CALDERWOOD & HARKNESS LLP Attorneys at Law
600 Lexington Avenue New York, NY 10022
Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
December 8, 2023
Ridgeline Capital Partners, LLC 390 Park Avenue, 22nd Floor New York, NY 10022
Attention: Jonathan Kessler, Managing Partner
Samara Okonkwo, Partner, Head of Renewable Energy Investments David Lim, Vice President
Re: Tax Opinion — Investment Tax Credit Availability, Partnership Allocations, and Flip Mechanics in Connection with the Tax-Equity Investment in Solstice Holdings, LLC (the "Partnership")
C&H Matter No. 1015-00005
Ladies and Gentlemen:
I. INTRODUCTION AND ENGAGEMENT
Calderwood & Harkness LLP ("we," "our," "us," or "C&H") has acted as special tax counsel to Calloway-Briggs Renewables Inc. ("CBR"), a Texas corporation, in connection with the structuring, negotiation, and closing of the tax-equity investment (the "Transaction") by Ridgeline Capital Partners, LLC ("Ridgeline" or the "Investor") in Solstice Holdings, LLC (the "Partnership"), a Delaware limited liability company classified as a partnership for federal income tax purposes (Employer Identification Number: 88-4071523).
This opinion letter (this "Opinion") is delivered to Ridgeline at closing pursuant to Section 8.2(h) of the Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC, dated as of September 21, 2023, as amended through the date hereof (the "LLCA"), and Section 6.1(d)(viii) of the Capital Contribution Agreement, dated as of September 21, 2023 (the "CCA"), each among CBR Solstice Manager, LLC ("CBR Manager"), a Delaware limited liability company and wholly owned disregarded entity of CBR, and Ridgeline. The LLCA and the CCA, together with the other agreements described in Section II.D below, are collectively referred to herein as the "Transaction Documents."
Although C&H has acted, and continues to act, as counsel to CBR in connection with the Transaction, this Opinion is delivered for the express benefit of Ridgeline in connection with Ridgeline's decision to invest One Hundred Twenty Million Dollars ($120,000,000) in the Partnership. This Opinion is being delivered as a condition to Ridgeline's obligation to fund the first tranche of its capital commitment at the closing occurring on the date hereof. Except as expressly provided herein, this Opinion does not create an attorney-client relationship between C&H and Ridgeline, nor does it constitute legal advice to Ridgeline on matters other than those specifically addressed herein.
We have been advised that Ridgeline is also separately represented by its own tax counsel, Quelston Calhoun & Associates LLP, and that Ridgeline has relied, and will continue to rely, upon its own counsel for advice regarding the tax consequences of the Transaction to Ridgeline as they may be affected by Ridgeline's particular facts and circumstances. This Opinion is not intended to be, and should not be construed as, a substitute for such advice.
In rendering the opinions expressed herein, we have examined and relied upon the documents, certificates, records, and other materials described in Section III below, and we have made the assumptions set forth in Section IV below.
II. SUMMARY OF THE TRANSACTION
The following is a summary of the material aspects of the Transaction relevant to the opinions expressed herein. Capitalized terms used but not otherwise defined in this Section II have the meanings assigned to them in the Transaction Documents.
A. The Solstice Portfolio
The Partnership, through its wholly owned project companies (each as described below), owns a portfolio of seven (7) utility-scale solar photovoltaic generating facilities (collectively, the "Solstice Portfolio" or the "Projects," and each individually, a "Project") with a total aggregate nameplate capacity of approximately 420 megawatts direct current ("MW(dc)"). The Projects are located across multiple counties in the states of Texas and New Mexico.
The ownership and management structure of the Partnership is as follows:
Managing Member. CBR Solstice Manager, LLC ("CBR Manager"), a Delaware limited liability company and wholly owned disregarded entity of CBR (Employer Identification Number: 88-4071597), serves as the Managing Member of the Partnership. CBR Manager is responsible for the day-to-day management and operation of the Partnership and the Projects, subject to the terms and conditions of the LLCA, including certain protective consent rights reserved to Ridgeline as the Tax-Equity Member.
Tax-Equity Member. Ridgeline Capital Partners, LLC serves as the Tax-Equity Member of the Partnership. Ridgeline is a Delaware limited liability company classified as a partnership for federal income tax purposes.
Project Companies. The Partnership owns 100% of the membership interests of seven project companies, each of which is a Delaware limited liability company that has elected to be treated as a disregarded entity for federal income tax purposes. As a consequence, for federal income tax purposes, each project company is treated as a division of the Partnership, and the Partnership is treated as the direct owner of the assets held by each project company. The seven project companies, their respective Projects, and the key characteristics of each Project are as follows:
1. Pecos Sun Solar, LLC — 85 MW(dc) utility-scale solar photovoltaic generating facility located in Reeves County, Texas. Commercial operation date ("COD"): October 15, 2023. EPC contract cost: $78,200,000.
2. Red Mesa Solar, LLC — 70 MW(dc) utility-scale solar photovoltaic generating facility located in Pecos County, Texas. COD: October 28, 2023. EPC contract cost: $63,700,000.
3. Coyote Flats Solar, LLC — 65 MW(dc) utility-scale solar photovoltaic generating facility located in Ward County, Texas. COD: November 5, 2023. EPC contract cost: $59,100,000.
4. Llano Verde Solar, LLC — 55 MW(dc) utility-scale solar photovoltaic generating facility located in Hudspeth County, Texas. COD: November 12, 2023. EPC contract cost: $50,400,000.
5. Cimarron Solar, LLC — 50 MW(dc) utility-scale solar photovoltaic generating facility located in Lea County, New Mexico. COD: September 30, 2023. EPC contract cost: $45,800,000.
6. Sandoval Ridge Solar, LLC — 50 MW(dc) utility-scale solar photovoltaic generating facility located in Sandoval County, New Mexico. COD: October 20, 2023. EPC contract cost: $46,100,000.
7. Amistad Solar, LLC — 45 MW(dc) utility-scale solar photovoltaic generating facility located in Val Verde County, Texas. COD: November 18, 2023. EPC contract cost: $41,300,000.
