PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
September 15, 2023
FROM: Robert Jansen, Associate, Tax Department, Calderwood & Harkness LLP
TO: Leila Nazari, Associate, Tax Department Leonard Cross, Partner, Tax Department
RE: ITC Recapture Risk Analysis — Solstice Portfolio (Calloway-Briggs Renewables Inc.)
MATTER NO.: 1015-00005
BILLING NO.: 78204-001
I. Executive Summary
This memorandum analyzes the risk of Investment Tax Credit ("ITC") recapture under Internal Revenue Code ("IRC" or "Code") § 50(a) for the seven utility-scale solar photovoltaic ("PV") projects comprising the Solstice Portfolio (420 MW(dc) aggregate capacity), developed by Calloway-Briggs Renewables Inc. ("CBR"). The analysis is prepared in connection with the anticipated closing of the tax-equity investment and transferable credit sale transactions on or about September 21, 2023, and is intended to assist the deal team and our clients in identifying, quantifying, and mitigating recapture risks associated with the portfolio.
Two distinct sets of stakeholders bear recapture risk in connection with the Solstice Portfolio:
Ridgeline Capital Partners, LLC ("Ridgeline") — The tax-equity investor in Solstice Holdings, LLC (the partnership vehicle), which receives 99% of partnership-allocated ITCs. Ridgeline's allocated share of the partnership-level ITCs totals approximately $89,040,000 out of the total $153,840,000 in ITCs generated across the portfolio. Ridgeline's recapture risk arises by virtue of its status as a partner in the partnership that owns the energy property, and is governed by the recapture provisions applicable to partnerships under Treasury Regulation § 1.47-6.
Pinehurst Insurance Group, Inc. ("Pinehurst") — The transferable credit buyer under Inflation Reduction Act ("IRA") Section 6418, which has agreed to purchase $60,000,000 in face-value ITCs at $0.92 per dollar of credit, for aggregate cash consideration of $55,200,000. Pinehurst's recapture risk arises under the specific recapture provisions applicable to transferred credits under § 6418(g)(2), which impose recapture liability on the transferee notwithstanding the transferee's lack of ownership or control over the underlying energy property.
The total ITCs generated by the Solstice Portfolio amount to $153,840,000, calculated as a 40% effective ITC rate applied to total eligible basis of $384,600,000 (representing aggregate EPC costs across the seven projects). The 40% rate reflects the sum of the 30% base ITC rate under IRA § 48(a) and the 10% domestic content bonus adder under § 48(a)(12). The allocation of total ITCs is as follows:
• $89,040,000 allocated through the partnership structure to Ridgeline (99%) and CBR Solstice Manager, LLC ("CBR Manager") (1%);
• $64,800,000 subject to § 6418 transfer elections, of which $60,000,000 has been sold to Pinehurst; and
• $4,800,000 in face-value ITCs retained by CBR for its own use (reflecting the difference between total § 6418 elected credits of $64,800,000 and the $60,000,000 sold to Pinehurst).
The five-year recapture period under § 50(a) runs from each project's placed-in-service date. The earliest placed-in-service date is September 30, 2023 (Cimarron Solar, LLC), and the latest is November 18, 2023 (Amistad Solar, LLC). Accordingly, the recapture exposure window extends through approximately the fourth quarter of 2028 at the latest. The projected partnership flip date — the date on which Ridgeline's allocation of partnership tax items transitions from 99% to 5% — is targeted for the fourth quarter of 2028, approximately 5.0 years after the weighted-average commercial operation date ("COD") of October 25, 2023. This timing is designed to align with the tail end of the recapture period, which significantly reduces but does not entirely eliminate recapture exposure at the time of the flip.
Key Conclusion: Recapture risk for the Solstice Portfolio is manageable given the structural protections, contractual covenants, and indemnity arrangements currently in place. However, specific scenarios — including catastrophic casualty loss, lender foreclosure, early flip, and potential disallowance of the domestic content bonus adder — warrant heightened monitoring throughout the recapture period. This memorandum identifies those scenarios, quantifies the potential exposure, and provides recommendations for additional safeguards.
II. Legal Framework: Section 50(a) Recapture Rules
A. Statutory Overview
IRC § 50(a)(1) provides the governing framework for recapture of investment tax credits, including the ITC under § 48. Under this provision, if during any taxable year investment credit property is disposed of, or otherwise ceases to be investment credit property with respect to the taxpayer, before the close of the "recapture period," a portion of the ITC previously claimed must be recaptured as an increase in the taxpayer's federal income tax liability for the taxable year in which the disposition or cessation occurs.
The recapture period for energy property eligible for the ITC under § 48 is five years, beginning on the date the property is placed in service. The amount of ITC subject to recapture declines ratably over the five-year period in accordance with the following statutory schedule:
The recapture mechanism operates by increasing the taxpayer's federal income tax liability for the year in which the recapture event occurs by the applicable recapture percentage multiplied by the ITC originally claimed. This increase in tax liability is not treated as an underpayment for purposes of the estimated tax penalty rules, but interest does accrue from the original due date of the return on which the credit was claimed if the increase creates a deficiency. The practical effect is that recapture effectively reverses the benefit of the ITC on an accelerated basis, with the full reversal occurring in Year 1 and the reversal declining in 20-percentage-point increments through Year 5.
It is important to note that the recapture rules apply on a property-by-property basis. The recapture period for each item of energy property commences on the date that specific property is placed in service, not on the date the overall project achieves commercial operation. However, as a practical matter, for utility-scale solar PV projects, the placed-in-service date for the energy property is typically coterminous with the project's COD, as the energy property (panels, inverters, racking, and balance-of-system components) is placed in service as an integrated system. For purposes of this memorandum, we treat each project's COD as the placed-in-service date for all energy property within that project.
B. Project-Specific Recapture Windows
The following table sets out each project's placed-in-service date (COD) and the corresponding five-year recapture expiration date:
As indicated above, the earliest recapture period expires on September 30, 2028 (Cimarron Solar), and the latest expires on November 18, 2028 (Amistad Solar). The projected partnership flip date is targeted for the fourth quarter of 2028, approximately 5.0 years after the weighted-average COD of October 25, 2023. This means the flip is designed to occur at or near the tail end of the recapture period. However, depending on the precise flip date and the specific projects involved, it is possible that certain projects (particularly Coyote Flats, Llano Verde, and Amistad, with later CODs) could remain within their recapture periods at the time the flip occurs. This residual recapture window is a key structural risk that we address in detail in Sections IV and VII below.
