Preferred Equity: A Capital Solution to Meet the Looming “PIS” Deadline

The One Big Beautiful Bill Act signed into law by President Trump on July 4, 2025 (the “OBBBA”) terminates the Section 45Y Clean Electricity Production Tax Credit (the “45Y PTC”) and Section 48E Clean Electricity Investment Tax Credit (the “48E ITC”) for wind and solar facilities that are placed in service (“PIS”) after December 31, 2027, except for those projects that begin construction by July 4, 2026.  This significantly accelerates the timeline for sponsors and investors to bring projects online in order to maintain profitability of the project via tax credit sales.

Traditional financing structures—such as structured debt, tax equity, or common equity infusions—may not, on their own, be best suited to address the compressed PIS timelines and evolving risk profiles.  On the one hand, sponsors now require rapid closings and liquidity infusions to be able to meet new PIS deadlines.  On the other hand, equity investors demand priority, governance, and redemption and other exit rights to mitigate downside risk in a rapidly evolving energy landscape.  Preferred equity can be a solution to bridge the gap among these clashing interests by supplying quick liquidity, while offering investors negotiated priority and control without the rigidity of debt.

Preferred Equity Offers a Capital Solution.

Preferred equity structures occupy a unique position between debt and common equity, often blending characteristics of both.  These structures, or other forms of “structured” equity, can offer investors fixed returns and covenant-style protections (e.g., budget consent, leverage limits, and distribution locks), while also providing the upside participation through “equity kickers” (which typically cap residual cash flows and/or exit proceeds).

Preferred equity arrangements are highly customized to fit the specific circumstances of each transaction, taking into account the project’s risk profile, liquidity requirements, and the investor’s appetite for risk and short- and long-term objectives.  The flexibility of preferred equity structures can make them particularly well suited for unpredictable or unstable investment environments, enabling investors to participate in potential equity upside while limiting exposure to downside risk.

Combine Preferred Equity With Existing Funding Structures for 48E ITC and 45Y PTC Projects.

The OBBBA preserved transferability of the 48E ITC and 45Y PTC, ensuring that projects able to meet the PIS deadline remain attractive investment opportunities.  However, meeting that PIS deadline requires significant capital infusion in a short amount of time.  In this context, preferred equity can be combined with traditional direct transfer or tax equity financing structures to enhance liquidity, especially as stakeholders race to complete projects on time.

Tax equity structures, which are popular for 48E ITC projects, infuse capital into projects, providing a valuable step-up in basis and increasing the overall value of the 48E ITC.  Tax equity investors are typically averse to significant construction risk and do not fund until mechanical completion of the project, or later.  This risk aversion creates need for early-stage financing between early development costs and later-stage tax equity infusions.

In direct transfer structures, which are a popular way to monetize 45Y PTC projects, sponsors typically seek future tax credit purchase commitments to secure bridge financing as a means for infusing liquidity into development-stage projects.

In both structures, incorporating preferred equity into the capital stack that combines predictable income, enhanced or springing governance rights and equity-linked returns offers investors a flexible and risk-measured way to supplement upfront liquidity needs, while enabling sponsors to better balance leverage ratios and fixed-payment obligations.

Preferred Equity Investors Are Focused on Exit Strategies.

When structuring investment documents for tax credit transactions, we see an increasing number of investors requesting preferred equity-style exit options, including full- or partial-return redemption if a project fails to achieve milestones by a specified date, in addition to investor-initiated sales thereafter to provide a clear exit path if the credits are not realized as expected.

In this context, preferred equity bridges the gap between initial capital requirements and the eventual sale of tax credits, giving investors an exit option if credit pricing deteriorates as the PIS deadline or other drop-dead deadline approaches—a particularly attractive feature when traditional exits, such as IPOs or secondary market sales, may be limited or congested.  In anticipation of exit-market volatility, investors may seek drag-along and tag-along rights, as well as IPO-or-sale clauses, which offer flexibility and protection in various exit scenarios.

Conclusion.

The looming PIS deadline under the OBBBA (December 31, 2027) is prompting sponsors to share more risk with investors and to seek ways to accelerate liquidity injections.  In response to these pressures, customized structured solutions for 48E ITC and 45Y PTC projects can occupy a unique middle ground between senior debt and common equity.  Preferred equity enables investors to manage downside risk while sharing in upside benefits, and provides sponsors with liquidity to develop and place projects online before the clock runs out.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.