The aggregate EPC contract cost across all seven Projects is $384,600,000. The EPC contractor for all seven Projects is Vasquez Brothers Construction, Inc. ("VBC"), a Texas corporation (Employer Identification Number: 75-2648103), which entered into a Master Engineering, Procurement, and Construction Agreement with the project companies (the "Master EPC Agreement"). The weighted-average commercial operation date across all seven Projects, calculated on a capacity-weighted basis, is approximately October 25, 2023.
Each Project consists of ground-mounted solar photovoltaic modules, single-axis tracking systems, inverters, step-up transformers, a project substation, medium- and high-voltage electrical collection systems, monitoring and communications equipment, site improvements, access roads, fencing, and all related balance-of-system components necessary for the generation of electricity from solar energy and the delivery of such electricity to the applicable point of interconnection with the transmission grid.
B. Tax-Equity Investment Structure (Partnership Flip)
The Transaction is structured as a "partnership flip" tax-equity investment, a structure commonly utilized in the renewable energy industry to monetize federal tax incentives, including ITCs and accelerated depreciation deductions. The material economic and tax terms of the Transaction are summarized below.
Capital Contributions. Ridgeline's total capital commitment to the Partnership is $120,000,000, to be funded in two tranches:
(i) First Tranche: $96,000,000, to be funded at the closing occurring on the date hereof (December 8, 2023); and
(ii) Second Tranche: $24,000,000, to be funded within sixty (60) days following the achievement of the final COD for the last Project to achieve COD (expected due date: February 6, 2024, based on the Amistad Solar COD of November 18, 2023, plus a sixty-day funding period).
CBR Manager's total capital contribution to the Partnership is $2,400,000, representing two percent (2%) of Ridgeline's total capital commitment of $120,000,000. This contribution level satisfies (and exceeds) the minimum investment requirement applicable to the managing member (or developer) under Revenue Procedure 2007-65, 2007-2 C.B. 967 ("Rev. Proc. 2007-65"), which requires a minimum investment of at least one percent (1%) of the tax-equity member's capital contribution.
Pre-Flip Allocations (Projected Years 1 through 5). During the "Pre-Flip Period," which commences on the effective date of the LLCA and continues until the occurrence of the "Flip Date" (as defined below), allocations of tax items and cash distributions under the LLCA are as follows:
• Ridgeline (Tax-Equity Member): 99% of all tax items, including Investment Tax Credits, Modified Accelerated Cost Recovery System ("MACRS") depreciation deductions, and allocable shares of taxable income and loss; 30% of cash distributions available for distribution.
• CBR Manager (Managing Member): 1% of all tax items; 70% of cash distributions available for distribution.
Post-Flip Allocations. Upon Ridgeline's achievement of its target after-tax yield (defined below), the allocations "flip" to the following:
• Ridgeline (Tax-Equity Member): 5% of all partnership items (including tax items and cash distributions).
• CBR Manager (Managing Member): 95% of all partnership items (including tax items and cash distributions).
Target Yield and Flip Date. Ridgeline's target yield is 7.25% after-tax internal rate of return ("IRR"), calculated in accordance with the methodology specified in Schedule 4.2 of the LLCA. The "Flip Date" is the date on which Ridgeline has received sufficient tax benefits (including ITCs, depreciation deductions, and allocable shares of taxable income or loss) and cash distributions to achieve its target yield. Based on the financial model agreed upon by the parties (Exhibit H to the LLCA), the projected Flip Date is in the fourth quarter of 2028, approximately five (5) years following the weighted-average COD.
Purchase Option. Pursuant to the Purchase Option Agreement dated as of September 21, 2023, CBR Manager (or its designee) holds a purchase option (the "Purchase Option") to acquire Ridgeline's residual 5% membership interest in the Partnership following the Flip Date. The Purchase Option is exercisable during the 180-day period commencing on the Flip Date, at a purchase price equal to the fair market value of Ridgeline's 5% interest as of the date of exercise, as determined by a qualified independent appraiser selected pursuant to the procedures set forth in the Purchase Option Agreement, subject to a floor price of $1.00. The use of a fair market value purchase price (rather than a fixed or nominal price) is a critical element of the Transaction's compliance with Rev. Proc. 2007-65 and is intended to ensure that Ridgeline bears genuine economic risk with respect to its investment.
C. Parallel Section 6418 Transfer
In addition to the partnership-flip tax-equity investment that is the subject of this Opinion, a portion of the ITCs generated by the Projects are being transferred under Section 6418 of the Code (as added by the IRA) to Pinehurst Insurance Group, Inc. ("Pinehurst"), a Connecticut corporation (Employer Identification Number: 06-1483927). The terms of the Section 6418 transfer are governed by the Tax Credit Purchase Agreement dated as of September 21, 2023 (the "TCPA") among the Partnership, CBR Manager, and Pinehurst.
Under the TCPA, $60,000,000 in face-value ITCs are being sold and transferred to Pinehurst at a price of $0.92 per $1.00 of credit, for aggregate cash proceeds of $55,200,000 to the Partnership. An additional $4,800,000 in face-value ITCs are being retained by CBR for its own use. The total ITCs transferred or retained outside the partnership tax-equity structure thus equal $64,800,000, leaving $89,040,000 in ITCs allocated to the partnership tax-equity structure for allocation between Ridgeline and CBR Manager in accordance with the LLCA.
This Opinion addresses only the tax-equity partnership structure and Ridgeline's allocable share of tax benefits arising thereunder. C&H has delivered a separate opinion letter to Pinehurst, also dated as of the date hereof, addressing the federal income tax consequences of the Section 6418 transfer of credits to Pinehurst. We express no opinion herein regarding the Section 6418 transfer or the tax consequences thereof to Pinehurst or to any other party.