C. Applicable ITC Amounts by Project
The following table sets forth each project's eligible basis (EPC cost), the applicable ITC rate (40%), and the resulting ITC generated:
The 40% ITC rate reflects the sum of the 30% base ITC rate under IRA § 48(a) (available for projects that satisfy the prevailing wage and apprenticeship requirements under § 48(a)(10)) and the 10% domestic content bonus adder under § 48(a)(12) (available for projects in which steel, iron, and manufactured products are substantially all produced in the United States). Both the base rate enhancement and the domestic content bonus adder are subject to compliance requirements during the five-year recapture period, as discussed further in Section VII.B below.
The allocation of the $153,840,000 in total ITCs is as follows:
• Partnership-allocated ITCs: $89,040,000, allocated 99% to Ridgeline ($88,149,600) and 1% to CBR Manager ($890,400), in accordance with the ITC allocation provisions of the Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC (the "LLCA").
• § 6418 transferred ITCs: $64,800,000 subject to § 6418 transfer elections, of which $60,000,000 has been sold to Pinehurst under the Tax Credit Purchase Agreement (the "TCPA"), and $4,800,000 has been retained by CBR for its own use.
III. Recapture Trigger Events
This section identifies and analyzes the principal events that could trigger ITC recapture under § 50(a) in the context of the Solstice Portfolio's ownership and financing structure.
A. Disposition of Energy Property
A "disposition" under § 50(a) includes any sale, exchange, or other transfer of the solar energy property, whether voluntary or involuntary. The scope of the term "disposition" is broad and encompasses transfers by sale, contribution, distribution, abandonment, foreclosure, and condemnation, among others.
In analyzing what constitutes a disposition at the project-company level, it is essential to distinguish between (i) a transfer of the project assets themselves (solar panels, inverters, racking, balance-of-system equipment, and related personal property constituting the energy property) and (ii) a transfer of membership interests in the project companies. Solstice Holdings, LLC holds 100% of the membership interests in each of the seven project companies, each of which is organized as a single-member limited liability company and is treated as a disregarded entity for federal tax purposes under Treasury Regulation § 301.7701-3. Under well-established principles of entity classification, a transfer of 100% of the membership interests in a disregarded entity is treated, for federal tax purposes, as a transfer of the underlying assets of that entity. See Rev. Rul. 99-5, 1999-1 C.B. 434; see also Treasury Regulation § 301.7701-2(c)(2)(i). Therefore, any sale or transfer of a project company's membership interests during the recapture period would be treated as a transfer of the underlying energy property, triggering recapture of the ITC attributable to that project.
With respect to the intercompany contribution by CBR of the project company membership interests to Solstice Holdings, LLC under § 721 (tax-free contribution to a partnership in exchange for a partnership interest), this contribution should not constitute a recapture event. The contribution is made in connection with the formation of the partnership and the admission of Ridgeline as a tax-equity investor. Because the energy property continues to be held by Solstice Holdings (through its wholly-owned disregarded entities), the property remains investment credit property with respect to the same taxpayer (i.e., the partnership for purposes of the ITCs allocated through the partnership structure). Provided the contribution qualifies under § 721 and the energy property continues to be used as energy property by the partnership, no disposition triggering recapture should be deemed to have occurred. This analysis is consistent with Treasury Regulation § 1.47-3(f) and the general principle that a tax-free contribution to a partnership does not constitute a disposition for recapture purposes so long as the property remains in qualified use within the partnership.
B. Cessation of Qualified Use
Energy property must remain "energy property" throughout the recapture period to avoid triggering recapture. If property ceases to be used as energy property at any time during the five-year period — for example, if solar panels are permanently decommissioned, a facility is converted to a non-energy use, or a facility is permanently idled and removed from service — recapture is triggered under § 50(a)(1). The test is whether the property continues to qualify as "energy property" under § 48(a)(3) with respect to the taxpayer.
Several scenarios involving temporary interruption of operations deserve specific attention. Temporary shutdowns for scheduled maintenance, equipment repairs, or force majeure events (such as storm damage, flooding, or grid curtailment) generally should not trigger cessation of qualified use, provided the property is restored to service within a reasonable period and the taxpayer continues to maintain the property as energy property with the intent and capability to return it to service. Neither the Code nor the Treasury Regulations prescribe a specific timeframe for determining when a temporary shutdown becomes a permanent cessation, but the IRS has historically looked to the totality of the circumstances, including the taxpayer's demonstrated intent and capability to restore the property to service. We note that extended periods of idling — particularly if combined with physical deterioration of the equipment or failure to maintain insurance and operational readiness — could support an IRS argument that the property has ceased to be energy property.
The concept of partial recapture also warrants discussion. If only a portion of the energy property at a particular project ceases to qualify — for example, if a subset of solar panels at a site is permanently removed from service due to irreparable damage while the remainder of the facility continues to operate — recapture may be limited to the proportionate ITC attributable to the decommissioned portion. Section 50(a) applies to each item of investment credit property, and recapture is determined on a property-by-property basis. Accordingly, if the decommissioned panels represent, for example, 10% of the eligible basis of a project, only 10% of that project's ITC should be subject to recapture (at the applicable recapture percentage for the year in which the cessation occurs). This proportionate approach is supported by the statutory text and the legislative history of the recapture provisions.
C. Change in Ownership at the Partnership Level
The partnership-flip structure involves a change in the allocation of tax items from 99%/1% (Ridgeline/CBR Manager) to 5%/95% (Ridgeline/CBR Manager) at the "flip point," which occurs when Ridgeline achieves its target after-tax internal rate of return of 7.25%. This raises the question of whether the flip itself could constitute a recapture event with respect to the ITCs previously allocated to Ridgeline.
