MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
TO: Leonard Cross, Partner, Tax — Calderwood & Harkness LLP
FROM: Leila Nazari, Associate, Tax; Robert Jansen, Associate, Tax — Calderwood & Harkness LLP
DATE: September 15, 2023
RE: Investment Tax Credit Eligibility and Basis Analysis — Solstice Portfolio (420 MW(dc))
MATTER NO.: 1015-00005
BILLING NO.: 78204-001
CLIENT: Calloway-Briggs Renewables Inc.
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I. Executive Summary
This memorandum analyzes the eligibility of seven utility-scale solar photovoltaic projects comprising the Solstice Portfolio, totaling 420 megawatts direct current ("MW(dc)"), for the federal investment tax credit ("ITC") under Section 48 of the Internal Revenue Code of 1986, as amended (the "Code"), including as substantially revised by the Inflation Reduction Act of 2022 (the "IRA"). The Solstice Portfolio has been developed by our client, Calloway-Briggs Renewables Inc. ("CBR"), and is the subject of a dual-tranche tax-equity monetization transaction involving both a partnership-flip structure and a transferable credit sale under new Section 6418 of the Code.
Based on our analysis of the applicable statutory provisions, Treasury regulations, IRS guidance, the engineering-procurement-construction ("EPC") contracts, the independent appraisal, prevailing wage and apprenticeship records, and domestic content documentation, we conclude as follows:
1. ITC Eligibility. All seven projects in the Solstice Portfolio constitute "energy property" eligible for the ITC under Section 48(a). Each project consists of equipment that uses solar energy to generate electricity within the meaning of Section 48(a)(2)(A)(i)(VII), and construction of each project began before January 1, 2025, such that Section 48 (rather than the technology-neutral Section 48E) governs the ITC determination.
2. Applicable ITC Rate. The applicable ITC rate is 40%, composed of a 30% base rate (reflecting satisfaction of the prevailing wage and apprenticeship requirements under Sections 48(a)(10) and 48(a)(11)) plus a 10% domestic content bonus adder under Section 48(a)(12). The energy community bonus adder under Section 48(a)(14) does not apply, as none of the seven project sites qualifies as an "energy community." The low-income community adder under Section 48(e) is inapplicable to utility-scale projects.
3. Total Eligible Basis. The total eligible basis (cost basis of solar energy property under Section 1012) across the seven projects is $384,600,000, representing aggregate EPC costs as confirmed by the independent appraisal prepared by Greystone Worthington, LLC.
4. Total ITCs Generated. The Solstice Portfolio generates total ITCs of $153,840,000 ($384,600,000 × 40%).
5. Allocation of ITCs. The ITCs are allocated as follows:
• $89,040,000 allocated through the partnership-flip structure in Solstice Holdings, LLC, with Ridgeline Capital Partners, LLC serving as the tax-equity investor (99% pre-flip allocation of tax items, including ITCs, to Ridgeline; 1% to CBR Solstice Manager, LLC);
• $64,800,000 to be the subject of Section 6418 transfer elections, of which $60,000,000 in face value will be sold to Pinehurst Insurance Group, Inc. at $0.92 per $1.00 of credit (yielding $55,200,000 in cash proceeds) and $4,800,000 in face value will be retained by CBR for application against its own federal income tax liability.
This memorandum should be read in conjunction with the following companion memoranda, each of which addresses discrete aspects of the Solstice Portfolio transaction:
(a) the Tax Structure Memorandum (partnership-flip and Section 6418 analysis);
(b) the Section 6418 Transfer Election Memorandum;
(c) the ITC Recapture Risk Memorandum; and
(d) the Partnership Tax Allocation Memorandum (Section 704(b) substantial economic effect analysis).
We also note the existence of a separate research memorandum addressing the interaction of Section 6418 transfer elections with partnership-flip structures, which is relevant to the structural bifurcation of the ITC allocation described herein.
II. Background and Transaction Overview
A. The Sponsor
Calloway-Briggs Renewables Inc. ("CBR") is a Texas C-corporation (EIN: 84-3291076; Texas Secretary of State File No.: 803762114) with its principal offices located at 2700 Post Oak Boulevard, Suite 1450, Houston, Texas 77056. CBR was co-founded by Marcus Calloway, who serves as Chairman and Chief Executive Officer and holds approximately 38% of CBR's equity, and Diana Briggs, who serves as President and Chief Operating Officer and holds approximately 34% of CBR's equity. The remaining equity is held by a combination of early-stage investors and members of management.
Since its formation in 2017, CBR has developed approximately 1.2 gigawatts ("GW") of solar photovoltaic projects across the southwestern United States. For the fiscal year ended December 31, 2022, CBR reported revenues of approximately $67.4 million and total assets of approximately $412 million. As of the date of this memorandum, CBR operates approximately 780 MW of solar generation capacity across five states (Texas, New Mexico, Arizona, Nevada, and California). CBR has established itself as a mid-market developer and owner-operator of utility-scale solar projects, with a particular concentration in the ERCOT market in Texas and the Western Interconnection.
The financial lead on the Solstice Portfolio transaction is Theo Vasquez, CBR's Chief Financial Officer. The day-to-day deal lead is Priya Anand, Vice President of Project Finance, who has been coordinating with Calderwood & Harkness, Larchmont & Associates, and the tax-equity and credit purchaser counterparties throughout the structuring and negotiation process.
B. The Solstice Portfolio
The Solstice Portfolio consists of seven utility-scale solar PV projects totaling 420 MW(dc) located across Texas and New Mexico. The projects range in capacity from 45 MW(dc) (Amistad) to 85 MW(dc) (Pecos Sun) and are situated in counties across both states that offer strong solar irradiance, available land, and proximity to existing transmission infrastructure.