D. Related Agreements
In addition to the LLCA and the CCA, the Transaction involves the following principal agreements and documents (collectively with the LLCA and the CCA, the "Transaction Documents"), each of which we have reviewed for purposes of rendering this Opinion:
(i) the Tax Credit Purchase Agreement (the "TCPA"), dated as of September 21, 2023, among the Partnership, CBR Manager, and Pinehurst;
(ii) the Tax Indemnity Agreement, dated as of September 21, 2023, between CBR and Ridgeline, pursuant to which CBR provides certain indemnities to Ridgeline in the event of ITC disallowance, ITC recapture, or other adverse tax consequences;
(iii) the Escrow Agreement, dated as of September 21, 2023, among the Partnership, Ridgeline, CBR Manager, and Clearwater Escrow Services, Inc. ("Clearwater"), as escrow agent (Escrow Account No. CES-2023-80114), providing for the establishment and maintenance of certain reserve accounts, including the ITC recapture reserve and the operating expense reserve;
(iv) the Purchase Option Agreement, dated as of September 21, 2023, between CBR Manager and Ridgeline, granting CBR Manager the Purchase Option described in Section II.B above;
(v) the Intercompany Contribution Agreement, dated as of September 21, 2023, between CBR and CBR Manager, documenting the contribution by CBR of its interests in the project companies to the Partnership;
(vi) the Back-Leverage Intercreditor and Consent Agreement (the "Intercreditor Agreement"), among Osprey National Bank, N.A. ("ONB"), CBR Manager, and the Partnership, governing the relationship between the back-leverage lender (ONB) and the tax-equity investor (Ridgeline) with respect to CBR Manager's pledged interests in the Partnership;
(vii) the Pledge Agreement, dated as of December 8, 2023, between CBR Manager and ONB, pursuant to which CBR Manager pledges its membership interest in the Partnership to secure its obligations under the back-leverage term loan facility;
(viii) the Partnership Representative Designation and Tax Matters Agreement, dated as of September 21, 2023, between CBR Manager and Ridgeline, designating CBR Manager as the "partnership representative" of the Partnership under Section 6223 of the Code and setting forth the parties' respective rights and obligations with respect to partnership-level audits and adjustments under the centralized partnership audit rules of Sections 6221 through 6241 of the Code (as amended by the Bipartisan Budget Act of 2015); and
(ix) the various ancillary documents, certificates, and instruments delivered in connection with the closing of the Transaction.
In addition, we have reviewed and relied upon the independent appraisal and fair market value analysis prepared by Greystone Worthington, LLC (Helen Farber, Managing Director), dated November 15, 2023 (the "Greystone Appraisal"), and the independent engineer's report prepared by Meridian Technical Advisors, LLC (Dr. Rajan Mehta, Principal Engineer), dated November 10, 2023 (the "Meridian IE Report"), each of which was prepared in connection with the Transaction and delivered to the parties at or prior to the closing.
III. DOCUMENTS EXAMINED AND INFORMATION RELIED UPON
In connection with rendering this Opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of the following documents, certificates, records, and other materials:
Core Transaction Documents:
1. Executed Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC, dated as of September 21, 2023, including all exhibits, schedules, and appendices thereto;
2. Executed Capital Contribution Agreement, dated as of September 21, 2023, including all exhibits and schedules thereto;
3. Executed Tax Credit Purchase Agreement, dated as of September 21, 2023;
4. Executed Tax Indemnity Agreement, dated as of September 21, 2023;
5. Executed Purchase Option Agreement, dated as of September 21, 2023;
6. Executed Escrow Agreement, dated as of September 21, 2023, including Clearwater Escrow Services, Inc. account documentation (Escrow Account No. CES-2023-80114);
7. Executed Intercompany Contribution Agreement, dated as of September 21, 2023;
8. Executed Back-Leverage Intercreditor and Consent Agreement, dated as of September 21, 2023;
9. Executed Pledge Agreement, dated as of December 8, 2023; and
10. Executed Partnership Representative Designation and Tax Matters Agreement, dated as of September 21, 2023.
Corporate and Entity Documents:
11. Certificate of Formation and Operating Agreement of Solstice Holdings, LLC, as filed with the Delaware Secretary of State;
12. Certificate of Formation and Operating Agreement of CBR Solstice Manager, LLC, as filed with the Delaware Secretary of State;
13. Certificates of Formation and Operating Agreements of each of the seven project companies (Pecos Sun Solar, LLC; Red Mesa Solar, LLC; Coyote Flats Solar, LLC; Llano Verde Solar, LLC; Cimarron Solar, LLC; Sandoval Ridge Solar, LLC; and Amistad Solar, LLC), each as filed with the Delaware Secretary of State;
14. Articles of Incorporation and Bylaws of Calloway-Briggs Renewables Inc. (Texas Secretary of State File No. 803762114);
15. Secretary's Certificate of CBR, dated as of December 8, 2023, certifying copies of the Articles of Incorporation and Bylaws, board resolutions authorizing the Transaction, and incumbency of officers;
16. Secretary's Certificate of CBR Manager, dated as of December 8, 2023; and
17. Good standing certificates for the Partnership, CBR Manager, and each project company from the Delaware Secretary of State, and foreign qualification certificates from the Texas Secretary of State and the New Mexico Secretary of State, as applicable.
Project Documents:
18. Master Engineering, Procurement, and Construction Agreement, dated as of March 15, 2022, between VBC and the project companies, together with all change orders, amendments, and supplements thereto through the date hereof;
19. Power Purchase Agreements between the five Texas project companies and Lone Star Grid Solutions, LLC (five agreements, each with a fifteen-year term, with a weighted-average contract price of $32.50/MWh and an annual escalation rate of 1.5%);
20. Power Purchase Agreements between the two New Mexico project companies and Enchantment Power Cooperative (two agreements, each with a twenty-year term, with a weighted-average contract price of $29.75/MWh and an annual escalation rate of 2.0%);
21. ERCOT interconnection agreements for the five Texas Projects;
22. Northgate Corporation/WECC interconnection agreements for the two New Mexico Projects;
23. Site lease agreements, easements, access agreements, and related real property documents for each Project;
24. Title reports and title insurance commitments for each Project site;
25. Environmental and regulatory permits, licenses, and approvals for each Project, including NEPA documentation, stormwater permits, county building permits, and conditional use permits, as applicable; and
26. Insurance certificates and coverage summaries issued by Sentinel Underwriters, Inc., documenting property and casualty insurance, commercial general liability insurance, and builder's risk insurance, each underwritten by Fortis Indemnity Company, and performance bonds issued by Ironclad Surety Corp.