Under Treasury Regulation § 1.47-6 and established IRS guidance, a change in the ratio of profit or loss allocations in a partnership does not, by itself, constitute a disposition of the underlying energy property or a cessation of qualified use, so long as the partnership continues to own and use the energy property. The flip alters the economic sharing arrangement between the partners but does not involve any transfer of the energy property itself. The partnership (Solstice Holdings) continues to own 100% of the membership interests in each of the seven project companies, and the project companies continue to own and operate the energy property. Accordingly, the flip should not trigger recapture.
However, this analysis depends on the continued ownership and use of the energy property by the partnership. If, coincident with or proximate to the flip, the partnership were to dispose of the energy property or the property were to cease to be used as energy property, recapture would be triggered. Furthermore, if Ridgeline were to dispose of its partnership interest during the recapture period (i.e., prior to the flip), the portion of the ITC allocated to Ridgeline would be subject to recapture under Treasury Regulation § 1.47-6(a)(2), which provides that a partner's disposition of its partnership interest is treated as a recapture event with respect to the ITCs allocated to that partner. This risk is mitigated by the transfer restrictions contained in Article IX of the LLCA, which prohibit any transfer of a member's interest in Solstice Holdings during the recapture period without the prior written consent of the other member. These restrictions are discussed further in Section IX below.
D. CBR Purchase Option
The Purchase Option Agreement, dated as of the closing date, grants CBR Solstice Manager, LLC the option to purchase Ridgeline's post-flip residual 5% interest in Solstice Holdings at fair market value (with a floor of $1.00). The option is exercisable during the 180-day window following the flip date, which is projected to occur in the fourth quarter of 2028.
Because the option is exercisable only after the flip, and the flip is projected to occur approximately 5.0 years after the weighted-average COD of October 25, 2023, the exercise of the purchase option should fall at or beyond the expiration of the recapture period for most projects. Specifically, the earliest recapture period expires on September 30, 2028 (Cimarron Solar), and the latest expires on November 18, 2028 (Amistad Solar). If the flip occurs on or after November 18, 2028, and CBR exercises the purchase option during the subsequent 180-day window, all projects will have exited the recapture period, and the purchase of Ridgeline's partnership interest will not trigger recapture.
However, a material risk scenario exists if the flip occurs earlier than projected. If Ridgeline achieves its 7.25% after-tax IRR sooner than anticipated — for example, due to higher-than-expected energy production, favorable electricity pricing, or accelerated depreciation benefits — the flip could occur while certain projects (particularly those with later CODs, such as Coyote Flats, Llano Verde, and Amistad) remain within their recapture periods. In that scenario, if CBR exercises the purchase option and acquires Ridgeline's partnership interest, the acquisition would constitute a disposition of Ridgeline's partnership interest, triggering recapture of the ITC attributable to Ridgeline's share for those projects still within their recapture windows.
Recommendation: We recommend including protective language in the Purchase Option Agreement ensuring that the option cannot be exercised until after the last project's recapture period has expired (i.e., not before November 19, 2028), or, in the alternative, structuring the exercise so that the partnership continues to own the energy property post-exercise and no disposition of energy property occurs at the partnership level. We discuss this recommendation further in Section X below and request direction from Leila Nazari and Leonard Cross on the preferred approach.
E. Foreclosure or Lender Step-In
The Solstice Portfolio is subject to two principal debt facilities with Osprey National Bank, N.A. ("Osprey"):
(i) Back-Leverage Term Loan. Osprey holds a security interest in CBR Solstice Manager's managing member interest in Solstice Holdings under the Pledge Agreement executed in connection with the back-leverage term loan ($68,000,000, facility reference ONB-PF-2023-0587). If CBR defaults on the back-leverage facility and Osprey forecloses on CBR Manager's pledged membership interest, the foreclosure would result in a change in the managing member of Solstice Holdings. Depending on how the foreclosure is structured and the identity of the acquiring party, this could constitute a disposition triggering ITC recapture.
(ii) Construction/Term Facility. The construction facility (ONB-PF-2022-0341, $245,000,000, converting to a term facility upon each project's COD) includes security interests at the project level. The collateral package includes first-priority liens on the project assets, including the energy property (panels, inverters, racking, and balance-of-system components). Foreclosure on the project-level assets would be a direct disposition of the energy property, unambiguously triggering ITC recapture for the affected projects.
The Back-Leverage Intercreditor and Consent Agreement among Osprey, Ridgeline, and CBR includes standstill and step-in provisions designed to prevent abrupt foreclosure actions. Specifically, the agreement requires Osprey to provide Ridgeline with not less than 90 days' prior written notice of any intended foreclosure action and grants Ridgeline a right of first refusal to purchase the pledged interest or to cure the default on CBR's behalf. These provisions are intended to provide a buffer period during which the parties can negotiate a resolution that avoids triggering recapture. However, the risk is not entirely eliminated: under severe default scenarios — particularly if CBR's financial condition deteriorates to the point that cure is impractical and Ridgeline declines to exercise its step-in rights — foreclosure could proceed and recapture could result.
F. Casualty Loss or Condemnation
Destruction of solar energy property by casualty during the recapture period — whether caused by severe weather events (hurricanes, hailstorms, tornadoes), fire, flood, or equipment failure — could trigger cessation of qualified use if the property is not replaced or restored to service within a reasonable period. The projects are located in West Texas and central New Mexico, regions that are susceptible to severe weather, including hailstorms and high winds. While the solar panels and racking systems are designed and rated to withstand specified wind and hail loads, extreme weather events exceeding design specifications could result in significant damage or destruction of energy property.
Condemnation or eminent domain proceedings affecting project sites could also result in involuntary disposition of the energy property. While there are no known pending condemnation actions with respect to any of the project sites, and the ground leases contain provisions requiring advance notice and cooperation in the event of condemnation proceedings, the possibility of future condemnation (for example, in connection with roadway or utility infrastructure expansion) cannot be entirely excluded.