From a structural perspective, the seven projects are held by seven separate Delaware limited liability companies (each treated as a disregarded entity for federal income tax purposes). Each project-level LLC is wholly owned by Solstice Holdings, LLC, a Delaware limited liability company taxed as a partnership for federal income tax purposes (EIN: 88-4071523). Solstice Holdings is managed by CBR Solstice Manager, LLC, a Delaware limited liability company treated as a disregarded entity for federal income tax purposes (EIN: 88-4071597), which is itself wholly owned by CBR. Both Solstice Holdings and CBR Solstice Manager were formed on August 14, 2023, in anticipation of the transaction.
The EPC contractor for all seven projects is Vasquez Brothers Construction, Inc. ("VBC"), a Texas corporation (EIN: 75-2648103) headquartered at 8500 N. Stemmons Freeway, Suite 400, Dallas, Texas 75247. VBC is engaged under a master EPC agreement (the "Master EPC Agreement") that covers the engineering, procurement, and construction of all seven projects. VBC is an unrelated third party to CBR; notwithstanding the surname coincidence with CBR's CFO, Theo Vasquez, Carlos Vasquez (President of VBC) and Theo Vasquez are unrelated individuals. We address this point in greater detail in the basis analysis in Section VII below.
C. Project Summary Table
The following table summarizes the key characteristics of each project in the Solstice Portfolio:
All seven project-level LLCs are Delaware limited liability companies and are treated as disregarded entities for federal income tax purposes. Accordingly, for purposes of the ITC analysis, the relevant taxpayer is Solstice Holdings, LLC (or, with respect to any Section 6418 transfer election, the partnership filing the election on behalf of the relevant disregarded entity).
D. Offtake Agreements
Each project in the Solstice Portfolio has a long-term power purchase agreement ("PPA") providing contracted revenue certainty for the economic life of the project:
Texas Projects (Pecos Sun, Red Mesa, Coyote Flats, Llano Verde, and Amistad). Each of the five Texas-sited projects has entered into a 15-year fixed-price PPA with Lone Star Grid Solutions, LLC, a Texas-based retail electric provider and power marketer. The weighted-average PPA price across the five Texas projects is $32.50 per megawatt-hour ("MWh"), with a 1.5% annual price escalator beginning on the first anniversary of the commercial operation date of each respective project. These PPAs were negotiated at arm's length and reflect current ERCOT market conditions for long-term solar offtake.
New Mexico Projects (Cimarron and Sandoval Ridge). The two New Mexico-sited projects have entered into 20-year fixed-price PPAs with Enchantment Power Cooperative, a New Mexico-based electric cooperative. The weighted-average PPA price across the two New Mexico projects is $29.75/MWh, with a 2.0% annual price escalator. The longer tenor of these PPAs reflects the cooperative's preference for long-term price stability and its regulatory framework, which supports extended-duration procurement.
The contracted revenue streams under these PPAs form the economic foundation of the Solstice Portfolio and are a key input into both the tax-equity sizing (Ridgeline's capital contribution to Solstice Holdings) and the back-leverage term loan provided by Osprey National Bank, N.A.
E. Transaction Structure Summary
The Solstice Portfolio is being financed through a combination of tax-equity capital, transferable credit sale proceeds, and debt:
Total Financing. Total financing for the Solstice Portfolio is approximately $180,000,000, exclusive of construction financing.
Tax-Equity Investment (Partnership Flip). Ridgeline Capital Partners, LLC, a Delaware limited liability company (EIN: 13-4827651), will make a $120,000,000 capital contribution to Solstice Holdings, LLC as the tax-equity investor in a partnership-flip structure. Under the terms of the amended and restated limited liability company agreement of Solstice Holdings (the "LLCA"), pre-flip allocations will be 99% of all tax items (including ITCs and depreciation deductions) and 30% of cash distributions to Ridgeline, and 1% of tax items and 70% of cash distributions to CBR Solstice Manager. The partnership will "flip" from these pre-flip allocations to 5% tax items and cash to Ridgeline and 95% tax items and cash to CBR Solstice Manager upon Ridgeline achieving a 7.25% after-tax internal rate of return on its capital contribution. The flip date is projected to occur in the fourth quarter of 2028 based on current financial projections.
Transferable Credit Sale Under Section 6418. Credits with an aggregate face value of $60,000,000 will be sold to Pinehurst Insurance Group, Inc., a Connecticut corporation (EIN: 06-1938274), at a price of $0.92 per $1.00 of credit, yielding aggregate cash proceeds of $55,200,000 to be deposited into the Solstice Portfolio financing structure. The transfer will be effected through a Transfer Credit Purchase Agreement (the "TCPA") and corresponding Section 6418 transfer elections. An additional $4,800,000 in face-value credits will be retained by CBR for its own use against its federal income tax liability.
Key Transaction Dates. Signing of the LLCA, TCPA, and ancillary transaction documents is scheduled for September 21, 2023. Closing was originally scheduled for November 30, 2023, but has been delayed by eight days to December 8, 2023, to accommodate final interconnection confirmation for the Amistad project (the last project to achieve commercial operation). Closing is conditioned upon all seven projects having achieved commercial operation and upon satisfaction of customary conditions precedent, including delivery of final COD certificates, legal opinions, and tax indemnity agreements.
Construction Financing. Osprey National Bank, N.A. has provided a $245,000,000 construction facility (Agreement No. ONB-PF-2022-0341) to fund development and construction of the seven projects. Upon closing of the permanent financing (tax equity and credit sale), the construction facility will be repaid in full and replaced with a $68,000,000 back-leverage term loan (Agreement No. ONB-PF-2023-0587) secured by CBR Solstice Manager's interest in Solstice Holdings.
III. Legal Framework: ITC Under Section 48 (as Amended by the IRA)
A. Statutory Overview of Section 48 Energy Property ITC
Section 48(a)(1) of the Code provides that the amount of the energy credit for any taxable year equals the applicable percentage of the basis of each energy property placed in service during such taxable year. The ITC is a dollar-for-dollar reduction in federal income tax liability, subject to certain limitations and recapture provisions.