Tax and Compliance Documents:
27. Prevailing wage compliance certifications from VBC, including certified payroll records and certifications signed by Carlos Vasquez, President of VBC, and Elena Vasquez-Torres, Vice President of Project Execution of VBC, dated as of November 30, 2023, certifying compliance with the prevailing wage requirements of Section 48(a)(10) of the Code for each of the seven Projects;
28. Apprenticeship compliance certifications from VBC, including documentation of qualified apprentice utilization, labor hour summaries, and registered apprenticeship program information, dated as of November 30, 2023, certifying compliance with the apprenticeship requirements of Section 48(a)(11) of the Code;
29. Domestic content certifications, including manufacturer attestations and component tracking documentation, demonstrating compliance with the domestic content requirements of Section 48(a)(12) of the Code for all solar modules, inverters, racking and tracking systems, and other manufactured components installed in each Project; and
30. IRS Forms W-9 for each entity party to the Transaction Documents.
Third-Party Reports and Analyses:
31. Independent appraisal and fair market value analysis prepared by Greystone Worthington, LLC (Helen Farber, Managing Director), dated November 15, 2023;
32. Independent engineer's report prepared by Meridian Technical Advisors, LLC (Dr. Rajan Mehta, Principal Engineer), dated November 10, 2023, including capacity test results, performance ratio analyses, and COD certifications for each Project; and
33. Energy production forecasts prepared by Meridian Technical Advisors, LLC for each Project.
Financing Documents:
34. Construction facility agreement with Osprey National Bank, N.A. (Facility Reference No. ONB-PF-2022-0341);
35. Back-leverage term loan facility agreement with Osprey National Bank, N.A. (Facility Reference No. ONB-PF-2023-0587); and
36. UCC/lien search results from the Delaware Secretary of State, the Texas Secretary of State, and the New Mexico Secretary of State.
Certificates and Representations:
37. Officer's Closing Certificate of CBR, dated as of December 8, 2023, signed by Theo Vasquez, Chief Financial Officer of CBR, certifying as to the accuracy and completeness of certain factual representations and warranties made in connection with the Transaction; and
38. Such other representations, warranties, and certifications of officers and authorized representatives of CBR and CBR Manager regarding factual matters as we have deemed necessary or appropriate for purposes of rendering this Opinion.
A comprehensive list of all Transaction Documents reviewed is attached hereto as Exhibit A.
In our examination of the foregoing documents, we have assumed the genuineness of all signatures, the legal capacity and authority of all natural persons, the authenticity of all documents submitted to us as originals, and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed that each document we reviewed was duly authorized, executed, and delivered by all parties thereto in accordance with all applicable laws and that such documents have not been amended, modified, or supplemented except as reflected in documents we have reviewed.
IV. ASSUMPTIONS
In rendering the opinions expressed in this Opinion, we have relied upon, and our opinions are subject to, the following assumptions. We have not independently verified any of the assumptions set forth below.
A. Factual Assumptions
We have assumed the following with respect to factual matters:
1. All representations and warranties made by CBR, CBR Manager, and the project companies in the Transaction Documents (including, without limitation, in the LLCA, the CCA, the Tax Indemnity Agreement, and the Officer's Closing Certificate) are, and will remain, true, correct, and complete in all material respects as of the date hereof and at all relevant times thereafter.
2. All parties to the Transaction Documents have performed, and will continue to perform, all of their respective covenants, agreements, and obligations under the Transaction Documents in accordance with the terms thereof.
3. Each Project constitutes (or, upon placement in service, has constituted) "energy property" within the meaning of Section 48(a)(3) of the Internal Revenue Code of 1986, as amended (the "Code") — specifically, "solar energy property" as described in Section 48(a)(3)(A)(i) of the Code — because each Project consists of equipment that uses solar energy to generate electricity.
4. Each Project has been placed in service (within the meaning of Section 48(a) of the Code and the Treasury Regulations thereunder) on or before December 31, 2023, on the dates set forth in the Meridian IE Report and the Officer's Closing Certificate (i.e., CODs ranging from September 30, 2023 to November 18, 2023). For purposes of this assumption, we have relied on the analysis and conclusions of the Meridian IE Report with respect to the placed-in-service dates of each Project, including the satisfaction of applicable technical, contractual, and regulatory milestones.
5. VBC has complied, and will continue to comply, with the prevailing wage requirements under Section 48(a)(10) of the Code and the apprenticeship requirements under Section 48(a)(11) of the Code throughout the construction of all Projects, including with respect to any alteration or repair work performed during the recapture period. We have relied on the prevailing wage and apprenticeship compliance certifications described in Section III above in making this assumption.
6. The domestic content requirements under Section 48(a)(12) of the Code have been satisfied for all Projects, based on the domestic content certifications and manufacturer attestations reviewed by us, as described in Section III above. We have not independently tested, verified, or audited the domestic content of any solar module, inverter, racking or tracking system, or other manufactured component installed in any Project.
7. CBR's contribution of the membership interests in the project companies to the Partnership was properly structured and qualifies as a tax-free contribution under Section 721 of the Code, such that no gain or loss was recognized by CBR or the Partnership in connection with such contribution.
8. The fair market value of the Projects and the project company interests, as determined by the Greystone Appraisal, is accurate and was determined using accepted appraisal methodologies consistent with the requirements of the Code, the Treasury Regulations, and applicable professional standards. We have relied on the Greystone Appraisal and have not independently verified the fair market value conclusions expressed therein.
9. No Project will undergo a change in use, disposition, cessation of qualification as energy property, or any other event that would trigger recapture of the ITC under Section 50(a) of the Code during the five-year recapture period applicable to such Project. We have relied on the covenants and representations of CBR and CBR Manager in the LLCA and the Tax Indemnity Agreement in making this assumption.