Fortis Indemnity Company property insurance and business interruption coverage (placed by Sentinel Underwriters, Inc.) provides financial protection against casualty losses, covering full replacement cost of the energy property and business interruption losses during restoration periods. However, it is critical to recognize that insurance proceeds would offset the economic loss (i.e., the cost of replacing damaged equipment and the lost revenue during downtime) but would not eliminate the ITC recapture itself. The ITC recapture is a federal tax liability triggered by the cessation of qualified use; insurance proceeds are not a substitute for continued operation of the energy property during the recapture period. The Tax Indemnity Agreement serves as the primary protection for Pinehurst against recapture-related tax liabilities, and the LLCA covenants serve the analogous function for Ridgeline, as discussed in Sections IV and VI below.
IV. Recapture Analysis: Partnership-Flip Structure (Ridgeline)
A. Allocation of Recapture Liability
Under § 50(a) and Treasury Regulation § 1.47-6, the recapture of ITCs allocated to a partner in a partnership is the liability of that partner if the partnership disposes of the energy property or the property ceases to be investment credit property during the recapture period. The recapture liability follows the original allocation of the ITC: each partner is liable for recapture of the ITC that was allocated to and claimed by that partner.
In the pre-flip period, Ridgeline receives 99% of the partnership-allocated ITCs. The total ITCs allocated through the partnership structure amount to $89,040,000. Accordingly, approximately $88,149,600 in ITCs are attributable to Ridgeline, and approximately $890,400 are attributable to CBR Manager. If recapture is triggered during the recapture period, Ridgeline's tax liability would increase by the applicable recapture percentage multiplied by $88,149,600.
It bears emphasis that recapture is assessed at the partner level, not at the partnership level. The partnership itself does not have a federal income tax liability that can be increased by recapture. Rather, each partner's individual (or corporate) federal income tax liability is increased by the recaptured amount attributable to that partner's share of the original ITC. This has important implications for enforcement and collection: the IRS would assess the recapture against Ridgeline directly, and Ridgeline's recourse would be against CBR under the indemnity and covenant provisions of the LLCA.
B. Quantification of Recapture Exposure by Year
The following table sets forth Ridgeline's maximum recapture exposure for each year of the recapture period, assuming that all partnership-allocated energy property is disposed of or ceases to qualify in the applicable year:
These figures represent the maximum aggregate exposure and assume that all seven projects are simultaneously affected. In practice, recapture is assessed on a project-by-project basis, and the actual exposure in any given scenario would be limited to the ITC attributable to the specific project(s) affected by the recapture-triggering event. For example, if only one project (such as Amistad Solar, with $16,520,000 in total ITCs) experienced a recapture event in Year 2, Ridgeline's recapture exposure would be limited to 80% of its share of Amistad's ITCs (approximately $9,574,560, assuming the partnership-level allocation for Amistad is proportionate to the portfolio-wide allocation), rather than the full $70,519,680 shown above.
C. Risk Mitigants for Ridgeline
Ridgeline's recapture risk is mitigated by a comprehensive set of contractual protections embedded in the transaction documents:
LLCA Covenants. CBR Manager, as the managing member of Solstice Holdings, is subject to extensive affirmative and negative covenants designed to protect the ITC during the recapture period. These covenants include, among others: (a) an obligation to maintain the projects as energy property and to operate them in compliance with all applicable laws, permits, and regulatory requirements; (b) a prohibition on selling, transferring, or otherwise disposing of project assets without Ridgeline's prior written consent; (c) an obligation to maintain insurance meeting specified thresholds (full replacement cost property insurance, business interruption insurance, and general liability insurance, with Ridgeline named as additional insured and loss payee); and (d) an obligation to maintain prevailing wage and apprenticeship compliance throughout the recapture period.
Transfer Restrictions. Article IX of the LLCA restricts transfers of partnership interests during the recapture period. Neither member may sell, assign, pledge, encumber, or otherwise transfer its interest in Solstice Holdings without the prior written consent of the other member, subject to limited exceptions for permitted transfers to affiliates and pledges to approved lenders. These restrictions are designed to prevent recapture triggered by a partner's disposition of its partnership interest.
Default/Removal-for-Cause Protections. Ridgeline holds protective rights under the LLCA, including the right to remove CBR Manager as managing member for cause if material covenants are breached. "Cause" is defined to include, among other events, a disposition of energy property without Ridgeline's consent, failure to maintain required insurance, material breach of prevailing wage or domestic content covenants, and a material default under any project-level debt facility. Upon removal for cause, Ridgeline has the right to designate a replacement managing member, thereby ensuring continuity of operations and reducing the risk of further recapture-triggering events.
Insurance. As noted above, the projects are covered by comprehensive property and casualty insurance through Fortis Indemnity Company, placed by Sentinel Underwriters, Inc. The insurance policies cover full replacement cost of the energy property, business interruption during restoration periods, and general liability. Ridgeline is named as an additional insured and loss payee under the policies, ensuring that insurance proceeds are applied to restoration of the energy property and that Ridgeline has visibility into claims and coverage decisions.
V. Recapture Analysis: Section 6418 Transferred Credits (Pinehurst)
A. Statutory Framework for Transferee Recapture
IRA Section 6418, enacted as part of the Inflation Reduction Act of 2022, permits eligible taxpayers to transfer certain tax credits, including the ITC under § 48, to unrelated transferee taxpayers in exchange for cash consideration. The transfer is treated as a tax-free payment for both the transferor and the transferee, and the transferred credit is claimed by the transferee on its federal income tax return for the taxable year specified in the transfer election.
Section 6418(g)(2) addresses the application of the recapture rules to transferred credits. Under this provision, in the case of transferred credits, the recapture rules of § 50(a) apply to the transferee taxpayer as if the transferee had originally claimed the credit. This means that if a recapture event occurs with respect to the underlying energy property during the five-year recapture period, the transferee — not the transferor — bears the immediate federal income tax liability arising from recapture. The recapture amount is calculated by applying the applicable recapture percentage (as set forth in the statutory schedule described in Section II.A above) to the face value of the transferred credits.
This statutory allocation of recapture liability to the transferee creates a unique and potentially adverse risk dynamic. Unlike a tax-equity investor in a partnership-flip structure, who has contractual and structural control over the energy property through its partnership interest and governing documents, a transferee credit buyer such as Pinehurst has no ownership interest in, operational control over, or legal authority with respect to the underlying solar energy property. Pinehurst cannot prevent a disposition, cessation of use, or other recapture-triggering event from occurring. Pinehurst's sole recourse in the event of recapture is contractual — specifically, the Tax Indemnity Agreement discussed in Section VI below and the representations and warranties contained in the TCPA.