Section 48(a)(2)(A)(i)(VII) defines "energy property" to include, among other things, "equipment which uses solar energy to generate electricity." Utility-scale solar photovoltaic systems — consisting of solar modules, inverters, racking and tracking systems, and associated balance-of-plant equipment — Squarely fall within this definition. This classification has been well established through decades of IRS guidance and is not subject to any meaningful interpretive uncertainty.
The Inflation Reduction Act (Pub. L. 117-169), enacted on August 16, 2022, substantially amended Section 48. The IRA introduced several significant changes relevant to the Solstice Portfolio, including: (1) a two-tier base rate structure linking the enhanced rate to compliance with prevailing wage and apprenticeship requirements; (2) bonus credit adders for domestic content, energy community siting, and low-income community benefit; and (3) the new Section 6418 transferability regime, which permits eligible taxpayers to elect to transfer all or a portion of certain tax credits (including the ITC) to unrelated transferee taxpayers in exchange for cash consideration.
Section 48 continues to apply to solar energy property for which construction begins before January 1, 2025. Projects for which construction begins on or after January 1, 2025 are subject to the new technology-neutral clean electricity ITC under Section 48E. All seven Solstice Portfolio projects commenced physical work of a significant nature or satisfied the five-percent safe harbor for beginning of construction well before January 1, 2025, and therefore Section 48 governs the ITC determination for each project.
B. Base ITC Rate: Two-Tier Structure
The IRA replaced the former flat-rate ITC structure with a two-tier system designed to incentivize compliance with labor standards:
Base Rate. Under Section 48(a)(9)(A), the base ITC rate for energy property is 6% of eligible basis. This rate applies as a default to all qualifying energy property.
Enhanced Rate. Under Section 48(a)(9)(B), the base rate is increased by a factor of five — to 30% — if the project satisfies the prevailing wage and apprenticeship ("PWA") requirements set forth in Sections 48(a)(10) and 48(a)(11). The enhanced rate thus provides a powerful incentive for project developers to ensure that construction workers are compensated at or above prevailing wage rates and that a specified percentage of construction labor hours are performed by registered apprentices.
As discussed in detail in Section IV below, our analysis confirms that all seven Solstice Portfolio projects satisfy the PWA requirements, supporting application of the 30% base ITC rate.
C. Bonus Adders
In addition to the base rate, the IRA introduced several bonus credit adders that increase the ITC percentage for projects meeting specified criteria:
Domestic Content Adder — Section 48(a)(12). An additional 10 percentage points of ITC (applied to eligible basis) is available for energy property where any steel, iron, or manufactured product that is a component of the facility was produced in the United States, subject to the detailed requirements set forth in Section 48(a)(12)(B) and IRS Notice 2023-38. As discussed in Section V below, our analysis concludes that all seven Solstice Portfolio projects satisfy the domestic content requirements, and the 10% domestic content bonus adder applies.
Energy Community Adder — Section 48(a)(14). An additional 10 percentage points of ITC is available for energy property located in an "energy community" as defined by reference to Section 45(b)(11)(B). Energy communities include (i) brownfield sites, (ii) metropolitan or non-metropolitan statistical areas meeting specified fossil fuel employment and unemployment thresholds, and (iii) census tracts (or adjoining tracts) where a coal mine has closed after 1999 or a coal-fired electric generating unit has been retired after 2009. As discussed in Section VI below, our analysis concludes that none of the seven Solstice Portfolio project sites qualifies as an energy community, and this adder does not apply.
Low-Income Community Adder — Section 48(e). An additional credit amount (either 10 or 20 percentage points, depending on the applicable category) is available for certain solar and wind facilities with a nameplate capacity of less than 5 MW(ac) that are located in low-income communities or serve low-income households. This adder is reserved for smaller-scale projects and is not available for the utility-scale Solstice Portfolio projects. Accordingly, the low-income community adder is not applicable.
D. Basis Eligible for ITC
Under Section 48(a)(1), the ITC is computed on the "basis" of energy property as determined under Section 1012 of the Code. For energy property acquired by purchase, the basis is generally the cost of the property, including all amounts properly capitalizable as part of the cost of the property.
Eligible basis includes all costs properly capitalizable to the solar energy property, including but not limited to: solar modules (photovoltaic panels), inverters (both string and central inverters), racking and single-axis tracker systems, balance-of-plant electrical equipment (transformers, switchgear, cabling, and metering), site preparation costs directly related to the installation of energy property, and interconnection facilities up to the point of delivery to the electric grid.
Costs excluded from eligible basis include: land and land rights (which are non-depreciable and therefore not "energy property"), transmission infrastructure beyond the point of interconnection, certain common facilities that are not integral to the solar energy generation function, and any costs that are not properly capitalizable under Section 263A or applicable accounting principles.
The independent appraisal prepared by Greystone Worthington, LLC (Helen Farber, Managing Director) supports both the fair market value and the cost basis determination for each of the seven Solstice Portfolio projects. The appraisal methodology and conclusions are discussed further in Section XII below.
A detailed project-by-project eligible basis analysis is set forth in Section VII of this memorandum.
IV. Prevailing Wage and Apprenticeship Compliance (30% Base Rate Qualification)
A. Prevailing Wage Requirements — Section 48(a)(10)
Section 48(a)(10)(A) of the Code, as added by the IRA, requires that laborers and mechanics employed by the taxpayer, or by any contractor or subcontractor, in the construction, alteration, or repair of a facility with respect to which the ITC is claimed must be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located. The prevailing rates are determined by the Secretary of Labor in accordance with the Davis-Bacon Act (40 U.S.C. § 3141 et seq.).
This prevailing wage requirement applies to construction that begins after January 29, 2023 — the date that falls 60 days after the publication of IRS Notice 2022-61 (published November 30, 2022), which provided initial guidance on the PWA requirements. All seven Solstice Portfolio projects commenced construction after January 29, 2023, and therefore the prevailing wage requirement is fully applicable to each project.
