MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
From: Leonard Cross, Partner, Tax; Leila Nazari, Associate, Tax — Calderwood & Harkness LLP
To: Marcus Calloway, Chairman & CEO; Theo Vasquez, CFO; Priya Anand, VP, Project Finance — Calloway-Briggs Renewables Inc.
Date: September 15, 2023
Re: Tax Structure Memorandum — Solstice Portfolio: Partnership-Flip Tax-Equity Investment and Section 6418 Transferable Credit Sale
C&H Matter No.: 1015-00005
C&H Billing No.: 78204-001
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I. EXECUTIVE SUMMARY
This memorandum analyzes and memorializes the proposed dual-tranche tax monetization structure for the Solstice Portfolio, a portfolio of seven utility-scale solar photovoltaic ("PV") projects with an aggregate nameplate capacity of 420 megawatts direct current ("MW(dc)") located across the states of Texas and New Mexico (the "Solstice Portfolio" or the "Portfolio"). The Solstice Portfolio is owned, directly or indirectly, by our client, Calloway-Briggs Renewables Inc. ("CBR"). This memorandum addresses the tax structuring aspects of the proposed transaction and describes the integrated two-tranche financing architecture that CBR intends to employ to maximize the monetization of investment tax credits ("ITCs") and accelerated depreciation deductions generated by the Portfolio.
The proposed structure contemplates total financing to be raised of approximately $180,000,000 across two integrated tranches, as summarized below:
• Tranche 1 — Partnership-Flip Tax-Equity Investment: Ridgeline Capital Partners, LLC ("Ridgeline") will make a capital contribution of $120,000,000 to Solstice Holdings, LLC (the "Partnership"), a newly formed Delaware limited liability company that will hold the seven project companies. This investment follows the partnership-flip model consistent with the safe harbor principles articulated in Revenue Procedure 2007-65.
• Tranche 2 — Section 6418 Transferable Credit Sale: CBR, acting through the project companies as eligible taxpayers, will sell ITCs with a face value of $60,000,000 to Pinehurst Insurance Group, Inc. ("Pinehurst") for aggregate cash proceeds of $55,200,000, reflecting a purchase price of $0.92 per dollar of credit. CBR will retain ITCs with a face value of $4,800,000 for use against its own federal income tax liability.
The grand total deal value of the transaction is therefore $180,000,000, calculated as follows: $120,000,000 (Ridgeline tax-equity contribution) + $55,200,000 (Pinehurst credit sale proceeds) + $4,800,000 (CBR retained credits at face value).
The aggregate eligible basis for ITC purposes across the seven projects in the Portfolio equals $384,600,000, representing total engineering, procurement, and construction ("EPC") costs. The applicable ITC rate is 40%, comprised of a 30% base rate (reflecting the 6% statutory rate multiplied by the 5× prevailing wage and apprenticeship compliance multiplier) plus a 10% domestic content bonus adder under Section 48(a)(12) of the Internal Revenue Code of 1986, as amended (the "Code"). The energy community adder does not apply. Total ITCs generated by the Portfolio are therefore $153,840,000 ($384,600,000 × 40%).
Key dates for the transaction are as follows. The Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC (the "LLCA"), the Tax Credit Purchase Agreement (the "TCPA"), and ancillary transaction documents are expected to be signed on September 21, 2023. Commercial operation dates ("CODs") for the seven projects are targeted between September 30 and November 18, 2023. Closing was originally scheduled for November 30, 2023, subject to adjustment for achievement of the final project COD; as discussed further below, the actual closing date was December 8, 2023.
The LLCA is governed by Delaware law with respect to entity formation and governance matters and by federal tax law with respect to the tax provisions. The TCPA and ancillary transaction documents are governed by New York law.
We note that this memorandum addresses the tax structuring aspects of the transaction. Separate memoranda, which are being prepared concurrently by this firm, address: (i) ITC eligibility and basis; (ii) Section 6418 election mechanics; (iii) ITC recapture risk; and (iv) partnership allocation analysis under Section 704(b) of the Code and the Treasury regulations thereunder.
II. DESCRIPTION OF THE SOLSTICE PORTFOLIO
A. Portfolio Overview
The client in this matter is Calloway-Briggs Renewables Inc. ("CBR"), a Texas C-corporation headquartered at 2700 Post Oak Boulevard, Suite 1450, Houston, TX 77056. CBR is a privately held renewable energy development company that has been actively involved in the development, construction, and operation of utility-scale solar projects throughout the United States since its founding in 2017. Since inception, CBR has developed approximately 1.2 gigawatts ("GW") of solar generating capacity across multiple jurisdictions, establishing a significant track record in the renewable energy sector. For the fiscal year ended December 31, 2022, CBR reported total revenues of $67.4 million and total assets of approximately $412 million. As of the date of this memorandum, CBR currently operates approximately 780 MW of solar generating capacity across five states.