B. Quantification of Pinehurst's Recapture Exposure by Year
Pinehurst has purchased $60,000,000 in face-value ITCs. The following table sets forth Pinehurst's maximum recapture exposure for each year of the recapture period:
As with the Ridgeline analysis, these figures represent the maximum aggregate exposure assuming all transferred credits are subject to recapture in the applicable year. In practice, recapture would be assessed on a project-by-project basis and would be limited to the transferred credits attributable to the specific project(s) affected by the recapture event. The TCPA allocates the transferred credits among the seven projects in proportion to each project's share of total eligible basis, which provides a basis for determining the credit amount at risk in any single-project recapture scenario.
C. Pinehurst's Lack of Control Over Recapture Triggers
As discussed above, Pinehurst does not own, operate, or control the solar energy property. It has no right to inspect the projects, direct operational decisions, or prevent CBR from taking (or failing to take) actions that could trigger recapture. Pinehurst has no seat on any governing body of Solstice Holdings, CBR, or any project company. This fundamental asymmetry between recapture liability and operational control is the central risk factor in the § 6418 transfer structure and is the primary justification for the Tax Indemnity Agreement described below.
Pinehurst's protections are limited to the following contractual mechanisms:
• The Tax Indemnity Agreement, which provides dollar-for-dollar indemnification (plus tax gross-up) for recaptured or disallowed credits, subject to a cap;
• The representations and warranties in the TCPA, pursuant to which CBR represents and warrants, among other things, that the projects qualify as energy property, that the placed-in-service dates are accurate, that the domestic content requirements are satisfied, that prevailing wage and apprenticeship requirements have been and will continue to be satisfied, and that CBR will maintain the projects as energy property throughout the recapture period;
• The affirmative covenants in the TCPA, pursuant to which CBR agrees to provide annual compliance certifications, maintain required insurance, and promptly notify Pinehurst of any event that could reasonably be expected to trigger recapture; and
• The negative covenants in the TCPA, pursuant to which CBR agrees not to dispose of the energy property, cease operations at any project, or take any action that would cause the energy property to cease to qualify, in each case during the recapture period, without Pinehurst's prior written consent.
While these contractual protections are comprehensive, they are only as effective as CBR's willingness and financial ability to honor them. Pinehurst's ultimate backstop is the Tax Indemnity Agreement, the terms and adequacy of which we analyze in the following section.
VI. Tax Indemnity Agreement Analysis
A. Structure and Scope
The Tax Indemnity Agreement, dated September 21, 2023, is an agreement by CBR in favor of Pinehurst pursuant to which CBR assumes responsibility for certain tax-related losses incurred by Pinehurst in connection with the transferred credits. The agreement covers two primary categories of risk:
(i) ITC Recapture under § 50(a). If any recapture event occurs during the five-year recapture period with respect to the energy property underlying the transferred credits, and Pinehurst incurs a recapture liability as a result, CBR is obligated to indemnify Pinehurst for the full amount of the recaptured credits.
(ii) ITC Disallowance. If the IRS determines that the transferred credits were not properly available — for example, because the energy property did not qualify for the ITC, the placed-in-service date was incorrectly determined, the domestic content requirements were not satisfied, the prevailing wage and apprenticeship requirements were not met, or the § 6418 transfer election was defective — and Pinehurst's federal income tax liability is increased as a result, CBR is obligated to indemnify Pinehurst for the disallowed credit amount.
The indemnity obligation encompasses the full recaptured or disallowed credit amount plus a tax gross-up. The gross-up is designed to make Pinehurst whole on an after-tax basis: because the indemnity payment, if received by Pinehurst, would be includible in Pinehurst's gross income for federal income tax purposes, the gross-up compensates Pinehurst for the additional tax liability arising from the receipt of the indemnity payment itself. This is a standard feature of tax indemnity agreements in the renewable energy credit transfer market.
B. Indemnity Cap
The indemnity obligation is subject to a cap of 125% of the aggregate purchase price paid by Pinehurst for the transferred credits. The purchase price is $55,200,000 ($60,000,000 in face-value credits × $0.92 per dollar of credit). Accordingly, the indemnity cap is:
$55,200,000 × 1.25 = $69,000,000
This cap is intended to cover the full $60,000,000 in face-value credits plus up to $9,000,000 in tax gross-up. The adequacy of this cap depends on the magnitude of the recapture event and Pinehurst's marginal tax rate. We analyze the cap's adequacy under several scenarios:
Full Portfolio Recapture in Year 1 (Extreme Scenario). If 100% recapture occurs in Year 1, Pinehurst's recapture liability would be $60,000,000. Assuming Pinehurst's effective marginal federal corporate tax rate is approximately 21%, the gross-up required to make Pinehurst whole on an after-tax basis would be calculated as follows:
Gross-Up = ($60,000,000 / (1 – 0.21)) – $60,000,000 = $75,949,367 – $60,000,000 = approximately $15,949,367
The total indemnity payment (recapture amount plus gross-up) would therefore be approximately $75,949,367, which would exceed the $69,000,000 cap by approximately $6,949,367. This means that in the extreme scenario of full-portfolio Year 1 recapture, Pinehurst would bear an unindemnified loss of approximately $6.9 million.
However, full-portfolio recapture in Year 1 is an extreme and highly improbable scenario. It would require the simultaneous disposition or cessation of use of all energy property across all seven projects within the first twelve months of operation — an event that would likely be precipitated only by a catastrophic multi-project casualty, a wholesale abandonment of the portfolio by CBR, or a similar extraordinary circumstance. In more likely partial or later-year recapture scenarios, the $69,000,000 cap should be more than sufficient to cover Pinehurst's losses. For example:
• Single-project recapture in Year 2 (Amistad Solar): 80% × $9,570,000 (Pinehurst's approximate share of Amistad ITCs) = $7,656,000; with gross-up: approximately $9,691,139 — well within the cap.