VBC, acting through its President, Carlos Vasquez, and its Vice President of Project Execution, Elena Vasquez-Torres, has represented and warranted under the Master EPC Agreement that all laborers and mechanics employed on the seven project sites — including those employed by any subcontractors engaged by VBC — are compensated at or above the prevailing wage rates for their respective localities as determined by the Secretary of Labor under the Davis-Bacon Act. The Master EPC Agreement includes specific covenants requiring VBC to (a) maintain certified payroll records for each project site, (b) ensure subcontractor compliance with prevailing wage requirements, and (c) promptly notify CBR and Calderwood & Harkness of any potential non-compliance.
CBR has obtained certified payroll records from VBC for each of the seven project sites. These records have been reviewed by Larchmont & Associates, PLLC (Susan Kaplan, Tax Partner), CBR's independent tax advisor, which has confirmed that the compensation paid to all laborers and mechanics on each project site meets or exceeds the applicable Davis-Bacon wage determinations for Reeves County, Pecos County, Ward County, Hudspeth County, and Val Verde County in Texas, and Lea County and Sandoval County in New Mexico. The applicable wage determinations have been cross-referenced against the U.S. Department of Labor's SAM.gov database for each county and trade classification.
We note that Section 48(a)(10)(B) provides a correction and penalty mechanism. If the taxpayer discovers that a laborer or mechanic was paid less than the prevailing rate, the taxpayer may cure the deficiency by paying any required back wages to the affected worker and remitting a penalty of $5,000 per worker for each instance of intentional disregard. As of the date of this memorandum, no corrections have been required, and VBC has not reported any instances of non-compliance.
B. Apprenticeship Requirements — Section 48(a)(11)
Section 48(a)(11)(A) of the Code requires that the applicable percentage of total labor hours of construction, alteration, or repair work performed on a qualifying facility be performed by qualified apprentices. A "qualified apprentice" is an individual who is employed by the taxpayer, contractor, or subcontractor and is participating in a registered apprenticeship program as defined by the National Apprenticeship Act (29 U.S.C. § 50 et seq.) or a state apprenticeship program recognized by the U.S. Department of Labor's Office of Apprenticeship.
The applicable percentage of total labor hours that must be performed by qualified apprentices is determined by the calendar year in which construction of the facility begins:
• For facilities the construction of which begins in 2023: 12.5% of total labor hours.
• For facilities the construction of which begins in 2024 or thereafter: 15% of total labor hours.
Because all seven Solstice Portfolio projects commenced construction in 2023, the applicable apprenticeship labor hour threshold is 12.5%.
Section 48(a)(11)(B)(ii) provides a "good faith effort" exception to the apprenticeship requirement. If the taxpayer (or its contractor or subcontractor) has requested qualified apprentices from a registered apprenticeship program and either (a) the request has been denied or (b) the program has failed to respond within five business days, the apprenticeship requirement is deemed satisfied with respect to the labor hours that would otherwise have been required to be performed by such apprentices. This good faith effort exception serves as a safety valve for projects located in areas with limited apprenticeship program availability.
VBC has provided certifications — signed by Carlos Vasquez in his capacity as President of VBC — that no less than 12.5% of total labor hours across all seven project sites were performed by qualified apprentices registered with the U.S. Department of Labor or applicable state apprenticeship agencies (in Texas, the Texas Workforce Commission; in New Mexico, the New Mexico Department of Workforce Solutions). VBC's apprenticeship records have been reviewed by both Calderwood & Harkness and Larchmont & Associates. The records demonstrate compliance across all sites, with actual apprenticeship labor hours as a percentage of total construction labor hours ranging from 13.1% (Pecos Sun) to 16.4% (Sandoval Ridge) on a project-by-project basis. In no case did VBC need to invoke the good faith effort exception.
C. Conclusion on Base Rate
Based on the foregoing analysis — including our review of VBC's representations and warranties under the Master EPC Agreement, the certified payroll records reviewed by Larchmont & Associates, and VBC's apprenticeship labor hour certifications — we conclude that all seven Solstice Portfolio projects satisfy both the prevailing wage requirements of Section 48(a)(10) and the apprenticeship requirements of Section 48(a)(11) of the Code.
Accordingly, the applicable base ITC rate for each project is 30% (representing the 6% base rate multiplied by the factor of five under Section 48(a)(9)(B)).
We note that prevailing wage and apprenticeship compliance is an ongoing obligation that extends through the recapture period (generally five years from the placed-in-service date) for purposes of the ITC, and that any post-construction alteration or repair work on the projects must also comply with PWA requirements. We discuss ongoing compliance monitoring in Section XIII.B below.
V. Domestic Content Bonus Adder (10% Adder Qualification)
A. Statutory Requirements — Section 48(a)(12)
Section 48(a)(12)(A) of the Code provides an additional 10 percentage points of ITC for energy property that satisfies certain domestic content requirements. Specifically, the bonus adder applies if any steel, iron, or manufactured product that is a component of the energy property was "produced in the United States."
The term "produced in the United States" is defined by reference to Section 48(a)(12)(B) and interpretive guidance provided in IRS Notice 2023-38 (subsequently supplemented by proposed regulations published in the Federal Register). The domestic content requirements are composed of two distinct components:
Steel and Iron Requirement. All manufacturing processes for any steel or iron that is a component of the energy property — from the initial melting stage through the application of coatings — must take place in the United States. This requirement applies to structural steel and iron, including racking components, mounting structures, support piers, and any other steel or iron elements that are structural in nature. Minor steel or iron items that are ancillary or incidental to the energy property (e.g., nuts, bolts, screws, washers, and similar fasteners) are excluded from this requirement under a de minimis exception.
Manufactured Products Requirement. Under the adjusted percentage test set forth in IRS Notice 2023-38, at least 40% (for projects beginning construction in 2023) of the total cost of manufactured components that are part of the energy property must be attributable to components that are manufactured in the United States, or, alternatively, mined or extracted in the United States. This percentage increases in subsequent years — to 45% for projects beginning construction in 2024 and 50% for projects beginning construction in 2025 — but the 40% threshold is the operative standard for all seven Solstice Portfolio projects. The adjusted percentage test requires identification of each manufactured product, determination of the cost of each, and calculation of the aggregate domestic-manufactured share as a percentage of total manufactured product cost.