The Solstice Portfolio represents CBR's largest single portfolio-level tax monetization transaction to date. The Portfolio comprises seven utility-scale solar PV projects with an aggregate nameplate capacity of 420 MW(dc), situated in geographically proximate locations across West Texas and southeastern New Mexico. The projects are at an advanced stage of construction, with all seven targeting commercial operation in the third and fourth quarters of 2023. The Portfolio benefits from long-term offtake arrangements, experienced EPC execution by a single contractor, and a well-defined construction schedule that supports the tax structuring objectives described in this memorandum.
B. Project-Level Detail
The following table provides a summary of the seven projects comprising the Solstice Portfolio:
Each of the seven project companies is organized as a Delaware limited liability company and is currently treated as a disregarded entity for federal income tax purposes. All seven project companies are wholly owned by Solstice Holdings, LLC, the entity that will serve as the partnership vehicle for purposes of the partnership-flip structure described in Section IV of this memorandum.
The EPC contractor for all seven projects is Vasquez Brothers Construction, Inc. ("VBC"), a Dallas, Texas-based construction firm (EIN: 75-2648103). VBC is engaged under a master EPC agreement governed by Texas law, which provides for a single contractual framework covering the design, procurement, construction, commissioning, and testing of all seven facilities. VBC's obligations under the master EPC agreement include lump-sum turnkey pricing, guaranteed completion dates, liquidated damages for delay, and performance guarantees tied to minimum energy production thresholds. VBC has provided representations and certifications regarding compliance with prevailing wage and apprenticeship requirements under the Inflation Reduction Act of 2022 (the "IRA"), as further discussed in Section VIII.B below.
The capacity-weighted average COD for the Portfolio, based on the target COD schedule set forth above, is approximately October 25, 2023. This date serves as the reference point for certain financial modeling assumptions, including the projected partnership flip date discussed in Section IV.D.
C. Offtake Contracts
Revenue from the Solstice Portfolio is secured by long-term power purchase agreements ("PPAs") with creditworthy counterparties in each of the two states in which the projects are located.
Texas Projects. The five Texas projects — Pecos Sun, Red Mesa, Coyote Flats, Llano Verde, and Amistad — are each party to 15-year PPAs with Lone Star Grid Solutions, LLC ("Lone Star"). The PPAs provide for a capacity-weighted average initial contract price of $32.50 per MWh, subject to an annual escalation rate of 1.5%. Lone Star is a Texas-based load-serving entity with an investment-grade credit profile and substantial experience as an offtaker for utility-scale solar facilities in ERCOT. The PPAs contain standard provisions for curtailment, force majeure, default, and termination, as well as performance guarantees and minimum delivery obligations.
New Mexico Projects. The two New Mexico projects — Cimarron and Sandoval Ridge — are each party to 20-year PPAs with Enchantment Power Cooperative ("Enchantment"). The PPAs provide for a capacity-weighted average initial contract price of $29.75 per MWh, subject to an annual escalation rate of 2.0%. Enchantment is a generation and transmission cooperative serving multiple member distribution cooperatives in New Mexico and has a strong track record of performing under long-term renewable energy contracts. The five-year longer term of the New Mexico PPAs, together with the higher annual escalation rate, partially offsets the lower initial contract price relative to the Texas PPAs.
The contracted revenue streams under these PPAs are a critical component of the partnership economics and support the reasonably anticipated profit analysis discussed in Section IV.F below in connection with the Revenue Procedure 2007-65 safe harbor.
D. Existing Financing
The construction of the Solstice Portfolio has been financed under a $245,000,000 construction-to-term loan facility provided by Osprey National Bank, N.A. ("Osprey") pursuant to a credit agreement identified as Agreement No. ONB-PF-2022-0341 (the "Construction Facility"). Proceeds from the tax-equity investment and the transferable credit sale will be used, in part, to repay a portion of the outstanding draws under the Construction Facility at or promptly following closing.
Following the closing of the transactions described in this memorandum, Osprey will provide a $68,000,000 back-leverage term loan to CBR, secured by CBR Solstice Manager, LLC's managing-member interest in Solstice Holdings, LLC (Agreement No. ONB-PF-2023-0587) (the "Back-Leverage Facility"). The Back-Leverage Facility is a standard feature of partnership-flip tax-equity structures and enables CBR to increase its economic leverage without disturbing the tax-equity economics. The interplay between the Back-Leverage Facility and the partnership structure is governed by an Intercreditor and Consent Agreement among Osprey, Ridgeline, and CBR, as further described in Section VIII.G and Section IX.A below.
III. TRANSACTION STRUCTURE OVERVIEW
A. Structural Diagram
The following narrative description sets forth the organizational and transactional structure of the dual-tranche financing. An organizational chart reflecting this structure has been prepared and is included as Exhibit A to this memorandum.
Organizational Structure. At the top of the structure is Calloway-Briggs Renewables Inc. ("CBR"), the Texas C-corporation that serves as the ultimate parent and developer of the Solstice Portfolio. CBR wholly owns CBR Solstice Manager, LLC ("CBR Manager"), a Delaware limited liability company formed on August 14, 2023, and treated as a disregarded entity for federal income tax purposes (EIN: 88-4071597). CBR Manager serves as the Managing Member of the Partnership.