• Three-project recapture in Year 3: 60% × $28,000,000 (illustrative) = $16,800,000; with gross-up: approximately $21,265,823 — within the cap.
C. Survival Period
The Tax Indemnity Agreement survives through 60 days following the expiration of the five-year recapture period for the last project in the portfolio. The last project to achieve COD is Amistad Solar, with a placed-in-service date of November 18, 2023, and a corresponding recapture expiration date of November 18, 2028. Accordingly, the Tax Indemnity Agreement survives through approximately January 17, 2029.
This 60-day tail period is designed to account for the possibility that a recapture event occurs near the end of the recapture period and is not identified or assessed until shortly after the period expires. The tail period also provides a buffer for situations in which the IRS initiates an audit during the recapture period and issues a notice of deficiency shortly before or after the recapture period's expiration. Any claim under the Tax Indemnity Agreement must be submitted to CBR in writing prior to the expiration of the survival period, and CBR is obligated to pay valid claims within 30 days of receipt of a properly documented claim notice.
D. CBR's Financial Capacity to Honor the Indemnity
The enforceability of the Tax Indemnity Agreement is only as valuable as CBR's financial ability to satisfy its indemnity obligations when called upon. Accordingly, an assessment of CBR's financial profile is relevant to the risk analysis.
Based on the financial information provided by CBR and its counsel, CBR's key financial metrics are as follows:
• 2022 Revenues: $67.4 million
• Total Assets: Approximately $412 million
• Existing Operating Portfolio: Approximately 780 MW across five states (in addition to the 420 MW Solstice Portfolio)
• Corporate Structure: C-corporation organized under the laws of Delaware
The $69,000,000 indemnity cap represents approximately 16.7% of CBR's total assets. While this is a significant obligation, CBR appears to have adequate financial capacity to support the indemnity based on its current financial profile. However, we note that the indemnity is an unsecured obligation of CBR — it is not backed by any collateral, letter of credit, escrow reserve, or other form of credit enhancement. Accordingly, Pinehurst's recovery under the indemnity is subject to CBR's continued solvency and financial capacity over the approximately five-year survival period of the agreement.
We understand that Pinehurst's counsel, Thornberry Mack LLP (led by Roland Thornberry), negotiated the enhanced indemnity provisions — including the 125% cap and the tax gross-up — as a condition of Pinehurst's agreement to the $0.92 per dollar credit purchase price. The pricing negotiation history reflects the market's assessment of recapture risk: Pinehurst's initial bid was $0.89 per dollar of credit; CBR's counter was $0.94; and the final agreed price of $0.92 reflects a compromise that accounts for, among other factors, Pinehurst's recapture exposure and the protections afforded by the Tax Indemnity Agreement.
Consideration for Discussion: We flag for Leonard Cross and Leila Nazari the question of whether Pinehurst should require additional credit support to backstop the indemnity. Options include a standby letter of credit from a rated financial institution, an escrow reserve funded at closing, or a pledge of specific CBR assets. The current agreement does not include any such provision. The absence of credit support creates a risk that, in the event of CBR's financial deterioration or insolvency during the recapture period, Pinehurst would be unable to recover on the indemnity even if recapture occurs. This issue warrants discussion in connection with the overall risk assessment for the TCPA and should be addressed, if at all, prior to the September 21, 2023 signing date.
VII. Specific Recapture Risk Scenarios
This section analyzes five specific scenarios that represent the most material recapture risks for the Solstice Portfolio. For each scenario, we describe the factual predicate, quantify the potential recapture exposure, identify the applicable mitigants, and assess the residual risk.
A. Scenario 1: Single Project Casualty Loss (Illustrative)
Hypothetical: Amistad Solar, LLC (45 MW(dc), Val Verde County, Texas, $41,300,000 EPC cost, $16,520,000 total ITC) suffers catastrophic damage from a severe hailstorm in Year 2 of the recapture period (calendar year 2025). The storm destroys approximately 85% of the solar panels, rendering the facility inoperable. Due to supply chain constraints affecting replacement panel procurement and permitting delays for reconstruction, the facility is not rebuilt within 12 months of the casualty event. At that point, the energy property is deemed to have ceased to be energy property with respect to the taxpayer.
Recapture Amount: 80% (Year 2 recapture percentage) × $16,520,000 (total Amistad ITC) = $13,216,000. This recapture amount would be allocated between the partnership-allocated ITCs and the § 6418 transferred ITCs in proportion to the original allocation. Assuming the portfolio-wide allocation ratio applies (approximately 57.9% partnership / 42.1% § 6418 transfer), approximately $7,652,064 would be recaptured from Ridgeline (through its partnership allocation) and approximately $5,563,936 would be recaptured from Pinehurst (as the transferee credit buyer).
Insurance Coverage: Fortis Indemnity Company property insurance would cover the cost of replacing the damaged panels and restoring the facility, subject to policy limits and applicable deductibles. Business interruption insurance would cover lost revenue during the restoration period. However, as noted in Section III.F above, insurance proceeds do not directly offset the ITC recapture tax liability. The insurance covers the economic loss; the Tax Indemnity Agreement addresses the tax recapture liability.
Tax Indemnity Agreement: CBR would be obligated to indemnify Pinehurst for Pinehurst's share of the $13,216,000 recapture amount (approximately $5,563,936), plus a tax gross-up. Assuming a 21% effective marginal tax rate, the total indemnity payment would be approximately $7,042,958 — well within the $69,000,000 cap.
Residual Risk Assessment: This scenario is plausible given the geographic location of the projects in regions susceptible to severe weather. The primary mitigant is the property insurance program, which should enable restoration of the facility and, if completed in a timely manner, could prevent a cessation of qualified use from being deemed to have occurred. The 12-month restoration assumption in this hypothetical is conservative; in many cases, restoration could be accomplished more quickly, particularly if replacement equipment is available and permitting does not present significant delays. We recommend confirming with Sentinel Underwriters (Laura Jennings) that the policy includes provisions for expedited procurement and reconstruction.