IRS Notice 2023-38 also provides a safe harbor methodology under which taxpayers may use a pre-approved list of components and associated cost percentages to satisfy the manufactured products requirement without the need for a fully individualized cost analysis. CBR's analysis has applied this safe harbor methodology as a cross-check against its detailed component-by-component cost analysis.
B. Application to the Solstice Portfolio
VBC, in coordination with CBR's project finance and procurement teams, has sourced solar modules, inverters, racking and tracker systems, and balance-of-plant equipment with specific attention to the domestic content requirements of Section 48(a)(12). The sourcing strategy was developed in consultation with Greystone Worthington, LLC, which has served as the independent advisor for purposes of validating the domestic content analysis.
Steel and Iron. All structural steel racking and mounting systems for the seven Solstice Portfolio projects are manufactured in the United States. VBC has provided mill certifications and country-of-origin documentation for all steel and iron components incorporated into each project. The mill certifications confirm that the steel and iron used in the tracker and mounting systems was melted, poured, rolled, and coated at domestic facilities. No foreign-sourced structural steel or iron has been incorporated into any of the seven projects. Calderwood & Harkness has reviewed a representative sample of the mill certifications and country-of-origin documentation, and has confirmed that the documentation is facially consistent with the requirements of Section 48(a)(12) and IRS Notice 2023-38.
Manufactured Products. CBR and VBC have jointly prepared a detailed cost-component analysis (the "Domestic Content Certification") that identifies each manufactured product incorporated into the energy property of each project, assigns a cost value to each product, and determines whether the product (or its constituent components) was manufactured in the United States. The Domestic Content Certification demonstrates that the adjusted percentage of domestic-manufactured components exceeds the 40% threshold for each of the seven projects. Greystone Worthington has independently reviewed and confirmed the Domestic Content Certification.
Key domestic-sourced components include the following:
• Tracker systems: Single-axis tracker systems are manufactured at domestic facilities and constitute a significant portion of total manufactured product cost.
• Inverters: Both string inverters and central inverters have been procured from domestic manufacturers, satisfying the domestic content standard.
• Balance-of-plant electrical equipment: Transformers, switchgear, and associated electrical components have been sourced from domestic suppliers.
• Solar modules: The solar modules for all seven projects are manufactured at a domestic production facility, satisfying the "substantially transformed" standard under applicable guidance. We note that the modules incorporate certain foreign-sourced solar cells; however, the module assembly process — including cell stringing, lamination, framing, and junction box attachment — constitutes substantial transformation in the United States, and the modules therefore qualify as domestic manufactured products for purposes of the adjusted percentage test.
CBR's analysis has also been cross-checked against the safe harbor list of components and applicable cost percentages set forth in IRS Notice 2023-38, confirming that the domestic content threshold is satisfied under both the detailed cost analysis methodology and the safe harbor methodology.
C. Conclusion on Domestic Content Adder
Based on the documentation provided by VBC (including mill certifications, country-of-origin documentation, and the Domestic Content Certification), the independent review and confirmation by Greystone Worthington, LLC, and our own legal review of the applicable statutory and regulatory standards, we conclude that all seven Solstice Portfolio projects satisfy the domestic content requirements of Section 48(a)(12) of the Code.
Accordingly, the 10% domestic content bonus adder applies to each project, bringing the total applicable ITC rate to 40% (30% base rate + 10% domestic content adder).
VI. Energy Community Bonus Adder (Not Applicable)
A. Statutory Requirements — Section 48(a)(14)
Section 48(a)(14) of the Code provides an additional 10 percentage points of ITC for energy property located in an "energy community" as defined under Section 45(b)(11)(B). The energy community designation is designed to direct clean energy investment toward communities that have been economically impacted by the transition away from fossil fuel-based energy production.
Section 45(b)(11)(B) defines three categories of energy communities:
(i) Brownfield sites — Any site that is a brownfield site as defined under certain provisions of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. § 9601(39)(A) and (D)(ii)(III).
(ii) Metropolitan or non-metropolitan statistical areas with fossil fuel employment — Any metropolitan statistical area ("MSA") or non-metropolitan statistical area ("non-MSA") that (a) has, or at any time during the period beginning in 2010 had, 0.17% or greater direct fossil fuel employment as a percentage of total employment, or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas, and (b) has an unemployment rate at or above the national average unemployment rate for the prior year.
(iii) Census tracts with retired coal facilities — Any census tract, or any census tract directly adjoining such tract, in which (a) a coal mine has closed after December 31, 1999, or (b) a coal-fired electric generating unit has been retired after December 31, 2009.
The IRS has published lists of qualifying energy communities, initially in IRS Notice 2023-29 and subsequently updated, identifying the MSAs, non-MSAs, and census tracts that meet the statutory criteria.
B. Analysis of Project Locations
We have analyzed each of the seven Solstice Portfolio project sites against the IRS-published lists of energy communities (including Notice 2023-29 and subsequent updates) and against the underlying statutory criteria:
Reeves County, Texas (Pecos Sun — 85 MW). Reeves County is located in West Texas and has a significant history of oil and gas exploration and production. However, based on the IRS's designation of the applicable non-metropolitan statistical area and the employment and unemployment data for the relevant reference year, Reeves County does not appear on the energy community list. While the county's fossil fuel employment may meet or approach the 0.17% threshold, the applicable statistical area does not satisfy the unemployment rate criterion (i.e., the unemployment rate does not equal or exceed the national average for the prior year). Reeves County also does not contain any brownfield sites or retired coal facilities that would independently qualify.
Pecos County, Texas (Red Mesa — 70 MW). Similar to Reeves County, Pecos County has oil and gas activity but does not qualify under the MSA/non-MSA fossil fuel employment and unemployment criteria. No brownfield or coal facility basis for qualification exists.