Solstice Holdings, LLC (the "Partnership") is a Delaware limited liability company formed on August 14, 2023, and classified as a partnership for federal income tax purposes (EIN: 88-4071523). The registered agent of Solstice Holdings is Cascade Systems, located at 160 Greentree Drive, Suite 101, Dover, DE 19904. The Partnership has two members: (i) CBR Manager, as Managing Member, and (ii) Ridgeline Capital Partners, LLC ("Ridgeline"), a Delaware limited liability company (EIN: 13-4827651), as Tax-Equity Member.
Beneath the Partnership sit the seven project company SPEs — Pecos Sun Solar, LLC; Red Mesa Solar, LLC; Coyote Flats Solar, LLC; Llano Verde Solar, LLC; Cimarron Solar, LLC; Sandoval Ridge Solar, LLC; and Amistad Solar, LLC — each a Delaware LLC treated as a disregarded entity for federal income tax purposes.
Capital Flows. Ridgeline contributes $120,000,000 in aggregate capital contributions to Solstice Holdings (in two tranches, as described in Section IV.B). CBR Manager contributes $2,400,000 in capital to Solstice Holdings. These contributions flow through the Partnership to fund project costs and operations.
Section 6418 Credit Transfer. Separately, the seven project companies (with CBR as the regarded taxpayer for purposes of Section 6418) execute transfer elections directing ITCs with a face value of $64,800,000 for transfer, of which $60,000,000 in credits are sold to Pinehurst Insurance Group, Inc. ("Pinehurst"), a Connecticut corporation (EIN: 06-1938274). In consideration, Pinehurst pays a purchase price of $55,200,000 ($0.92 per $1.00 of credit). CBR retains the remaining $4,800,000 in transferred credits for its own account.
Escrow. All closing-date capital contributions and purchase price payments flow through Clearwater Escrow Services, Inc. (Account No. CES-2023-80114), which serves as the escrow intermediary for the transaction.
Back-Leverage. Osprey National Bank holds a security interest in CBR Manager's managing-member interest in the Partnership pursuant to the Pledge Agreement, securing the $68,000,000 Back-Leverage Facility.
B. Two-Tranche Architecture
The dual-tranche approach is employed to maximize the total cash monetization of tax benefits generated by the Solstice Portfolio. The traditional partnership-flip structure, standing alone, is the most widely used mechanism for monetizing ITCs and accelerated depreciation in utility-scale solar transactions. However, the IRA's introduction of Section 6418 — which permits eligible taxpayers to sell specified energy credits to unrelated transferee taxpayers for cash — creates a new, complementary monetization pathway that was not previously available.
By combining these two mechanisms, CBR achieves several important objectives. First, the partnership-flip structure allows CBR to monetize both the ITC and the MACRS depreciation deductions allocable to Ridgeline's share of the Partnership's tax items. Ridgeline receives 99% of all tax items (including ITCs and depreciation) during the pre-flip period, and in return makes a substantial capital contribution ($120,000,000) that reflects the present value of those tax benefits to Ridgeline. Second, the Section 6418 transfer mechanism allows CBR to sell a separate, discrete portion of ITCs directly for cash to Pinehurst, an unrelated corporate taxpayer with significant federal tax liability and the ability to efficiently utilize the credits. This second tranche generates incremental cash proceeds ($55,200,000) that would not be available under a partnership-flip structure alone.
The total ITCs generated by the Portfolio are $153,840,000. These credits are allocated between the two tranches as follows:
• ITCs allocated to the partnership-flip structure (of which Ridgeline receives 99% during the pre-flip period): $89,040,000 ($153,840,000 – $64,800,000).
• ITCs transferred under Section 6418: $64,800,000, of which:
• Credits sold to Pinehurst: $60,000,000 (face value)
• Credits retained by CBR: $4,800,000 (face value) ($64,800,000 – $60,000,000)
The allocation between the two tranches is effectuated through project-level elections. Specifically, certain projects (or portions of credits from certain projects) are designated for the Section 6418 transfer, while the remaining credits flow through the Partnership and are allocated to the members in accordance with the LLCA.
C. Flow of Funds Diagram
The following summarizes the flow of funds at closing and post-closing:
At Closing (December 8, 2023):
The actual closing date of December 8, 2023 reflects an eight-day extension from the original scheduled closing date of November 30, 2023. The extension was necessitated by a minor delay in obtaining interconnection confirmation for the Amistad project, which achieved COD on November 18, 2023, as scheduled, but required additional time for final confirmation from the transmission operator.
On the closing date, the following fund flows occurred:
• Ridgeline first tranche: $96,000,000 released from Clearwater Escrow to the Solstice Holdings operating account at Osprey National Bank.
• Pinehurst credit purchase price: $55,200,000 released from Clearwater Escrow to CBR's designated account.
• CBR Manager capital contribution: $2,400,000 contributed by CBR Manager to Solstice Holdings.
• Partial repayment of Osprey Construction Facility: A portion of the funds received by CBR and the Partnership was applied to the partial repayment of outstanding draws under the $245,000,000 Construction Facility.
