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Family Offices and Solar Investing
March 8, 2019

There’s a phrase that wealth managers use to describe the money that leaves their clients’ coffers to go into government hands: involuntary philanthropy. Of course, the simple term is “taxes.” But the phrase spotlights the philanthropic impact that the world’s highest net-worth families have in preserving and distributing their resources across generations.

Often, that function is exercised within family offices — private firms that provide services ranging from investing and budgeting to charitable giving and tax mitigation.

Because family offices are, by definition, private affairs, estimates of how many there are vary widely. A 2017 report by Campden Research concluded that 5,300 family offices were operating worldwide, roughly 2,200 of them in North America. But a 2016 report by Ernst & Young put the global number nearly twice as high, with at least half set up in just the previous 15 years.

How much money do these family offices control? Again, confidentiality makes it hard to estimate. After Swiss bank UBS conducted 311 online surveys and interviewed leaders of 25 single-family offices in 2018, it reported that, on average, each office managed about $800 million in assets. Calculated across thousands of offices, the investment potential is well into the trillions of dollars.

Going Beyond Giving

Such sums mean that tax mitigation often is at the core of what a family office is tasked to do. But simply making charitable donations to create tax deductions isn’t enough. Instead, family offices deploy a battery of tax-advantaged strategies in their investment portfolios such as municipal bonds, partnerships, UITs and annuities. But these asset classes also entail market and reporting risks.

Investing in solar, on the other hand, offers sophisticated investors strong investment returns and robust tax advantages with minimal exposure to market volatility or increased audit risks. Of the various tax-advantaged options, solar is the easiest to understand, has the lowest potential risk of audit, and generates the most consistent cash flow for the duration of the project.

With solar, the product is sunshine. Once the system is installed, there are no market risks comparable to oil and gas investing. Solar is clean energy and clean investment, so it’s simple in the eyes of the IRS. These projects offer predictable, stable, long-term cash flows, ease of tax preparation, and clearly defined returns.

Solar also meets a growing demand for impact investing, in which funds generate beneficial social or environmental impacts alongside financial returns. Historically, high net-worth families tend to want their wealth to serve a philanthropic purpose.

“Family offices can move the needle with their collective investment muscle and dramatically expand solar utilization in the under-funded commercial solar space,” explains SDC Energy President Charles Schaffer. “Not only does solar investments make sense for family offices now, but they are making a tangible difference for future generations,” he notes.

Netting Tax Benefits

Because they don’t pay income taxes, nonprofits such as churches and schools can’t take advantage of the tax benefits that reduce the capital outlay for a solar project. But outside investors who own those solar projects can.

Among those solar benefits is the federal investment tax credit, or ITC, that applies dollar-for-dollar against income taxes owed. Recent tax law changes left the solar ITC phase-out schedule untouched. From 30% currently, the ITC drops to 26% beginning in 2020, 22% in 2021, and levels out at 10% in 2022 with no sunset provision.

After last year’s tax changes, depreciation now plays a bigger role in solar’s tax benefits. The old rules limited bonus depreciation in the first year to 50% and up to $500,000. But the new tax law offers 100% bonus depreciation with no upper limit on solar equipment placed in service before Jan. 1, 2023. After that, bonus depreciation drops 20% each year until it is fully phased out in 2027.

Investing for Social Returns

Instead of simply donating money to nonprofits, “social investing” in a non-profit’s solar project offers multiple benefits. It boosts a family office’s portfolio, generates income for the duration of the project, and leaves additional money available that otherwise would have gone to taxes. And it’s not just a one-time gift; solar reduces a non-profit’s operational costs year after year for two decades while creating sustainable clean power.

“In the end, if we hold onto $1 million that might otherwise go to the IRS and we’re able to get 6% or even a 10% yield on that money, that’s a significant benefit to the family,” says financial advisor Mark Trewitt. “It stays in the family office economy and can be used for further charitable giving.”

One family that Trewitt introduced to SDC Energy invested in two evangelical Christian church solar projects over the course of two years. After depreciation and other tax benefits conclude in 2024, the family will then recognize income which can be offset with a charitable donation, or they can choose to pay taxes on it at that time.

“Our investors were very pleased that they were helping churches and any other non-profits aligned with their faith,” said Trewitt, author of Integrated Generosity for Faith-Based Families. “The economics of investing in solar attracted them initially, but they have come to appreciate the opportunity to balance their heart with their portfolio.”

SDC Energy’s unique form of directed philanthropy through solar financing lets investors triple their impact by protecting the planet, supporting philanthropic organizations and boosting their portfolio.