Ward County, Texas (Coyote Flats — 65 MW). Ward County is in the Permian Basin region and has extensive oil and gas operations. Notwithstanding this fossil fuel presence, the applicable statistical area does not satisfy the combined fossil fuel employment and unemployment rate thresholds under the IRS-published energy community designations. Ward County does not qualify.
Hudspeth County, Texas (Llano Verde — 55 MW). Hudspeth County is a sparsely populated county in far West Texas. It does not meet the fossil fuel employment threshold for its applicable statistical area, does not contain any brownfield sites relevant to the statutory definition, and has no history of coal mining or coal-fired generation. Hudspeth County does not qualify.
Val Verde County, Texas (Amistad — 45 MW). Val Verde County, in the southwestern portion of Texas along the Rio Grande, does not have significant fossil fuel extraction or processing activity. It does not meet the MSA/non-MSA fossil fuel employment threshold and does not qualify under any of the three energy community categories.
Lea County, New Mexico (Cimarron — 50 MW). Lea County is one of New Mexico's most significant oil and gas producing counties, situated in the Permian Basin. Despite this substantial fossil fuel presence, the applicable non-metropolitan statistical area does not meet the unemployment rate criterion in the relevant reference year (i.e., the county's unemployment rate falls below the national average). Lea County does not qualify as an energy community under the MSA/non-MSA category. No brownfield or coal facility basis exists.
Sandoval County, New Mexico (Sandoval Ridge — 50 MW). Sandoval County is part of the Albuquerque MSA. The Albuquerque MSA does not meet the 0.17% fossil fuel employment threshold, as the region's economy is not significantly concentrated in fossil fuel extraction, processing, or transport. Sandoval County does not qualify.
We have also confirmed that none of the seven project sites is located on a brownfield site and that none is located in a census tract (or adjoining census tract) where a coal mine has closed after 1999 or a coal-fired electric generating unit has been retired after 2009.
C. Conclusion on Energy Community Adder
Based on the foregoing analysis, none of the seven Solstice Portfolio project sites qualifies as an "energy community" under any of the three statutory categories defined in Section 45(b)(11)(B) and referenced in Section 48(a)(14).
Accordingly, the energy community bonus adder of 10% does not apply to any project in the Solstice Portfolio. The total ITC rate remains 40% (30% base rate + 10% domestic content adder + 0% energy community adder).
We note that the IRS periodically updates the list of qualifying energy communities based on revised employment and unemployment data. If updated lists are published before the ITC claim is filed, we will re-evaluate each project site against the revised criteria, though we consider it unlikely that any of the seven locations will achieve qualifying status given the current data.
VII. Eligible Basis Analysis
A. Methodology
Under Section 48(a)(1) of the Code, the ITC is computed on the "basis" of energy property placed in service during the taxable year. For property acquired by purchase from an unrelated party, the basis is the cost of the property under Section 1012, which includes all amounts paid or incurred to acquire, construct, and place the property in a condition suitable for its intended use.
Basis includes all costs properly capitalizable to the solar energy property under Section 263A of the Code and applicable accounting rules, including direct costs of construction (materials, labor, equipment) and indirect costs allocable to the construction of the energy property (such as engineering and design costs, project management fees, and certain permitting costs directly attributable to the energy property).
For the Solstice Portfolio, EPC contract costs under the Master EPC Agreement serve as the primary measure of eligible basis. The Master EPC Agreement is a fixed-price, turnkey contract that covers the full scope of engineering, procurement, and construction for each project, including solar modules, inverters, tracker systems, balance-of-plant equipment, civil and electrical installation, commissioning, and performance testing. The contract price for each project represents the cost to CBR (through the project-level entities) of acquiring the completed energy property.
We have reviewed the EPC contract costs for each project to confirm that they consist entirely of costs properly capitalizable to qualifying solar energy property and do not include any non-qualifying costs. Specifically, we have confirmed the following:
• Land and land rights are excluded from eligible basis. All project sites are held under long-term ground leases structured as operating leases, and the lease payments are not capitalized to the cost of the energy property. No land acquisition costs are included in the EPC contract prices.
• Transmission infrastructure beyond the point of delivery is excluded. The EPC contract scope terminates at the point of interconnection to the electric grid (ERCOT for the Texas projects; Northgate Corporation/WECC for the New Mexico projects). Costs of transmission upgrades or off-site network improvements are not included in the EPC contract prices.
• Developer fees and non-capitalizable overhead are not included in the EPC contract prices. CBR's internal development costs (e.g., prospecting, land origination, corporate overhead) are accounted for separately and are not reflected in the EPC contract costs used for eligible basis purposes.
Greystone Worthington, LLC has prepared an independent ITC-basis appraisal and fair market value analysis (Helen Farber, Managing Director) for each of the seven projects. The appraisal confirms that the EPC contract prices are arm's-length, consistent with fair market value, and do not include inflated or non-qualifying costs. The appraisal methodology is discussed in greater detail in Section XII below.
Related-Party Analysis. We note for the record that VBC is an unrelated third party to CBR. Although CBR's Chief Financial Officer, Theo Vasquez, shares a surname with VBC's President, Carlos Vasquez, the two individuals are unrelated by blood, marriage, or any other familial or business relationship. We have confirmed this through representations provided by both CBR and VBC. No constructive ownership or affiliation analysis under Section 267 or Section 707(b) is triggered, and no related-party basis adjustment is required.
B. Project-by-Project Eligible Basis
The following table sets forth the eligible basis for each project in the Solstice Portfolio:
As reflected in the table above, no adjustments to the EPC contract costs were required. All EPC costs have been reviewed and confirmed to consist entirely of costs properly capitalizable to qualifying solar energy property. The zero-adjustment result reflects the fact that the Master EPC Agreement was carefully structured to include only qualifying costs within its scope, with non-qualifying costs (land, off-site transmission, developer overhead) addressed through separate agreements and accounting treatment.