Post-Closing:
• Ridgeline second tranche: $24,000,000 due on February 6, 2024, representing the second installment of Ridgeline's capital commitment. This date falls 60 days following the final COD (November 18, 2023, for the Amistad project), as extended by agreement of the parties to account for administrative processing and final documentation.
IV. TRANCHE 1: PARTNERSHIP-FLIP TAX-EQUITY INVESTMENT
A. Overview of the Partnership-Flip Structure
Under the partnership-flip structure, Ridgeline Capital Partners, LLC commits aggregate capital contributions of $120,000,000 to Solstice Holdings, LLC, the partnership entity that holds the seven project companies comprising the Solstice Portfolio. Ridgeline is a Delaware limited liability company that specializes in tax-advantaged infrastructure investments. As of the date of this memorandum, Ridgeline manages approximately $4.8 billion in tax-advantaged infrastructure assets and has deployed approximately $2.1 billion specifically in solar and wind tax-equity transactions. Ridgeline's institutional experience and scale make it one of the most active tax-equity investors in the renewable energy sector.
Key personnel at Ridgeline involved in this transaction include:
• Jonathan Kessler, Managing Partner — oversight and investment committee approval;
• Samara Okonkwo, Partner, Head of Renewable Energy Investments — senior deal sponsor and negotiation lead; and
• David Lim, Vice President — day-to-day deal execution and diligence coordination.
Ridgeline is represented in this transaction by Whitfield & Ayers LLP, with the following attorneys serving as primary counsel:
• Patricia Whitfield, Senior Partner;
• Nathan Ayers, Partner; and
• Kenji Watanabe, Senior Associate.
The partnership-flip structure employed in this transaction follows the well-established model consistent with the safe harbor principles set forth in Revenue Procedure 2007-65 ("Rev. Proc. 2007-65"), which provides guidance on the IRS's treatment of partnership-flip transactions involving renewable energy projects. Under this model, the tax-equity investor (Ridgeline) receives a disproportionately high allocation of tax benefits — including ITCs and MACRS depreciation deductions — during the initial "pre-flip" period, in exchange for its capital contribution. After the investor achieves a specified target after-tax return, the allocation percentages "flip," and the developer (CBR, through CBR Manager) receives the substantial majority of all economic and tax items going forward. The developer typically retains an option to purchase the investor's residual interest at fair market value following the flip.
The timeline of the partnership-flip structure proceeded as follows:
• July 10, 2023: CBR and Ridgeline executed a binding term sheet setting forth the principal economic terms of the tax-equity investment.
• August 14, 2023: Solstice Holdings, LLC and CBR Solstice Manager, LLC were formed as Delaware limited liability companies.
• September 21, 2023: The parties signed the LLCA and ancillary transaction documents.
B. Capital Contributions
Ridgeline's total capital commitment to Solstice Holdings is $120,000,000, funded in two tranches:
The two-tranche funding structure is standard practice in partnership-flip tax-equity transactions, where the investor retains a portion of its commitment until all projects in the portfolio have achieved COD and certain post-COD conditions have been satisfied. The 80/20 split reflects the parties' negotiated allocation of construction completion risk, with the second tranche serving as an incentive for the developer to achieve timely CODs across all projects.
CBR Manager's capital contribution to Solstice Holdings is $2,400,000, representing 2% of Ridgeline's commitment. This contribution is required to satisfy the minimum investment threshold for the developer/sponsor under Rev. Proc. 2007-65, which requires that the sponsor's interest in the partnership be "more than a de minimis" investment. The 2% level is consistent with market practice and IRS expectations for partnership-flip transactions. CBR Manager's contribution was funded at closing on December 8, 2023.
All capital contributions were funded through escrow at Clearwater Escrow Services, Inc. (escrow account CES-2023-80114), which served as the independent escrow intermediary for the transaction. Funds were held in escrow pending satisfaction of all closing conditions, and released upon execution of joint release instructions by the parties.
Conditions to Ridgeline's funding of each tranche include, among others: (a) achievement of COD for all applicable projects as certified by the independent engineer; (b) delivery of tax opinion letters from Calderwood & Harkness LLP; (c) delivery of officer's closing certificates and secretary's certificates; (d) confirmation of insurance compliance under the policies placed by Sentinel Underwriters, Inc. (including the Fortis Indemnity Company and Ironclad Surety Company policies); (e) satisfactory UCC and lien search results; and (f) absence of any material adverse effect with respect to the projects or CBR.
C. Pre-Flip Allocations (Projected Years 1–5)
During the pre-flip period, which is projected to extend approximately five years from the weighted-average COD (i.e., from approximately October 25, 2023 through Q4 2028), the LLCA provides for the following allocation of tax items and cash distributions:
Tax Items (ITCs, MACRS Depreciation, Taxable Income/Loss):
• Ridgeline (Tax-Equity Member): 99%
• CBR Manager (Managing Member): 1%
Cash Distributions:
• Ridgeline (Tax-Equity Member): 30%
• CBR Manager (Managing Member): 70%
The bifurcation between tax allocations and cash distributions is the defining structural feature of the partnership-flip model. Ridgeline's economic return is primarily driven by the value of the tax benefits it receives — specifically, the ITCs and accelerated depreciation deductions that it can apply against its own federal income tax liability. The 30% cash distribution allocation to Ridgeline reflects the minimum level of operating cash flow necessary to provide Ridgeline with a current return on its investment and to support its targeted after-tax yield of 7.25%.