10. The Partnership will file accurate, complete, and timely federal and state income tax returns (including IRS Schedule K-1s delivered to each partner) for each taxable year, reflecting the allocations of tax items required under the LLCA and in accordance with the Code and the Treasury Regulations.
11. The Partnership will maintain complete and accurate books and records in accordance with the Code, the Treasury Regulations (including the capital account maintenance rules of Treas. Reg. § 1.704-1(b)(2)(iv)), and generally accepted accounting principles.
12. The Transaction has been consummated in accordance with the terms of the Transaction Documents, including the funding of Ridgeline's first tranche capital contribution of $96,000,000 and CBR Manager's capital contribution of $2,400,000 on the date hereof.
B. Legal Assumptions
We have assumed the following with respect to legal matters:
1. The Transaction Documents are valid, binding, and enforceable in accordance with their respective terms under all applicable state law (including the Delaware Limited Liability Company Act and the laws of the State of Texas), and no Transaction Document has been terminated, rescinded, or modified except as reflected in documents we have reviewed. We express no opinion on matters of state law, and we have relied on opinions of Delaware and Texas counsel delivered in connection with the closing.
2. All necessary governmental and regulatory approvals, consents, licenses, permits, and authorizations required in connection with the Transaction, the ownership and operation of the Projects, and the performance of the parties' obligations under the Transaction Documents have been obtained, are in full force and effect, and will remain in full force and effect throughout the relevant periods.
3. No change in applicable federal tax law (whether by legislative, regulatory, judicial, or administrative action) occurring after the date of this Opinion will materially and adversely affect the conclusions expressed herein. We note that tax law is subject to change, and future changes could affect the analysis set forth in this Opinion.
4. Each entity described in this Opinion that is characterized as a limited liability company classified as a partnership, a disregarded entity, or a corporation, as applicable, is properly classified for federal income tax purposes, and no entity has made or will make any election under Treas. Reg. § 301.7701-3 that would alter its classification in a manner inconsistent with the Transaction Documents.
V. OPINIONS
Based upon and subject to the foregoing, and subject to the qualifications, limitations, and exceptions set forth in Sections VI and VII of this Opinion, we are of the opinion that:
Opinion 1: The Projects Constitute Energy Property Eligible for ITCs Under Section 48 of the Code
Each of the seven Projects constituting the Solstice Portfolio constitutes "energy property" within the meaning of Section 48(a)(3)(A)(i) of the Code — specifically, "solar energy property" — because each Project consists of equipment that uses solar energy to generate electricity, and each Project satisfies the requirements for the Investment Tax Credit ("ITC") under Section 48(a) of the Code, as amended by the Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (the "IRA").
Section 48(a)(1) of the Code provides that the energy credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year. Section 48(a)(3)(A)(i) defines "energy property" to include, among other things, equipment that uses solar energy to generate electricity. Each of the seven Projects consists of solar photovoltaic modules, inverters, racking and tracking systems, electrical collection equipment, substations, and related balance-of-system components — all of which constitute equipment that uses solar energy to generate electricity within the meaning of Section 48(a)(3)(A)(i).
Based on the Meridian IE Report and the Officer's Closing Certificate, each Project has been placed in service during the 2023 taxable year, on the specific dates set forth in Section II.A of this Opinion (i.e., CODs ranging from September 30, 2023 to November 18, 2023). The "placed in service" determination is based on all relevant facts and circumstances, including the completion of construction, the passage of performance testing, the achievement of interconnection with the applicable transmission grid (ERCOT for the Texas Projects and Northgate Corporation/WECC for the New Mexico Projects), and the commencement of commercial operations under the applicable Power Purchase Agreements. The Meridian IE Report confirms that each of these milestones has been satisfied for each Project.
The eligible basis of each Project for purposes of calculating the ITC equals the cost of the energy property placed in service, as determined under Section 48(a) of the Code and the Treasury Regulations thereunder. In the aggregate, the eligible basis of the seven Projects totals $384,600,000, based on the EPC contract costs set forth in Section II.A above. We have relied on the representations of CBR and the Greystone Appraisal in determining that the eligible basis amounts accurately reflect the cost of the energy property placed in service and that no amount included in eligible basis is attributable to property that does not constitute energy property (such as land, transmission facilities beyond the point of interconnection, or non-qualifying components).
Accordingly, it is our opinion that each of the seven Projects constitutes energy property eligible for the ITC under Section 48(a) of the Code, as amended by the IRA, and that ITCs should be allowed with respect to the eligible basis of each Project.
Opinion 2: The 40% ITC Rate Is Supported (30% Base Rate Plus 10% Domestic Content Adder)
A. Base Rate: 30%
Under Section 48(a)(2) of the Code, as amended by the IRA, the base ITC rate for solar energy property placed in service after December 31, 2021 is 6%. However, under Section 48(a)(10) and Section 48(a)(11) of the Code, as added by the IRA, the base rate is increased by a factor of five (the "5× multiplier"), from 6% to 30%, if the taxpayer satisfies both (i) the prevailing wage requirements of Section 48(a)(10) and (ii) the apprenticeship requirements of Section 48(a)(11).
Prevailing Wage Requirements (Section 48(a)(10)). Section 48(a)(10) requires that any laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) in the construction, alteration, or repair of the facility be paid wages at rates not less than the prevailing rates for corresponding classes of laborers and mechanics employed on projects of a character similar in the locality, as determined by the Secretary of Labor in accordance with subchapter IV of chapter 31 of title 40, United States Code (commonly known as the Davis-Bacon Act). Based on the prevailing wage compliance certifications provided by VBC, including the certifications signed by Carlos Vasquez, President of VBC, and Elena Vasquez-Torres, Vice President of Project Execution of VBC, dated November 30, 2023, the construction of each of the seven Projects has been performed in compliance with the prevailing wage requirements. The certifications include detailed certified payroll records, wage rate comparisons, and attestations of compliance covering all trades and labor classifications employed during the construction of each Project.