B. Scenario 2: Failure to Maintain Prevailing Wage/Apprenticeship Compliance
Background: IRA § 48(a)(10) requires that, in order for a project to claim the full 30% base ITC rate (as opposed to the 6% base rate available for projects that do not satisfy the requirements), the project must satisfy prevailing wage and apprenticeship requirements both during construction and for the first five years of operations. The prevailing wage requirement mandates that all laborers and mechanics employed in the construction, alteration, or repair of the facility are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality, as determined by the Secretary of Labor. The apprenticeship requirement mandates that a specified percentage of total labor hours be performed by qualified apprentices.
Risk Analysis: A failure to maintain prevailing wage or apprenticeship compliance during the five-year post-COD period could result in the IRS determining that the projects do not satisfy the requirements of § 48(a)(10), thereby reducing the applicable ITC rate from 30% to 6%. This would effectively disallow the incremental 24% of the ITC (i.e., the difference between the 30% rate and the 6% rate), resulting in a disallowance of $384,600,000 × 24% = $92,304,000 in ITCs. While this is technically an ITC disallowance rather than a § 50(a) recapture, the economic effect on the stakeholders is similar: both Ridgeline and Pinehurst would face increased federal income tax liabilities corresponding to their shares of the disallowed credits. Importantly, the Tax Indemnity Agreement covers ITC disallowance as well as recapture, providing Pinehurst with contractual protection in this scenario.
Allocation of Responsibility: Vasquez Brothers Construction, Inc. ("VBC"), the EPC contractor for all seven projects, bears primary responsibility for prevailing wage and apprenticeship compliance during the construction phase. Post-COD, responsibility for ongoing compliance shifts to CBR, which is responsible for ensuring that operations and maintenance workers (whether employed directly by CBR or by third-party O&M contractors) are paid prevailing wages and that apprenticeship requirements continue to be satisfied with respect to any alteration or repair work performed at the facilities.
Mitigant: The LLCA and TCPA include affirmative covenants requiring CBR to maintain prevailing wage and apprenticeship compliance throughout the five-year period, with annual certification requirements. CBR is required to deliver to both Ridgeline and Pinehurst, not later than 120 days following the end of each calendar year, a certificate signed by an authorized officer of CBR certifying compliance with prevailing wage and apprenticeship requirements for the preceding year. Additionally, VBC's EPC contract includes representations and warranties regarding construction-phase compliance, and VBC has provided an indemnity to CBR covering losses arising from VBC's failure to comply with prevailing wage and apprenticeship requirements during construction.
Residual Risk Assessment: The risk of prevailing wage non-compliance is moderate. Prevailing wage compliance is well-understood in the construction industry, and VBC has represented that it has implemented compliance programs consistent with Davis-Bacon Act requirements. However, the IRS's enforcement posture with respect to the IRA's prevailing wage and apprenticeship requirements remains uncertain, as these requirements are relatively new in the context of energy tax credits. We recommend that CBR and its tax advisors at Larchmont & Associates, PLLC (Susan Kaplan, Tax Partner) establish a robust monitoring and documentation system for post-COD prevailing wage compliance.
C. Scenario 3: Involuntary Disposition Due to Lender Foreclosure
Hypothetical: CBR defaults on the Osprey National Bank back-leverage term loan ($68,000,000, facility ONB-PF-2023-0587) — for example, due to a liquidity crisis affecting CBR's broader business or a material adverse change in CBR's financial condition. Following the occurrence and continuance of an event of default, Osprey exercises its remedies under the Pledge Agreement and forecloses on CBR Solstice Manager's pledged managing member interest in Solstice Holdings, LLC.
Recapture Analysis: The foreclosure on CBR Manager's membership interest in Solstice Holdings would result in a change in the identity of the managing member of the partnership. Depending on the structure and mechanics of the foreclosure, this could be analyzed as (i) a disposition of CBR Manager's partnership interest, triggering recapture of the ITCs allocated to CBR Manager (approximately $890,400 — a relatively small amount given CBR Manager's 1% allocation), or (ii) a change in the composition or control of the partnership that could have broader implications for the energy property's status as investment credit property. The more significant risk is that the foreclosure disrupts the operational structure of the partnership, leading to cessation of operations at the projects and consequent cessation of qualified use — a recapture trigger affecting all ITCs, including those allocated to Ridgeline and those transferred to Pinehurst.
Intercreditor Protections: The Back-Leverage Intercreditor and Consent Agreement includes standstill provisions requiring Osprey to provide Ridgeline with not less than 90 days' prior written notice of any intended foreclosure action. During the standstill period, Ridgeline has the right to cure the default on CBR's behalf, to negotiate directly with Osprey regarding workout alternatives, and to exercise a right of first refusal to acquire the pledged interest. These provisions are designed to ensure that Ridgeline has the opportunity to prevent a foreclosure from proceeding and to maintain continuity of operations at the projects.
Assessment: Foreclosure risk is assessed as low given CBR's current financial profile and the stability of the project cash flows. The projects benefit from long-term power purchase agreements ("PPAs") with creditworthy counterparties: fifteen-year PPAs with Lone Star Grid Solutions for the five Texas projects at a weighted-average contract price of $32.50/MWh with a 1.5% annual escalator, and twenty-year PPAs with Enchantment Power Cooperative for the two New Mexico projects at a weighted-average contract price of $29.75/MWh with a 2.0% annual escalator. These PPAs provide stable, predictable revenue streams sufficient to service the project-level debt and the back-leverage term loan under base-case and moderate downside scenarios. However, the risk cannot be entirely eliminated, particularly in the event of a broader financial distress affecting CBR or a severe and prolonged decline in energy markets.
D. Scenario 4: Sale of Projects or Change of Control of CBR
Background: During the five-year recapture period, CBR or its shareholders could undertake a transaction involving a sale of the Solstice Portfolio, a sale of CBR itself, or a change of control of CBR. Each of these transaction types must be analyzed for its potential to trigger ITC recapture.