CBR Manager, by contrast, retains the majority of operating cash flow (70%) during the pre-flip period. This allocation is essential for CBR's financial planning, as the retained cash flow is used to service the $68,000,000 Back-Leverage Facility from Osprey National Bank, to cover ongoing operations and maintenance ("O&M") expenses, and to fund reserves and other operational needs of the projects.
MACRS Depreciation. The seven projects in the Solstice Portfolio are eligible for the 5-year Modified Accelerated Cost Recovery System ("MACRS") depreciation schedule applicable to solar energy property under Section 168 of the Code. The depreciable basis of the projects is computed by reducing the total eligible cost basis by 50% of the ITC amount, as required by Section 50(c) of the Code:
Depreciable Basis = $384,600,000 – (50% × $153,840,000) = $384,600,000 – $76,920,000 = $307,680,000
Bonus depreciation may also be available for the 2023 tax year, subject to the phase-down schedule applicable to property placed in service after December 31, 2022 (80% bonus depreciation for property placed in service in 2023 under the Tax Cuts and Jobs Act phase-down). The interplay between bonus depreciation and the ITC basis reduction is addressed in detail in the separate ITC Eligibility and Basis Memorandum.
During the pre-flip period, Ridgeline receives 99% of all depreciation deductions, which, combined with the ITCs, constitute the primary economic benefit of its $120,000,000 investment.
D. Flip Mechanics
The "flip" is the pivotal event in the partnership-flip structure, marking the transition from the pre-flip allocation regime (in which Ridgeline receives 99% of tax items) to the post-flip allocation regime (in which CBR Manager receives 95% of all items).
Flip Trigger. The flip is triggered when Ridgeline achieves its target after-tax yield, which has been negotiated and set at 7.25% (measured as an after-tax internal rate of return, or "IRR"). The after-tax IRR calculation takes into account all cash inflows and outflows attributable to Ridgeline's investment, including:
• Capital contributions made by Ridgeline;
• ITC benefits received (valued at Ridgeline's applicable tax rate);
• MACRS depreciation deductions received (valued at Ridgeline's applicable tax rate);
• Cash distributions received from the Partnership; and
• Any taxable income or loss allocated to Ridgeline.
Projected Flip Date. Based on the financial model prepared by CBR's financial advisors and reviewed by Ridgeline and its counsel, the partnership flip is projected to occur in Q4 2028, approximately 5.0 years after the weighted-average COD of October 25, 2023. The actual flip date will depend on realized project performance, actual tax rates, and the timing of cash distributions, and may occur earlier or later than the projected date.
Post-Flip Allocations. Following the flip, all items — both tax items and cash distributions — are allocated as follows:
• Ridgeline (Tax-Equity Member): 5%
• CBR Manager (Managing Member): 95%
This reallocation reflects the intended economic substance of the transaction: once Ridgeline has achieved its targeted return on investment, the primary economic benefit of the projects reverts to CBR, the developer and long-term operator of the Portfolio.
Flip Calculation Methodology. The LLCA sets forth a detailed methodology for calculating the flip date, including the financial model assumptions, the discount rate, and the treatment of various contingencies. The flip calculation is performed on a semi-annual basis by Ridgeline's financial team and is subject to verification by CBR Manager. In the event of a dispute regarding the flip calculation, the LLCA provides for resolution by an independent accounting firm mutually acceptable to the parties.
Deficit Restoration Obligations. The LLCA includes provisions regarding deficit restoration obligations ("DROs") that play an important role in the flip mechanics. Ridgeline's DRO is limited to a negotiated amount, while CBR Manager bears a broader obligation to restore any negative capital account balance upon liquidation of the Partnership. The interplay between the DROs and the capital account maintenance provisions is critical to the Section 704(b) allocation analysis and is addressed in detail in the separate Partnership Tax Allocation Memorandum.
E. Purchase Option
Following the occurrence of the flip, the LLCA provides that CBR Solstice Manager, LLC has the right (but not the obligation) to purchase Ridgeline's residual 5% membership interest in Solstice Holdings at fair market value (subject to a floor of $1.00).
The purchase option is exercisable during a 180-day window following the flip date. If CBR Manager exercises the option, the parties will negotiate the fair market value of Ridgeline's 5% interest in good faith. If the parties are unable to agree on a fair market value within 30 days of CBR Manager's exercise notice, the fair market value will be determined by an independent appraisal process conducted by a nationally recognized appraisal firm mutually selected by the parties (or, if the parties cannot agree, appointed in accordance with the procedures set forth in the LLCA).
The purchase option is governed by a separate Purchase Option Agreement dated September 21, 2023, which sets forth the detailed terms and conditions of the option, including the exercise mechanics, the appraisal process, and the closing procedures for the interest transfer.