Land lease costs, as noted above, are excluded from eligible basis. The site leases for all seven projects are structured as operating leases under both GAAP and tax accounting standards, and the lease payments are treated as period costs rather than capitalized amounts.
Interconnection costs are included in eligible basis to the extent they relate to equipment and infrastructure up to the point of interconnection to the applicable electric grid — ERCOT for the five Texas projects (Pecos Sun, Red Mesa, Coyote Flats, Llano Verde, and Amistad) and Northgate Corporation/WECC for the two New Mexico projects (Cimarron and Sandoval Ridge). The interconnection facilities included in the EPC scope consist of collector system cabling, project substations, and gen-tie lines up to the point of delivery. Any costs associated with transmission system upgrades required by the applicable grid operator are borne by the utility and are not included in the EPC contract prices.
C. Total Eligible Basis
The aggregate eligible basis for the Solstice Portfolio is $384,600,000. This amount represents the sum of the EPC contract costs for all seven projects, as confirmed by the independent appraisal and verified through our legal diligence review.
VIII. ITC Computation
A. ITC Calculation by Project
Applying the 40% ITC rate (30% base rate + 10% domestic content bonus adder) to the eligible basis of each project, the ITC amounts are computed as follows:
The ITC computation is straightforward for each project: the eligible basis (equal to the EPC contract cost, with no adjustments) is multiplied by the applicable ITC rate of 40%. The 40% rate is uniform across all seven projects because each project satisfies the same qualification criteria — PWA compliance for the 30% enhanced base rate and domestic content compliance for the 10% bonus adder — and none qualifies for the energy community adder.
B. Total ITCs Generated
The total ITCs generated by the Solstice Portfolio are computed as follows:
$384,600,000 × 40% = $153,840,000
This aggregate credit amount of $153,840,000 represents a dollar-for-dollar reduction in federal income tax liability available to the taxpayers to whom the credits are allocated or transferred, subject to the allocation mechanics described in Section IX below and the recapture provisions analyzed in the companion ITC Recapture Risk Memorandum.
IX. Allocation of ITCs Between Partnership Structure and Section 6418 Transfer
A. Overview of Dual-Tranche Allocation
The $153,840,000 in total ITCs generated by the Solstice Portfolio will be allocated across two separate monetization channels:
• Partnership-flip tax-equity structure: $89,040,000 in ITCs will flow through Solstice Holdings, LLC to its members and will be allocated in accordance with the partnership allocation provisions of the LLCA.
• Section 6418 transfer elections: $64,800,000 in ITCs will be the subject of transfer elections under Section 6418 of the Code, with $60,000,000 in face-value credits sold to Pinehurst Insurance Group, Inc. and $4,800,000 in face-value credits retained by CBR for its own use.
Reconciliation: $89,040,000 + $64,800,000 = $153,840,000.
The allocation of ITCs between the partnership structure and the Section 6418 transfer is determined at the project-company level prior to the credits flowing through the partnership. The structural mechanics of this bifurcation — including the interplay between the partnership-level allocations under Section 704(b) and the project-level Section 6418 transfer elections — are addressed in detail in the companion research memorandum on the interaction of Section 6418 transfer elections with partnership-flip structures.
B. Partnership-Allocated ITCs ($89,040,000)
Of the total $153,840,000 in ITCs, $89,040,000 will flow through Solstice Holdings, LLC and will be allocated among the partnership's members in accordance with the allocation provisions of the LLCA. Under the pre-flip allocation provisions:
• Ridgeline Capital Partners, LLC (tax-equity investor): 99% of all tax items, including ITCs, representing $88,149,600 in allocated ITCs ($89,040,000 × 99%).
• CBR Solstice Manager, LLC (managing member / sponsor affiliate): 1% of all tax items, including ITCs, representing $890,400 in allocated ITCs ($89,040,000 × 1%).
Ridgeline's $120,000,000 capital contribution to Solstice Holdings is sized to reflect, among other factors, the value of these allocated ITCs, the five-year MACRS depreciation deductions on the partnership's depreciable basis (as reduced under Section 50(c)), the projected cash distributions, and Ridgeline's target 7.25% after-tax IRR. The allocation of ITCs and depreciation to Ridgeline is the primary driver of the tax-equity economics and is the principal source of the tax benefits monetized through the partnership-flip structure.
The Section 704(b) substantial economic effect analysis supporting these allocations is set forth in the companion Partnership Tax Allocation Memorandum. We note that the ITC allocation follows the partnership's allocation of the underlying depreciable basis of the energy property, consistent with the requirements of Treasury Regulation Section 1.46-3(f) and the principles of Section 704(b).
C. Section 6418 Transferred ITCs ($64,800,000)
The remaining $64,800,000 in ITCs will be the subject of transfer elections under Section 6418 of the Code. Section 6418, as enacted by the IRA, permits an "eligible taxpayer" to elect to transfer all or a specified portion of an "eligible credit" to an unrelated "transferee taxpayer" in exchange for cash consideration. The transfer is treated as a tax-free payment to the transferor (not included in gross income and not deductible by the transferee) and results in the transferee claiming the credit on its own federal income tax return as if the transferee had originally earned the credit.
The Section 6418 transfer elections for the Solstice Portfolio will be made at the project-company level. Each project company is a disregarded entity owned by Solstice Holdings, LLC; accordingly, for federal income tax purposes, the election is made by Solstice Holdings as the regarded tax owner of each project. The mechanics are operationally structured so that the credits designated for Section 6418 transfer are carved out of the Solstice Holdings credit pool before allocation to the partnership members under the LLCA.
Of the $64,800,000 in credits designated for Section 6418 transfer:
• $60,000,000 in face-value credits will be sold to Pinehurst Insurance Group, Inc. (a Connecticut corporation, EIN: 06-1938274) pursuant to the Transfer Credit Purchase Agreement (the "TCPA"). The purchase price is $0.92 per $1.00 of credit, yielding aggregate cash proceeds of $55,200,000 ($60,000,000 × $0.92).
