For renewable energy to be widely used in Indian Country, tribes and other project sponsors must attract private investment capital. Unfortunately, banks and other institutional lenders resist loaning money to reservation Indians for even standard investments such as home mortgages, and are even more reluctant to put their money into reservation projects that run more substantial risks. Yet some tribes and investors have found ways to work together. This section discusses a few of the commonly cited obstacles and some ways of dealing with them.⁵⁶ It also notes a few opportunities that are unique to Indian Country projects.

Obstacles to Transactions and Some Solutions

Two of the most significant obstacles to conventional lending transactions in Indian Country are: (1) lenders' need to be able to enforce agreements; and (2) their need to protect their investments in the event of default. Other obstacles may arise as well, such as the lack of a regulatory infrastructure, uncertainty regarding the applicability of federal and state laws, some tribal officials' unfamiliarity with business practices, some tribal leaders' reluctance to draw lines between business and politics, and businesspeople's unfamiliarity with tribal cultural values. Some of these obstacles can be addressed through the measures taken to deal with the two needs discussed below.

Lenders' Need for Enforceable Agreements

As sovereign governments, tribes have sovereign immunity from lawsuits, which means that they cannot be sued without their consent. As a result, lenders may fear that they will be unable to enforce contracts.

Tribes and lenders can deal with this in many ways. A tribe can waive its sovereign immunity for the limited purposes of the particular transaction. Alternatively, it can carry out the transaction through a tribal business entity legally distinct from the tribal governing body, which either does not have sovereign immunity or which has been vested by the tribe with only limited sovereign immunity. The range of tribal business entities includes tribal government corporations chartered under tribal law, tribal corporations chartered by the federal government under section 17 of the Indian Reorganization Act, and relatively independent tribal government agencies such as utility authorities and housing authorities.⁵⁷ Such entities can generally be sued in tribal courts and in some cases in federal courts. Another kind of entity that many tribes use is generically known as a "tribal enterprise." In many cases these have no legal existence separate from the tribe itself, and as such generally share in the tribe's sovereign immunity unless a valid waiver has been executed.

Lenders' Needs for Security Interests

Waiving immunity so that a lender can enforce an agreement in court represents only a threshold issue. A conventional lender also wants some form of collateral or security so that if the deal does not work, the lender can recover some of the money at risk or take possession of some property that can be converted into money.

In non-Indian America, the most typical way of securing a loan to buy a home is a mortgage, which gives the holder of the mortgage the right to take possession of the property in the event of a default. As noted earlier, because Indian land is held in federal trust status (or otherwise subject to federal restraints on alienation), a typical mortgage cannot be used for Indian land. Many years ago, however, the leasehold mortgage was developed as a solution to this problem. Federal law authorizes leasing Indian land for a variety of purposes, and the leasehold interest can be subject to a mortgage. Under this arrangement, the holder of the mortgage can take possession of the leasehold on default. At the expiration of the leasehold interest, the property reverts to the original owner unless the lease is renewed. The leasehold mortgage has been used for several decades in financing federally assisted home construction in Indian Country, and it could be an appropriate mechanism for financing investments in many kinds of renewable energy properties.

Another approach to providing a lender or investor with security is to pledge some particular source of funds or property as collateral. Some banks have accepted a security interest in gaming revenues, for instance.

Unique Methods of Financing Projects

For proposed renewable energy projects, some of the financing mechanisms used elsewhere in the country may work in Indian Country, but some standard options present complications. One example is bond financing. Pursuant to the Indian Tribal Government Tax Status Act of 1982 to the Internal Revenue Code, tribes have the authority to issue tax-exempt revenue bonds to finance "essential governmental functions."⁵⁸ This provision has been implemented by regulations that leave it unclear whether the Internal Revenue Service (IRS) would treat bonds for tribal renewable energy projects as "essential governmental functions," so each such project may need a ruling from the IRS.

Some options are unique to Indian Country. Some tribes have revenues from gaming or from sources such as judgments against the United States. In this case, if they do not have locally available renewable resources, tribes could choose to invest in projects on other reservations. A variety of federal assistance programs can be used to help finance projects, some of which are unique to Indian Country, such as the Social and Economic Development Strategies grant program administered by the Administration for Native Americans in HHS. In addition, the BIA administers a loan guarantee program for economic development projects.⁵⁹ Of course, the availability of funding for such programs depends on congressional appropriations.

Another arrangement that may be unique to Indian Country makes use of the tax status of tribal governments. Tribal governments and tribal corporations chartered under section 17 of the Indian Reorganization Act are not subject to federal income tax.⁶⁰ Non-Indian entities doing business on trust land are, of course, not exempt. A non-Indian entity carrying out a joint venture with a tribe may be able to reduce its taxable income by entering into a management agreement with the tribe or tribal corporation instead of a lease.⁶¹

One approach to investing in Indian Country that can be used to clarify the regulatory environment might also generate tax benefits for investors. In Indian Country, the authority of tribal governments is least subject to challenge on lands held in trust; for lands that are not in trust status, assertions of regulatory authority by a state are more likely to be sustained. If a site desirable for renewable energy development is in private hands, the non-Indian joint venture partner could purchase it and then donate it to the tribe, with the understanding that the tribe will ask the BIA to accept it into trust status. The donation would be tax-deductible, and would help the joint venture partner build an on-going relationship with the tribe or tribal business entity engaged in the project.⁶² The project might be structured in any number of ways. For example, it could be carried out by a tribal business entity on land leased to the entity, and if the joint venture partner contributes additional funds, that capital could be secured by a leasehold mortgage.

Abstract Table of Contents Previous Section Next Section