The use of a fair market value purchase option — rather than a fixed-price or determinable-price option — is a fundamental requirement of the Rev. Proc. 2007-65 safe harbor, as discussed in the following section.
F. Rev. Proc. 2007-65 Safe Harbor Analysis
Revenue Procedure 2007-65 provides a safe harbor under which the IRS will respect the partnership allocations in a partnership-flip transaction involving renewable energy projects, provided that four key requirements are satisfied. The Solstice Holdings structure has been designed to comply with each of these requirements, as summarized below:
1. Minimum Unconditional Investment by the Tax-Equity Investor. The safe harbor requires that the tax-equity investor make a "minimum unconditional investment" in the partnership — generally interpreted to mean that the investor's capital contribution must be a bona fide, at-risk investment that is unconditionally committed. Ridgeline's total commitment of $120,000,000, of which $96,000,000 is funded at closing with the remaining $24,000,000 funded within 60 days of the final COD, satisfies this requirement. Ridgeline's investment is at risk in the sense that it is subject to the economic performance of the projects and the partnership, and Ridgeline's return is not guaranteed.
2. Minimum Investment by the Sponsor. The safe harbor requires that the developer/sponsor make a meaningful, more-than-de-minimis investment in the partnership. CBR Manager's capital contribution of $2,400,000, representing 2% of Ridgeline's $120,000,000 commitment, satisfies this requirement. The 2% threshold is consistent with market practice and IRS expectations, and reflects a genuine financial commitment by CBR to the partnership.
3. Reasonably Anticipated Profits Independent of Tax Benefits. The safe harbor requires that the partnership have a "reasonably anticipated" profit motive independent of tax benefits — i.e., that the partnership is expected to generate economic profits from its business operations (in this case, the sale of electricity under the PPAs) irrespective of the ITCs and depreciation deductions. The Solstice Portfolio benefits from long-term PPAs with creditworthy counterparties (Lone Star Grid Solutions and Enchantment Power Cooperative), providing contracted revenue streams that support profitable operations over the life of the projects. CBR's financial model demonstrates positive pre-tax operating cash flows for the Partnership in each year of the projection period, satisfying this requirement.
4. Purchase Option at Fair Market Value. The safe harbor requires that any option held by the sponsor to acquire the investor's interest following the flip be exercisable only at fair market value, and not at a fixed or determinable price. The Purchase Option Agreement provides that CBR Manager may acquire Ridgeline's post-flip 5% interest at FMV (with a floor of $1.00), determined by negotiation or, if necessary, independent appraisal. This structure satisfies the FMV purchase option requirement.
Conclusion. Based on our analysis of the LLCA and the transaction documents, the partnership-flip structure embodied in Solstice Holdings, LLC is designed to fall within the Rev. Proc. 2007-65 safe harbor. While strict compliance with each element of the safe harbor does not guarantee that the IRS will not challenge the structure, adherence to the safe harbor significantly reduces the risk of adverse IRS treatment and provides a strong basis for defending the partnership allocations.
G. Partnership Tax Matters
Solstice Holdings, LLC is classified and taxed as a partnership for federal income tax purposes under Subchapter K of the Code. The entity was formed as a Delaware limited liability company, and no election has been made (or will be made) to classify the entity as a corporation under Treasury Regulation Section 301.7701-3.
Partnership Representative. Under Section 6223 of the Code (as amended by the Bipartisan Budget Act of 2015), partnerships are required to designate a "partnership representative" who has the authority to bind the partnership and its partners in connection with IRS audit and adjustment proceedings. The LLCA designates CBR Solstice Manager, LLC as the partnership representative of Solstice Holdings, acting through Theo Vasquez (CFO of CBR) as the designated individual. The designation is memorialized in a separate Partnership Representative Designation and Tax Matters Agreement dated September 21, 2023.
Capital Account Maintenance. The LLCA requires that capital accounts be maintained for each member in accordance with the rules set forth in Treasury Regulation Section 1.704-1(b)(2)(iv). Capital accounts are increased by capital contributions and allocations of income and gain, and decreased by distributions and allocations of loss and deduction. The ITC is treated as a tax credit rather than an item of income, and accordingly does not directly affect the capital accounts; however, the ITC basis reduction under Section 50(c) affects the depreciable basis of the partnership's assets and, consequently, the depreciation deductions that flow through the capital accounts.
Substantial Economic Effect. The allocations of income, gain, loss, deduction, and credit under the LLCA must have "substantial economic effect" within the meaning of Section 704(b) of the Code and the Treasury regulations thereunder in order to be respected for federal income tax purposes. The LLCA contains the standard regulatory provisions designed to satisfy the economic effect requirements, including:
• Minimum gain chargeback provisions under Treasury Regulation Section 1.704-2(f);
• Qualified income offset provisions under Treasury Regulation Section 1.704-1(b)(2)(ii)(d); and
• Compliance with the liquidation-in-accordance-with-capital-accounts requirement of Treasury Regulation Section 1.704-1(b)(2)(ii)(b).
A detailed analysis of the Section 704(b) allocation issues, including the substantial economic effect analysis and the treatment of the ITC allocations, is provided in a separate memorandum prepared by Sylvia Hartwell (Partner, Tax) and Leila Nazari (Associate, Tax) of this firm.