• $4,800,000 in face-value credits will be retained by CBR for application against its own federal income tax liability ($64,800,000 − $60,000,000 = $4,800,000).
The purchase price of $55,200,000 is to be deposited by Pinehurst into escrow at Clearwater Escrow Services, Inc. (Account No. CES-2023-80114) no later than five business days before the scheduled closing date. The escrowed funds will be released to CBR (or to the applicable project accounts as directed under the closing flow of funds) upon delivery of executed Transfer Election Statements, a closing certificate confirming satisfaction of conditions precedent (including confirmation of COD achievement for all seven projects), and such other deliverables as specified in the TCPA.
Tax Indemnity. Under the TCPA, CBR provides a comprehensive ITC recapture and disallowance indemnity in favor of Pinehurst Insurance Group, covering (among other things) any reduction, disallowance, or recapture of ITCs transferred to Pinehurst resulting from (a) failure to satisfy placed-in-service requirements, (b) post-closing disposition of energy property during the recapture period, (c) PWA or domestic content non-compliance, or (d) any other event giving rise to ITC recapture or adjustment under Section 50 or related provisions. The indemnity obligation is capped at 125% of the purchase price, or $69,000,000 ($55,200,000 × 1.25). The 25% premium over the purchase price reflects customary market practice for transferable credit transactions and is intended to cover Pinehurst's potential tax costs (including interest and penalties) in the event of credit disallowance.
The detailed mechanics of the Section 6418 transfer elections, including pre-filing registration requirements, transfer election statement preparation, and filing procedures, are addressed in the companion Section 6418 Transfer Election Memorandum. The ITC recapture risk analysis is set forth in the companion ITC Recapture Risk Memorandum.
D. Summary Table
X. Placed-in-Service Analysis
A. Placed-in-Service Standard Under Section 48
Property is treated as "placed in service" for purposes of the ITC in the taxable year in which the property is "placed in a condition or state of readiness and availability for a specifically assigned function." See Treas. Reg. § 1.46-3(d)(1)(ii). This standard is well established in the context of energy property and has been the subject of extensive IRS guidance and case law.
For utility-scale solar photovoltaic projects, the placed-in-service date is generally the date on which the project achieves "commercial operation" — that is, the date on which (a) mechanical completion of the facility has been achieved (all major equipment installed and commissioned), (b) the facility has been interconnected to the electric grid and has received permission to operate from the applicable grid operator, (c) commissioning and performance testing have been completed, and (d) the facility is capable of generating and delivering electricity in its intended commercial capacity. The convergence of these milestones establishes the date on which the energy property is in a condition of readiness and availability for its specifically assigned function of generating electricity for sale under the applicable PPA.
For each project in the Solstice Portfolio to claim the ITC for the 2023 taxable year, the project must be placed in service — i.e., must achieve commercial operation — on or before December 31, 2023. Solstice Holdings, LLC is a calendar-year taxpayer, and the 2023 taxable year ends on December 31, 2023. Any project that fails to achieve COD before year-end would not be eligible to claim the ITC for 2023 and would instead generate its ITC in the taxable year in which it is ultimately placed in service.
B. Commercial Operation Dates by Project
The following table summarizes the target commercial operation date ("COD") for each project and its status as of the date of this memorandum:
The weighted-average COD across the portfolio, for financial modeling purposes, is approximately October 25, 2023. All seven projects are targeted to achieve COD before the originally scheduled closing date of November 30, 2023, and well before the December 31, 2023 tax year-end.
Meridian Technical Advisors, LLC ("MTA"), the independent engineer retained by the parties, is providing ongoing construction monitoring reports for each project. Dr. Rajan Mehta, Principal Engineer at MTA, is personally overseeing the monitoring and will certify each project's substantial completion and COD achievement. MTA's COD certification for each project will constitute a closing deliverable under both the LLCA and the TCPA.
We note that the signing of the LLCA, TCPA, and ancillary transaction documents is scheduled for September 21, 2023 — before any project in the Solstice Portfolio has achieved COD. This sequencing is consistent with standard market practice for tax-equity and credit transfer transactions, in which the parties execute definitive agreements in advance of COD achievement, with closing (and the funding of capital contributions and credit purchase proceeds) conditioned upon all projects having achieved COD.
C. Risk Considerations
The primary placed-in-service risk for the Solstice Portfolio is the possibility that one or more projects fails to achieve COD before December 31, 2023. If any project is not placed in service by year-end, that project's ITC would not be available for the 2023 tax year. Such a delay could have significant consequences for the overall deal economics, including:
• Reduction in the total ITCs available for allocation to Ridgeline through the partnership-flip structure, potentially requiring resizing of Ridgeline's capital contribution or restructuring of the allocation provisions in the LLCA;
• Reduction in the total ITCs available for Section 6418 transfer to Pinehurst, potentially requiring adjustment to the face value of credits to be transferred and the corresponding purchase price; and
• Potential breach of conditions precedent under the LLCA and TCPA, which condition closing on COD achievement for all seven projects.
Amistad Solar (45 MW, Val Verde County, TX) presents the highest placed-in-service timing risk within the portfolio. Amistad has the latest target COD of November 18, 2023, and the key gating item for Amistad's COD achievement is ERCOT grid interconnection confirmation. As of the date of this memorandum, ERCOT interconnection studies are in progress, and VBC has reported that construction is proceeding on schedule, but the interconnection confirmation has not yet been received. The eight-day delay of closing from November 30 to December 8, 2023 was specifically implemented to provide additional runway for Amistad's interconnection confirmation.
Mitigation Measures. The LLCA and TCPA contain conditions precedent requiring COD achievement for all seven projects as a condition to closing. In addition, both agreements include mechanisms for a partial closing or credit adjustment in the event that one or more projects is delayed beyond year-end but the remaining projects have achieved COD. Specifically:
• The LLCA permits a partial closing with respect to projects that have achieved COD, with a corresponding adjustment to Ridgeline's capital contribution and the pre-flip allocation percentages;