Apprenticeship Requirements (Section 48(a)(11)). Section 48(a)(11) requires that, with respect to the construction, alteration, or repair of any facility for which the 5× multiplier is sought, the taxpayer must ensure that not less than the applicable percentage of total labor hours are performed by qualified apprentices. Based on the apprenticeship compliance certifications provided by VBC, including documentation of the qualified apprentice utilization rates, labor hour summaries, and evidence of participation in registered apprenticeship programs approved by the U.S. Department of Labor (or a State apprenticeship agency recognized by the Office of Apprenticeship), the construction of each of the seven Projects satisfies the apprenticeship requirements.
Conclusion. Based on the foregoing, it is our opinion that the prevailing wage and apprenticeship requirements of Sections 48(a)(10) and 48(a)(11) of the Code have been satisfied with respect to each of the seven Projects, and accordingly, the 5× multiplier applies, resulting in a base ITC rate of 30% for each Project.
B. Domestic Content Bonus: 10%
Under Section 48(a)(12) of the Code, as added by the IRA, an additional 10% bonus credit (the "Domestic Content Bonus") is available for energy property that satisfies the domestic content requirements. Specifically, Section 48(a)(12) requires that any steel, iron, or manufactured product that is a component of the energy property must be produced in the United States, meeting the applicable percentage thresholds prescribed by the Secretary of the Treasury. The Treasury Department and the IRS issued Notice 2023-38, 2023-20 I.R.B. 872, providing initial guidance on the domestic content requirements, including safe harbor provisions and certification procedures.
Based on our review of the domestic content certifications and manufacturer attestations provided by CBR, VBC, and the applicable component suppliers, each of the seven Projects satisfies the domestic content requirements of Section 48(a)(12). The certifications demonstrate that (i) all structural steel and iron used in the construction of each Project were produced in the United States (i.e., all manufacturing processes, from the initial melting stage through the application of coatings, occurred in the United States); and (ii) the applicable percentage of the total costs of manufactured products (including solar modules, inverters, single-axis trackers, and other manufactured components) that are components of each Project were manufactured in the United States, within the meaning of the applicable guidance.
Conclusion. Based on the foregoing, it is our opinion that the domestic content requirements of Section 48(a)(12) of the Code have been satisfied with respect to each of the seven Projects, and accordingly, the additional 10% Domestic Content Bonus applies to each Project.
C. Energy Community Adder: Not Applicable
Under Section 48(a)(14) of the Code, as added by the IRA, an additional 10% bonus credit (the "Energy Community Bonus") is available for energy property located in an "energy community" as defined in Section 45(b)(11)(B) of the Code. Based on our review of the geographic analyses performed by CBR's consultants, which evaluated the location of each Project against the criteria for energy communities (including brownfield sites, metropolitan statistical areas and non-metropolitan statistical areas with certain levels of direct employment or local tax revenues related to fossil fuel activities, and census tracts in which a coal mine has closed or a coal-fired electric generating unit has been retired), none of the seven Projects is located in an area that qualifies as an energy community.
Conclusion. No Energy Community Bonus is included in the ITC rate for any Project.
D. Total ITC Rate and Amount
Based on the analysis in Sections V.2.A through V.2.C above, the total applicable ITC rate for each of the seven Projects is as follows:
Applied to the aggregate eligible basis of the Solstice Portfolio, the total ITCs generated are as follows:
Of the total ITCs generated, the ITCs are allocated as follows:
A detailed computation of the ITC for each Project is set forth in Exhibit C hereto.
Opinion 3: Partnership Allocations Have Substantial Economic Effect Under Section 704(b) of the Code
A. General Framework
Under Section 704(b) of the Code, a partner's distributive share of any item of income, gain, loss, deduction, or credit shall be determined by the partnership agreement, provided that the allocation has "substantial economic effect." If an allocation under the partnership agreement does not have substantial economic effect, the partner's distributive share of such item shall be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances). Treasury Regulation Section 1.704-1(b)(2) provides a two-part test for determining whether an allocation has "substantial economic effect": first, the allocation must have "economic effect" (Treas. Reg. § 1.704-1(b)(2)(ii)); and second, the economic effect must be "substantial" (Treas. Reg. § 1.704-1(b)(2)(iii)).
The LLCA provides for the allocation of tax items (including ITCs and MACRS depreciation deductions) and cash distributions between Ridgeline and CBR Manager as set forth in Section II.B above. During the Pre-Flip Period, Ridgeline is allocated 99% of all tax items and receives 30% of cash distributions, while CBR Manager is allocated 1% of all tax items and receives 70% of cash distributions. Following the Flip Date, Ridgeline's share of all partnership items decreases to 5%, and CBR Manager's share increases to 95%.
B. Economic Effect
The LLCA satisfies the three requirements for "economic effect" under the basic test of Treasury Regulation Section 1.704-1(b)(2)(ii)(b):
1. Capital Accounts Maintained in Accordance with Treasury Regulation Section 1.704-1(b)(2)(iv). Section 5.1 of the LLCA requires that a capital account be established and maintained for each Member in accordance with the rules set forth in Treasury Regulation Section 1.704-1(b)(2)(iv), including proper adjustments for (a) cash and property contributions, (b) allocations of income, gain, loss, deduction, and credit (and items thereof), (c) distributions of cash and property, and (d) all other adjustments required by the Treasury Regulations (including adjustments for liabilities assumed and Section 704(c) allocations). The LLCA further provides that the capital accounts shall be adjusted to reflect the fair market value of Partnership assets in the event of any revaluation event described in Treasury Regulation Section 1.704-1(b)(2)(iv)(f). Based on our review, the capital account maintenance provisions of the LLCA satisfy the requirements of Treasury Regulation Section 1.704-1(b)(2)(iv).
2. Liquidating Distributions Made in Accordance with Positive Capital Account Balances. Section 12.3 of the LLCA provides that, upon the dissolution and liquidation of the Partnership, after payment of all Partnership liabilities (or the making of reasonable provision therefor), the remaining assets of the Partnership shall be distributed to the Members in accordance with their positive capital account balances (after giving effect to all contributions, distributions, and allocations for all periods, including the period during which the liquidation occurs). This provision satisfies the requirement of Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).