Sale of CBR Stock (C-Corporation Level). A sale of CBR's stock — i.e., a change in the ownership of CBR at the C-corporation level — would not directly trigger ITC recapture. The energy property ownership chain remains unchanged: CBR continues to exist as a corporate entity, CBR Solstice Manager (a wholly-owned subsidiary of CBR) continues to hold its managing member interest in Solstice Holdings, and Solstice Holdings continues to own the project companies and the underlying energy property. Because the ITC is claimed at the partnership level (by Ridgeline and CBR Manager as partners in Solstice Holdings) and at the transferee level (by Pinehurst with respect to transferred credits), a change in the indirect ownership of one partner (CBR Manager) through a stock sale at a higher corporate tier should not constitute a disposition of energy property or a cessation of qualified use.
Sale of CBR Manager's Membership Interest in Solstice Holdings. A direct sale by CBR Manager of its membership interest in Solstice Holdings would constitute a disposition of CBR Manager's partnership interest. This would trigger recapture of the ITCs allocated to CBR Manager (approximately $890,400 — a relatively small amount). However, if the sale resulted in a change of control of the managing member that disrupted operations or led to a cessation of qualified use at the project level, broader recapture implications could arise.
Sale of Project Companies or Project Assets. A sale by Solstice Holdings of the membership interests in one or more project companies, or a sale by the project companies of the project assets (energy property), would unambiguously constitute a disposition triggering recapture of the ITCs attributable to the affected projects. As discussed in Section III.A above, a sale of membership interests in a disregarded entity is treated as a sale of the underlying assets for federal tax purposes.
LLCA Transfer Restrictions. The LLCA prohibits sales or transfers of the type described in the second and third bullet points above during the recapture period without Ridgeline's prior written consent. These restrictions provide a contractual bar to recapture-triggering dispositions and ensure that Ridgeline retains a veto right over any transaction that could jeopardize its ITC position.
E. Scenario 5: Domestic Content Bonus Adder Disallowance
Background: The 10% domestic content bonus adder under § 48(a)(12) contributes an additional $38,460,000 in ITCs to the portfolio ($384,600,000 in eligible basis × 10%). The domestic content bonus adder is available only if the project satisfies the domestic content requirements, which generally require that 100% of steel and iron used in the project is produced in the United States and that a specified percentage (currently 40% for projects beginning construction in 2023, increasing in subsequent years) of the total cost of manufactured products is attributable to products mined, produced, or manufactured in the United States.
Risk Analysis: If the IRS determines, upon audit or examination, that one or more projects in the Solstice Portfolio did not satisfy the domestic content requirements, the 10% bonus adder would be disallowed for the affected projects. This would reduce the applicable ITC rate from 40% to 30% for those projects, resulting in a dollar-for-dollar disallowance of the incremental credits. Depending on the scope of the disallowance (single project versus multiple projects), the exposure could range from approximately $4,130,000 (if only Amistad Solar is affected) to $38,460,000 (if all projects are affected). This disallowance would be allocated between the partnership-allocated ITCs and the transferred credits in accordance with the original allocation methodology.
Tax Indemnity Agreement Coverage: The Tax Indemnity Agreement covers ITC disallowance events, including disallowance of the domestic content bonus adder. Accordingly, Pinehurst would be entitled to indemnification from CBR for its share of any disallowed credits, plus tax gross-up, subject to the $69,000,000 cap.
Mitigant: CBR retained Greystone Worthington, LLC (Helen Farber, Managing Director) to conduct an independent analysis of domestic content qualification for the Solstice Portfolio. Greystone Worthington's report, delivered on August 28, 2023, concludes that all seven projects satisfy the domestic content requirements based on the sourcing of steel, iron, and manufactured products. CBR and VBC have maintained detailed documentation of domestic sourcing, including supplier certifications, mill certificates for steel and iron, and cost analyses for manufactured products. This documentation package has been reviewed by our firm and appears to be comprehensive and well-organized. However, we note that the IRS's guidance on domestic content qualification under § 48(a)(12) is still evolving, and there is some uncertainty regarding the proper methodology for calculating the domestic content percentage for manufactured products. We recommend that CBR continue to maintain and update the domestic content documentation throughout the recapture period to support the qualification in the event of an audit.
VIII. Interaction with Depreciable Basis
Under IRC § 50(c), the depreciable basis of investment credit property is reduced by 50% of the ITC claimed with respect to that property. For the Solstice Portfolio, this basis reduction is calculated as follows:
Total Eligible Basis (EPC Cost): $384,600,000 Less: Basis Reduction (50% × $153,840,000 ITC): ($76,920,000) Depreciable Basis (5-Year MACRS): $307,680,000
The $307,680,000 in depreciable basis is recovered over a five-year MACRS recovery period (with the applicable MACRS conventions and depreciation percentages), generating depreciation deductions that are allocated among the partners in Solstice Holdings in accordance with the LLCA's allocation provisions.
If ITCs are recaptured during the recapture period, the § 50(c) basis reduction is reversed. Specifically, the depreciable basis of the affected energy property is increased by 50% of the recaptured ITC amount, and the taxpayer is entitled to claim additional depreciation deductions with respect to the restored basis. However, there is an important timing mismatch: the recapture liability is assessed immediately (as an increase in the taxpayer's tax liability for the year in which the recapture event occurs), whereas the additional depreciation benefit is spread over the remaining depreciable life of the property. In the case of a Year 1 recapture, for example, the taxpayer would owe the full recaptured ITC amount immediately but would recover the restored basis through depreciation deductions over the remaining four years of the MACRS recovery period (or longer, depending on the applicable convention). This timing mismatch means that recapture creates a net-negative economic impact, as the present value of the accelerated tax liability exceeds the present value of the deferred depreciation benefit.
For the partnership structure, recapture-related basis adjustments would need to flow through the partnership's § 704(b) capital accounts and be allocated among the partners consistent with the allocation provisions of the LLCA. The LLCA provides that recapture-related items are specially allocated to the partner whose ITC is recaptured, ensuring that the economic burden of recapture falls on the appropriate party. This special allocation is consistent with the requirements of Treasury Regulation § 1.704-1(b)(2)(iv) and the principles of economic effect.
IX. Structural Protections and Mitigants Summary
A. Contractual Protections
The transaction documents include a comprehensive set of contractual protections designed to minimize recapture risk and allocate recapture-related economic exposure to the appropriate parties:
1. LLCA Covenants. The Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC imposes affirmative and negative covenants on CBR Manager requiring it to: (a) maintain the energy property status o