V. TRANCHE 2: SECTION 6418 TRANSFERABLE CREDIT SALE
A. Overview of IRA Section 6418
The Inflation Reduction Act of 2022 (Pub. L. 117-169) (the "IRA") introduced Section 6418 of the Code, a groundbreaking provision that permits eligible taxpayers to transfer all or a portion of specified energy credits — including the Section 48 investment tax credit — to unrelated transferee taxpayers for cash consideration. Prior to the enactment of Section 6418, the only mechanism available to renewable energy developers for monetizing ITCs with third-party investors was the partnership-flip (or sale-leaseback) structure. Section 6418 represents a fundamental expansion of the tax credit market by creating a direct, bilateral transfer mechanism that operates independently of the partnership allocation rules.
Under Section 6418, the key operative principles are as follows:
• Transferability. An eligible taxpayer that determines a specified energy credit for any taxable year may elect to transfer all or any portion of such credit to any unrelated transferee taxpayer.
• Treatment of Transferred Credits. The transferred credits are treated as tax credits allowed to the transferee taxpayer for the taxable year in which the election is made, as if the transferee were the eligible taxpayer that originally determined the credits.
• Tax Treatment of Cash Consideration. The cash consideration received by the transferor in connection with the transfer is not includible in the gross income of the transferor. Correspondingly, the cash consideration paid by the transferee is not deductible by the transferee. This treatment ensures that the transfer transaction is tax-neutral, with the economic benefit flowing exclusively from the credit itself.
• Effective Date. Section 6418 applies to taxable years beginning after December 31, 2022. Accordingly, the credits generated by the Solstice Portfolio projects placed in service in 2023 are eligible for transfer under Section 6418.
The Treasury Department and the IRS have issued proposed regulations under Section 6418, which provide guidance on the mechanics of the transfer election, the pre-filing registration requirements, and the buyer protection provisions. As of the date of this memorandum, final regulations have not yet been adopted. The proposed regulations are discussed further in Section VIII.F below in the context of regulatory uncertainty risk.
B. Parties to the Credit Sale
Seller. The seller of the transferred credits is Calloway-Briggs Renewables Inc. ("CBR"), acting through the seven project companies as the eligible taxpayers that determine the ITCs. Because each of the seven project companies is treated as a disregarded entity for federal income tax purposes, CBR is the "regarded" taxpayer for purposes of Section 6418 and is the entity that makes the transfer election on its federal income tax return.
Buyer. The buyer of the transferred credits is Pinehurst Insurance Group, Inc. ("Pinehurst"), a Connecticut corporation and insurance holding company. Pinehurst is one of the largest property and casualty insurance groups domiciled in the northeastern United States, with total assets of approximately $18.3 billion and an average annual federal income tax liability of approximately $310 million. Pinehurst's substantial and predictable tax liability makes it an ideal transferee taxpayer, as it can efficiently absorb the transferred credits and apply them to offset its current-year federal income tax obligations.
Key personnel at Pinehurst involved in this transaction include:
• Gerald Fontaine, Chief Executive Officer;
• Catherine Moreau, Senior Vice President, Tax & Treasury — lead negotiator for the credit purchase; and
• Alec Drummond, Director, Alternative Tax Investments — day-to-day operational contact.
Pinehurst is represented in this transaction by Thornberry Mack LLP, with the following attorneys serving as primary counsel:
• Roland Thornberry, Partner; and
• Gwen Schaefer, Associate.
C. Credit Amount and Pricing
The total ITCs designated for transfer under Section 6418 are $64,800,000 in face value. Of this amount:
• Credits sold to Pinehurst: $60,000,000 (face value)
• Credits retained by CBR for its own use: $4,800,000 (face value) ($64,800,000 – $60,000,000)
The purchase price per dollar of credit negotiated between CBR and Pinehurst is $0.92. The aggregate purchase price for the $60,000,000 in transferred credits is therefore:
$60,000,000 × $0.92 = $55,200,000
The discount to Pinehurst is $4,800,000 ($60,000,000 – $55,200,000), representing the economic benefit to Pinehurst of acquiring $60,000,000 in federal tax credits for a cash outlay of only $55,200,000. This 8% discount is consistent with the emerging market pricing for Section 6418 transferable credits in the early stages of the market's development, reflecting the novelty of the mechanism, the regulatory uncertainty surrounding final regulations, and the counterparty credit risk associated with the tax indemnity obligations.
Pricing Negotiation History. The parties engaged in a competitive pricing negotiation process over the course of approximately one month. Pinehurst submitted an initial bid of $0.89 per dollar of credit. CBR countered at $0.94 per dollar. After further negotiation and due diligence by both parties' counsel and advisors, the parties agreed upon a final price of $0.92 per dollar. A Letter of Intent ("LOI") reflecting this agreed pricing was signed on July 18, 2023.