3. Deficit Restoration Obligation or Qualified Income Offset. Section 5.3(a) of the LLCA contains an unconditional deficit restoration obligation ("DRO") applicable to Ridgeline, pursuant to which Ridgeline is unconditionally obligated to restore the deficit balance, if any, in its capital account upon the liquidation of the Partnership (or upon the liquidation of Ridgeline's interest in the Partnership). This DRO satisfies the requirement of Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3). In addition, Section 5.3(b) of the LLCA contains a qualified income offset ("QIO") provision applicable to CBR Manager, pursuant to which, if CBR Manager unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6) that create or increase a deficit balance in CBR Manager's capital account in excess of any amounts that CBR Manager is obligated or deemed obligated to restore, items of income and gain shall be specially allocated to CBR Manager in an amount and manner sufficient to eliminate such excess deficit balance as quickly as possible. This QIO provision satisfies the requirements of Treasury Regulation Section 1.704-1(b)(2)(ii)(d).
Based on the foregoing, it is our opinion that the allocations under the LLCA satisfy the "economic effect" requirement of Treasury Regulation Section 1.704-1(b)(2)(ii).
C. Substantiality. The allocations under the LLCA satisfy the "substantiality" requirement of Treasury Regulation Section 1.704-1(b)(2)(iii). The substantiality requirement is met if there is a reasonable possibility that the allocations will affect substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences. Treasury Regulation Section 1.704-1(b)(2)(iii)(a).
The allocations under the LLCA are not "shifting allocations" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(iii)(b), because the enhanced allocation of tax items to Ridgeline during the Pre-Flip Period is not offset by a corresponding reduction in the Pre-Flip Period such that the net increases and decreases to the partners' capital accounts will be the same as they would have been if the partnership agreement did not contain the allocation provisions at issue. To the contrary, the disproportionate allocation of tax items to Ridgeline during the Pre-Flip Period results in meaningful differences in the partners' capital accounts that are reflected in the amounts each partner would receive upon a hypothetical liquidation of the Partnership.
The allocations are likewise not "transitory allocations" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(iii)(c). Although the LLCA provides for a change in allocation percentages upon the Flip Date, there is a strong likelihood, as of the time the allocations become part of the partnership agreement, that the net changes in the partners' capital accounts will not be largely offset by subsequent allocations. The flip is projected to occur approximately five years after the weighted-average COD, and the post-flip allocation percentages apply prospectively based on economic events that are not predetermined. The pre-flip allocations will have lasting economic consequences reflected in the partners' capital account balances and their respective entitlements upon liquidation.
Moreover, the overall allocation scheme has economic substance independent of its tax consequences. Ridgeline's investment of $120,000,000 in exchange for a 30% share of cash distributions (pre-flip) and a meaningful residual 5% interest (post-flip), combined with the genuine risk of loss inherent in a utility-scale solar energy investment (including commodity price risk, production variability, equipment degradation, and operational risk), demonstrates that the allocations were motivated by legitimate business considerations and are not merely tax-driven.
Based on the foregoing, it is our opinion that the economic effect of the allocations under the LLCA is "substantial" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(iii).
D. Minimum Gain Chargeback and Other Provisions
The LLCA includes the following additional provisions designed to ensure compliance with the Treasury Regulations governing partnership allocations:
(i) Minimum Gain Chargeback. Section 5.4(a) of the LLCA includes a minimum gain chargeback provision consistent with the requirements of Treasury Regulation Section 1.704-2(f). This provision requires that, if there is a net decrease in Partnership minimum gain during any taxable year, each partner shall be specially allocated items of Partnership income and gain for such taxable year (and, if necessary, subsequent years) in an amount equal to such partner's share of the net decrease in Partnership minimum gain, determined in accordance with Treasury Regulation Section 1.704-2(g)(2).
(ii) Partner Nonrecourse Debt Minimum Gain Chargeback. Section 5.4(b) of the LLCA includes a partner nonrecourse debt minimum gain chargeback provision consistent with the requirements of Treasury Regulation Section 1.704-2(i)(4). This provision requires that, if there is a net decrease in partner nonrecourse debt minimum gain attributable to a partner nonrecourse debt during any taxable year, each partner who has a share of the partner nonrecourse debt minimum gain attributable to that partner nonrecourse debt shall be specially allocated items of Partnership income and gain for such year in an amount equal to such partner's share of the net decrease in the partner nonrecourse debt minimum gain.
(iii) Qualified Income Offset. As described in Section V.3.B above, Section 5.3(b) of the LLCA includes a QIO provision consistent with Treasury Regulation Section 1.704-1(b)(2)(ii)(d).
These provisions operate as regulatory safeguards to protect the integrity of the capital account maintenance regime and the economic effect of the allocations. Their inclusion in the LLCA further supports the conclusion that the allocations have substantial economic effect.
E. Conclusion on Section 704(b) Compliance
Based on the foregoing analysis, it is our opinion that the allocations of tax items under the LLCA — including the allocations of ITCs, MACRS depreciation deductions, and other items of income, gain, loss, deduction, and credit to Ridgeline during the Pre-Flip Period and the adjusted allocations applicable after the Flip Date — should be respected for federal income tax purposes because such allocations have "substantial economic effect" within the meaning of Section 704(b) of the Code and Treasury Regulation Section 1.704-1(b)(2).
Opinion 4: The Flip Mechanics Are Consistent with Revenue Procedure 2007-65
A. Safe Harbor Analysis
Revenue Procedure 2007-65, 2007-2 C.B. 967, provides a "safe harbor" under which the Internal Revenue Service will respect the allocations of tax items in partnership-flip transactions involving wind energy production tax credit projects. Although Rev. Proc. 2007-65 was issued specifically in the context of wind energy partnership-flip structures and the production tax credit under Section 45 of the Code, the principles articulated therein have been widely applied by analogy — by taxpayers, tax practitioners, and the IRS in its examination activities — to partnership-flip structures involving solar energy ITCs under Section 48 of the Code. The IRS has not issued separate published guidance establishing a safe harbor specifically for solar ITC partnership-flip transactions, and accordingly, compliance with the principles of Rev. Proc. 2007-65 represents the prevailing industry standard for such transactions.
