). It said that laying a single turbine’s foundation that will be a part of larger wind farm will generally be treated as the start of construction of the larger project’s specified energy property. Because Treasury was concerned about applicants starting construction in 2010 (and now 2011, with the amendment of section 1603 of the American Recovery and Cash Grant Opinion - Ivanpah 15 April 5, 2011 Reinvestment Tax Act of 2009 by section 707 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) without a purposeful commitment to complete the project on a timely basis, the Treasury Guidance and other materials issued by Treasury require this physical work to be continuous. The frequently asked questions eased this requirement for projects where there is a contractual obligation to undertake and complete a continuous program of construction within a reasonable time. See FAQs # 5. Physical work performed at the applicant’s project site is taken into account under the physical work test, whether performed by the applicant or on the applicant’s behalf by a third party. See Treasury Guidance, at pg. 6. If an applicant contracts with another person to construct property on the applicant’s behalf away from the applicant’s project site, then the work performed under the contract may be taken into account in determining when physical work of a significant nature begins only if the contract is a “binding” written contract signed before the work commences. A contract is “binding” only if it is enforceable under state law and does not limit damages to a specified amount of less than 5% of the contract price. A contract may be binding if it is subject to a condition, as long as the condition is outside the control of either party. If a contract entitles an applicant to be refunded its deposits or payments in lieu of any damages in the event the contract is breached or cancelled, the contract may not be considered binding. In this case, work performed on the site of the projects should be sufficient to meet the physical work test, so it should not be necessary to determine whether the construction contracts are “binding” for cash grant purposes. FAQs # 2 says physical work includes “any physical work on the specified energy property at the site.” In addition, because the project companies have only given limited notices to proceed, the project companies would not be able to rely on the presumption that work is continuous if there is a contractual obligation to complete the project within a reasonable time. However, the project companies expect to give a full notice to proceed under the Bechtel contracts after the financial closing with the Department of Energy and that work will proceed substantially in accordance with the schedule set forth in the contracts, except for any construction interruption caused by events outside of the control of the relevant project company and its direct and indirect owners. BSE has informed us that construction first began on the project in October 2010 under limited notices to proceed and Bechtel has begun excavating for roads and xxxxx that will constitute specified energy property for each project company. Based upon the description of the start of construction in the Treasury Guidance and other materials issued by Treasury, the start of work described in Section A (e.g., excavation and drilling for xxxxx that are necessary to the production of power for each of the projects, road Cash Grant Opinion - Ivanpah 16 April 5, 2011 construction and certain foundation excavation) should constitute the start of physical work of a significant nature for each of the Ivanpah projects. The project companies expect work to proceed on a continuous basis until all three projects are completed. An independent engineer has confirmed that the schedule provides for construction to continue uninterrupted until completion. Accordingly, assuming construction of each project does not extend materially beyond the schedule set forth in the applicable contract and construction of the applicable project proceeds in an uninterrupted manner as shown in such schedule, the start of physical work of a significant nature should be considered to occur by December 31, 2011 for each project.