D. Payment Mechanics
The payment mechanics for the Section 6418 credit sale are structured to provide certainty of payment to CBR while protecting Pinehurst against the risk of non-delivery of the credits. Specifically:
• Pinehurst deposits the full purchase price of $55,200,000 into escrow at Clearwater Escrow Services, Inc. (Account No. CES-2023-80114) no later than five (5) business days before the scheduled closing date.
• The escrowed funds are released to CBR upon the satisfaction of all closing conditions, including the delivery of executed Transfer Election Statements (on the applicable IRS Form 3800 series forms) and a closing certificate confirming the satisfaction of all conditions precedent to the credit transfer.
The credit sale is documented in a Tax Credit Purchase Agreement (the "TCPA") dated September 21, 2023, which is governed by New York law. The TCPA sets forth the rights and obligations of CBR and Pinehurst with respect to the credit transfer, including representations and warranties, covenants, conditions precedent to closing, and remedies for breach.
E. Transfer Election Mechanics
The transfer of credits under Section 6418 is effectuated by means of a transfer election made on the transferor's federal income tax return for the taxable year in which the credits are determined. Because the seven project companies are treated as disregarded entities for federal income tax purposes, CBR — as the regarded taxpayer — is the entity that makes the transfer election on its federal income tax return for the 2023 taxable year.
Each Transfer Election Statement is required to include the following information:
• The eligible taxpayer identification (EIN of the project company and/or CBR);
• The transferee taxpayer identification (Pinehurst's EIN: 06-1938274);
• The type of credit being transferred (Section 48 ITC);
• The amount of credit allocated to each project and transferred to Pinehurst;
• The transfer price per dollar of credit; and
• The taxable year to which the transfer relates.
In addition, the proposed Treasury regulations under Section 6418 require a pre-filing registration with the IRS prior to the filing of the federal income tax return on which the transfer election is made. The registration process is administered through the IRS's electronic portal and is intended to facilitate tracking of credit transfers and to prevent fraud. CBR will be required to complete this registration in advance of filing its 2023 federal income tax return.
The detailed mechanics of the Section 6418 transfer election, including the registration process, the form and content of the Transfer Election Statements, and the coordination between the project-level credit determinations and the entity-level tax return filings, are addressed in a separate Section 6418 Transfer Election Memorandum currently being prepared by this firm.
F. Tax Indemnity
To protect Pinehurst against the risk that the transferred credits may be subject to recapture under Section 50(a) of the Code or disallowance by the IRS, CBR has agreed to provide a comprehensive tax indemnification to Pinehurst under a separate Tax Indemnity Agreement dated September 21, 2023.
The key terms of the Tax Indemnity Agreement are as follows:
• Coverage. CBR indemnifies Pinehurst for 100% of the amount of any transferred credits that are recaptured or disallowed, plus a gross-up for Pinehurst's incremental tax cost arising from such recapture or disallowance (including any interest and penalties).
• Cap. CBR's maximum aggregate liability under the Tax Indemnity Agreement is capped at 125% of the purchase price, or $69,000,000 ($55,200,000 × 1.25). This cap provides a meaningful ceiling on CBR's exposure while affording Pinehurst substantial protection against loss.
• Survival. The indemnification obligations survive through 60 days following the expiration of the 5-year recapture period under Section 50(a) for the last project in the Portfolio to be placed in service. Given that the final project (Amistad) achieves COD on November 18, 2023, the 5-year recapture period expires on approximately November 18, 2028, and the indemnity survival period would extend through approximately January 17, 2029.
G. Buyer Protections Under Section 6418
Section 6418 includes a statutory good-faith standard that provides important protections to the transferee taxpayer. Specifically, under Section 6418(d), a transferee taxpayer that purchases credits in good faith and without knowledge of facts giving rise to recapture or disallowance is protected from the adverse consequences that would otherwise result from such recapture or disallowance. In such circumstances, the recapture or disallowance liability shifts to the transferor (i.e., CBR).
In addition to the statutory protections, the TCPA includes enhanced representations and warranties from CBR regarding the following matters:
• The eligibility of the projects for the Section 48 ITC;
• Compliance with the prevailing wage and apprenticeship requirements necessary to qualify for the 5× multiplier;
• Qualification of the projects for the domestic content bonus adder under Section 48(a)(12);
• The placed-in-service dates for each of the seven projects; and
• The accuracy and completeness of the eligible basis calculations.
These representations and warranties were the subject of extensive negotiation between CBR's counsel (this firm) and Pinehurst's counsel (Thornberry Mack LLP), with Pinehurst seeking broader and more specific representations to support its good-faith defense in the event of a future IRS challenge.
In addition, the TCPA requires that CBR deliver to Pinehurst an independent appraisal supporting the fair market value of the ITC-eligible solar energy property. This appraisal has been prepared by Greystone Worthington, LLC (Helen Farber, Managing Director), a nationally recognized appraisal firm with extensive experience in renewable energy asset valuation.
VI. ITC COMPUTATION AND ALLOCATION
A. Eligible Basis
The total eligible basis for purposes of computing the Section 48 ITC for the Solstice Portfolio is $384,600,000. This figure represents the aggregate cost basis of the solar energy property placed in service across the seven projects, determined in accordance with Section 48(a)(3) of the Code.