We have analyzed the LLCA and the related Transaction Documents against the key requirements of the Rev. Proc. 2007-65 safe harbor and have concluded as follows:
1. Minimum Investment by Sponsor. Rev. Proc. 2007-65, § 4.01, requires that the sponsor (here, CBR Manager) make a minimum capital contribution to the partnership. CBR Manager has contributed $2,400,000 to the Partnership, representing 2.0% of Ridgeline's total capital commitment of $120,000,000. This exceeds the minimum 1% investment requirement set forth in the safe harbor and demonstrates CBR Manager's meaningful financial participation in the Partnership.
2. Meaningful Residual Interest. Rev. Proc. 2007-65, § 4.02, requires that the investor retain a meaningful residual interest in the partnership after the flip. Under the LLCA, Ridgeline retains a 5% interest in all partnership items (including tax items and cash distributions) following the Flip Date. A 5% residual interest is the minimum residual interest contemplated by the safe harbor, and its retention by Ridgeline demonstrates that Ridgeline's participation in the Partnership is not limited to the receipt of tax benefits during the Pre-Flip Period but extends to a continuing economic interest in the operations of the Partnership.
3. Participation in Operating Cash Flow. Rev. Proc. 2007-65, § 4.03, requires that the investor participate in the operating cash flow of the partnership in a manner that is not merely nominal. Ridgeline receives 30% of cash distributions available for distribution during the Pre-Flip Period and 5% of cash distributions after the Flip Date. A 30% share of pre-flip cash distributions constitutes meaningful participation in the economic activity of the Partnership and is not merely a nominal or token share designed to mask a financing arrangement.
4. No Deficit Restoration Obligation in Excess of Reasonably Anticipated Partnership Losses. The LLCA's DRO applicable to Ridgeline is structured to be consistent with the safe harbor requirement that the investor's deficit restoration obligation not exceed the amount that the investor reasonably expects to be called upon to restore. The DRO is unconditional (satisfying the economic effect test), but based on the financial projections, the Partnership is not expected to generate losses in excess of Ridgeline's capital account balance. Accordingly, the DRO functions primarily as a regulatory requirement rather than a source of material economic exposure.
5. Purchase Option at Fair Market Value. Rev. Proc. 2007-65, § 4.04, requires that any purchase option held by the sponsor be exercisable only at a price equal to the fair market value of the investor's interest at the time of exercise. Under the Purchase Option Agreement, CBR Manager's Purchase Option is exercisable during the 180-day window following the Flip Date at a purchase price equal to the fair market value of Ridgeline's 5% interest, as determined by a qualified independent appraiser selected pursuant to the procedures set forth in the Purchase Option Agreement, subject to a floor price of $1.00. The use of a fair market value purchase price (and not a fixed, predetermined, or nominal price) is essential to the conclusion that the Transaction is properly characterized as a partnership investment, rather than a disguised financing or lease arrangement. The $1.00 floor price is a de minimis threshold designed to prevent administrative complexities and does not impair the fair market value character of the Purchase Option.
6. No Guaranteed Return. Rev. Proc. 2007-65, § 4.05, requires that the investor's return not be guaranteed by the sponsor, the partnership, or any other party. Under the LLCA, Ridgeline's target yield of 7.25% after-tax IRR is a projected target, not a guarantee. Ridgeline bears genuine economic risk that the Partnership may not generate sufficient tax benefits, cash flow, or other economic returns to enable Ridgeline to achieve its target yield. The Tax Indemnity Agreement provides indemnification for certain specific tax risks (e.g., ITC disallowance or recapture), but it does not guarantee Ridgeline's overall return or shift all economic risk away from Ridgeline.
7. Service Fee/Priority Return Analysis. The disparity between Ridgeline's 99% allocation of tax items and its 30% share of cash distributions during the Pre-Flip Period is a characteristic feature of partnership-flip structures and is consistent with the structure contemplated by Rev. Proc. 2007-65. The 70% share of cash distributions allocated to CBR Manager during the Pre-Flip Period is treated as a priority return to the developer in recognition of CBR Manager's role in developing, constructing, and managing the Projects, and is not treated as a fee for services that would recharacterize the arrangement. The overall economics of the Transaction — including Ridgeline's capital contribution, its participation in cash distributions, and its retained residual interest — are consistent with a genuine partnership investment rather than a disguised service fee arrangement.
B. Partnership Classification
It is our opinion that the Partnership should be classified as a partnership for federal income tax purposes under Sections 761 and 7701 of the Code and Treasury Regulation Section 301.7701-3, and that the LLCA should not be recharacterized as a financing arrangement (e.g., a loan from Ridgeline to CBR or CBR Manager), a lease of the Projects by the Partnership to Ridgeline, a sale or exchange of tax credits, or any other form of transaction.
In reaching this conclusion, we have considered the following factors, each of which supports partnership classification and militates against recharacterization:
(i) Economic Substance. The Transaction has economic substance independent of its tax consequences. Ridgeline has invested a substantial amount of capital ($120,000,000) in a portfolio of operating solar energy projects with genuine revenue-generating potential under long-term Power Purchase Agreements with creditworthy counterparties.
(ii) Meaningful Participation in Profits and Losses. Ridgeline participates meaningfully in the profits and losses of the Partnership, including its 30% share of cash distributions during the Pre-Flip Period and its 5% residual interest in all partnership items after the Flip Date. Ridgeline bears genuine downside risk, including commodity price risk, production variability, equipment failure, and counterparty credit risk.
(iii) Absence of Guaranteed Returns. Ridgeline's target yield is a target, not a guarantee. The Transaction Documents do not provide for a guaranteed return of or on Ridgeline's capital investment, and Ridgeline's ultimate economic return is dependent on the actual performance of the Projects.